How to Fix the Federal Student Aid System

A landmark report came out last week from the New America Foundation featuring a novel plan to fix the federal student aid program. What makes it so new? It helps more Americans finish college—the end game of federal student aid—without burdening them with debt. The report has 30 specific recommendations for everything from the Pell grant to the student loan program. And here's the kicker—according to their accounting, the changes are revenue-neutral over the next ten years.

The idea is to simplify programs—for example, by having only one student loan program with one repayment plan—so families don't borrow as much up front, colleges don't have as much freedom to raise prices, and students have the support they need to stick with an education program. 

It’s the sign of a truly broken system that there is so much low-hanging fruit to be found: it would actually be quite possible to save money and help more of the neediest all at the same time. But implementing the whole plan would require vanquishing some persistent political bugaboos.

Here are some of the plan’s most important features and themes, and how they compare to what the Obama administration has done or is likely to do over the next four years:

Focus on need

Too much college aid today goes to the relatively well-off instead of the truly needy. The plan would immediately boost the Pell grant—the major need-based grant program—and turn the grant into an entitlement that automatically increases with inflation. Colleges that do a great job graduating low-income students would be qualified for bonus Pell funds that they can use to reduce the cost of attendance for eligible students even more. The extra money could also be spent on programs that help retention—currently, only 56 percent of students finish four-year programs in six years. The report advocates bringing back year-round Pell grants so students can complete their degrees faster.

The Obama administration nearly doubled funding for Pell grants in the past four years.

However, in this age of budget cliffs, entitlement status seems a less likely course of action. Without it Pell grants are likely to remain chronically underfunded.

Create pathways to success

NAF also pushes for tripling funding for GEAR UP, a program that helps at-risk middle and high school students prepare for college. GEAR UP programs are raising students’ ACT scores and college aspirations nationwide, but the program is tiny, with only a few hundred grantee organizations.

Expanding GEAR UP aid might be a great idea, but it would also expand the purview of the federal higher education aid program down to the 6th grade. I can hear the “states’ rights” and “local control” arguments now.

Simplify, Simplify, Simplify!

Lots of savings, and more fairness, is to be found by simplifying student loans: reducing options so there is only one kind of student loan, straight from the government, with one fixed interest rate and one repayment plan that is tied to income (and with bankruptcy protection restored). Total savings: $34 billion in subsidies over ten years.

Obama was able to be so generous with Pell grants because he cut middleman lenders out of the federal loan program, saving tens of billions of dollars in subsidies to bankers. This plan would complete that process. It would also make payments more manageable for all graduates—a smart move, and one of the most likely in this plan to pass.

No more 529 plans

Also in the name of simplifying and better targeting aid, this plan would eliminate all education-related tax breaks—including the tax-advantaged 529 savings plans—for a savings of over $180 billion, to go toward need-based aid.  The report calls the programs ineffective and wasteful—“a substantial share of the benefits going to families who can afford to send their children to college without the aid.”

That’s exactly why these programs are going to stay in there. Obama has championed these tax breaks, proposing to make one of them, the American Opportunity Tax Credit, permanent: “I am calling on Congress to make this tax credit permanent so it’s worth up to $10,000 for four years of college –- because we’ve got to make sure that in good times or bad, our families can invest in their children’s future and in the future of our country.”

Big Data Goes to School

The plan has strong ideas for imposing more accountability on colleges and students. It expands the “gainful employment” rule, which sanctions colleges based on how much their graduates earn and whether they are able to pay off their debts, from for-profit colleges to all colleges. It creates a competitive-grant program for states to improve graduation rates while remaining affordable. It mandates that colleges collect and publish better information on prices, financial aid awards, and students’ fate after graduation.

All the ideas in the report rest on a foundation of better recordkeeping. “Serious reform will not be possible unless we get serious about collecting and using better data,” say the authors, calling the current data a “clunky,” “uncoordinated,” and “incomplete” “jumble.” Colleges have long opposed a “unit record system” that would track individual students from high school through careers on privacy grounds, which this report deems essential. President Obama was the first president to create the office of Chief Technology Officer and has repeatedly confirmed his interest in data, so maybe he’ll be inspired to take up this cause.  

There’s a good chance that some of the best parts of this plan will come to pass over the next four years, especially channeling more student loans through the direct loan program and enrolling more students in income-based repayment plans. Changes that require colleges’ cooperation, such as national recordkeeping and reporting of student outcomes, are going to be a tougher sell. But cutting programs that make college more affordable for the middle or even upper-middle-class is a political nonstarter. It’s the perennial dilemma in policy making: it’s easier to pass a brand-new program than cancel a slew of misdirected subsidies.

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