More Proposed Financial Aid Reforms

The past few months have been an exciting time for financial aid researchers, as many reports proposing changes in federal financial aid policies and practices have been released as a part of the Bill and Melinda Gates Foundation’s Reimagining Aid Design and Delivery (RADD) project. The most recent proposal comes from the Education Policy Program at the New America Foundation, a left-of-center Washington think tank. Their proposal (summary here, full .pdf here) would dramatically shift federal priorities in student financial aid—by prioritizing the federal Pell Grant over all other types of aid and changing loan repayment options—without creating any additional costs to the government. Below, I detail some of the key proposals and offer my comments.

Pell Grant program

(1)     Shift the program from discretionary spending to an entitlement. I’m torn over this proposal. The goal is to guarantee that funding will be present for students in order to provide more certainty in the college planning process (a goal in my work), but moving more items to the entitlement side of the ledger makes cutting spending in any meaningful way exceedingly difficult. A potential compromise would be to authorize spending several years in advance, but not lock us into a program for generations to come.

(2)    Limit Pell eligibility to 125% of program length (five years for a four-year college and three years for a two-year college). Currently, students are allowed 12 full time equivalent semesters of Pell eligibility, which can be used through the bachelor’s degree. This means that students who only seek to earn an associate’s degree can use the Pell for six years in a two-year program. This can safely be cut back (to three years, perhaps), but I’m not sure if cutting all the way back to 125% of stated program length is ideal. I would be concerned about students who can’t quite make it across the finish line financially.

(3)    Create institutional incentives to enroll Pell recipients and graduate students. New America has several prongs in this policy, including bonuses for colleges which enroll and graduate large numbers of Pell recipients. But the most interesting part is a proposed requirement that colleges which enroll few Pell recipients, have high net prices of attendance for Pell recipients, and have substantial endowments have to provide matching funds in order for students to be Pell-eligible. I think this policy has potential and doesn’t punish colleges for actions they can’t control—compared to other proposals, which have sought to tie Pell funding for public and private colleges to state appropriations.

Student loans

(1)    Switch all students to income-based repayment of loans. This would reduce default rates and simplify financial aid, but has the potential to let students attending expensive colleges off the hook. New America shares my concern on this, but switching to IBR could still have substantial upfront costs (which would later be repaid).

(2)    Set student loan interests based on government borrowing costs plus three percentage points. This proposal should result in a revenue-neutral student loan program (after accounting for defaults) and stop the games of reauthorizing artificially low interest rates for political gain. Loan rates would be fixed for each cohort of students, but vary across each incoming cohort.

(3)    Allow colleges to lower federal loan limits “to discourage excessive borrowing.” I’m concerned about this point of the proposal, at least for undergraduate students. Loan limits are currently fairly modest and students should have the right to borrow a sufficient amount of money needed to attend college, whether the college disagrees with that or not.

Other key points

(1)    Pay for the additional Pell expenditures by cutting education tax credits, savings plans, and student loan interest deductions. This is a common call by financial aid researchers, and not just because academia tilts heavily to the left. Economic theory would suggest that plans to reduce the cost of college through grants should work as well as credits and deductions, but this assumes that students and their families fully account for the tax benefits in their decisionmaking and that the students who take up these programs are on the margin of attending college. Neither appears to be true. An additional tax deduction for being a student would likely be more effective than the current credit system.

(2)    Require better data systems and consumer information. I’m fully on board with getting better data systems so researchers can finally figure out whether financial aid works and student outcomes can be better tracked across colleges. I’m a little more concerned about some of the consumer information measures, as colleges should have the ability to tailor materials somewhat.

(3)    Create publicly available accountability standards. Gainful employment, in which for-profit colleges are examined based on job placement rates, could be a model for extending some sort of accountability to all colleges receiving federal funds. Graduation rates, earnings, and other measures could be used—or at the very least, the information could be made public to students, their families, and policymakers.

I don’t agree with everything that New America suggests in their policy proposals, but many of the suggestions would help improve financial aid delivery and our ability to examine whether programs work for students. To me, that is the mark of a successful proposal that could at least partially be adopted by Congress.

Author: Robert

I am an a professor at the University of Tennessee, Knoxville who studies higher education finance, accountability policies and practices, and student financial aid. All opinions expressed here are my own.

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