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An Overview of Our Student Aid Reform Proposals

Published:  January 30, 2013

[The New America Foundation’s Education Policy Program on Tuesday released a comprehensive package of policy proposals that would provide an overhaul of federal financial aid. The report, Rebalancing Resources and Incentives in Federal Student Aid, calls for specific changes to grants, loans, tax benefits, college outreach programs and federal regulations to provide more direct aid to the lowest-income students, while strengthening accountability for institutions of higher education to ensure that more students are able to earn affordable, high-quality credentials. Yesterday, we explained why student aid reform is needed. In today's post, we provide an overview of our proposals.]

In Rebalancing Resources and Incentives in Federal Student Aid, we offer more than 30 specific policy recommenda­tions that are designed to create a streamlined federal student aid system that is more understandable, effective, and fair. Taken together, the package of proposals in our report is budget neutral over the 10-year period from federal fiscal years 2013-2022.

Pell Grants

The Pell Grant program is the cornerstone of federal stu­dent aid. In 1972, when the program was created, a Pell Grant covered most if not all college costs for large num­bers of low-income students. But as college prices have soared over the years, the system has become less and less effective. Moreover, the program is now facing a major “funding cliff” in the 2014 fiscal year and each year there­after.

To improve both the effectiveness and sustainability of Pell Grants, we would:

  • Permanently eliminate the Pell Grant funding cliff
  • Put the program on a firm financial footing by shifting future Pell appropriations to the manda­tory side of the budget, making it a true entitle­ment;
  • Significantly increase the maximum Pell Grant to expand its purchasing power. The plan would increase the maximum award over current policy by $500 in fiscal year 2014 to $6,225; by $600 in 2015 to $6,410; by $700 in 2016 to $6,610, and $800 in 2017 and in each year thereafter through fiscal year 2022 to $6,830;
  • Restore the year-round Pell Grant so that stu­dents can complete their degree programs more quickly;
  • Limit eligibility for Pell Grants to 125 percent of program length to discourage extended and pro­longed enrollments;
  • Enact a Pell Grant matching requirement for four-year public and private non-profit colleges that enroll a relatively small share of low-income students but charge them high net prices. The goal of the proposal is to put an end to colleges’ financial aid arms war by pushing schools to real­locate their existing institutional aid from merit to need-based aid;
  • Create a Pell Grant bonus for four-year public and private non-profit colleges that enroll a sub­stantial share of low-income students and gradu­ate at least half of their students – with the aim of having the schools use this money to reduce the net price they charge their neediest students;
  • Create a Pell Grant bonus for community col­leges that have a combined graduation and trans­fer rate of at least 50 percent. Eligible schools could either use the additional money to reduce the net price they charge their neediest students or to create support programs to help low income students earn their degrees and transfer to four-year colleges; and
  • Eliminate the outdated Supplemental Educational Opportunity Grant program that disproportion­ately benefits wealthy private institutions and use the savings to shore up the Pell Grant program.

Student Loans

Federal student loans have long been seen as a good investment for students – providing them with the means to obtain an education that will pay substantial dividends throughout their lifetimes. But in recent years, there has been growing concern that many students and their fami­lies are taking on unmanageable levels of debt. Meanwhile, the federal student loan program is extremely complex, offering students and their families a variety of choices, with each carrying different interest rates and borrowing limits. Borrowers also face a baffling array of repayment options, but often lack the counseling needed to under­stand these options.

To simplify the federal student loan program and reduce the dangers of default, we recommend consolidating vari­ous programs into a single, enhanced Stafford Loan sys­tem. Specifically, we would:

  • Require all federal student loan borrowers to repay their loans based on a percentage of their earnings after they graduate;
  • End the poorly targeted subsidized interest rate benefit, which is unnecessary with the default Income Based Repayment program;
  • Create a new fixed formula for setting student loan interest rates that adjusts annually according to market conditions;
  • Establish a single set of federal loan limits for undergraduate students, regardless of their depen­dency status. Under our proposal, the annual lim­its for all undergraduates would be $6,000 for a first year student, $7,000 for a second-year stu­dent, and $9,000 for a third-, fourth-, or fifth -year student. The aggregate limit for undergraduates would be $40,000;
  • End the Graduate PLUS loan program, which allows for unlimited borrowing by graduate stu­dents and discourages prudent pricing on the part of institutions;
  • Raise the annual limit on Unsubsidized Stafford loans for graduate students from the $20,500 to $25,500 to replace some of the borrowing ability graduate students lose with the elimination of the Grad PLUS loan program;
  • Eliminate the Parent PLUS loan program, which allows parents to borrow up to the cost of atten­dance. This program can encourage families to over-borrow and provides colleges with a conve­nient source of funds if they wish to raise their prices;
  • Give colleges the discretion to lower federal stu­dent loan limits at their schools or in certain pro­grams to discourage excessive borrowing;
  • Limit eligibility for federal student loans to 150 percent of program length to discourage pro­longed enrollments; and
  • Restore the ability of borrowers to discharge pri­vate student loans in bankruptcy to make private loan borrowing a safer option for students.

In 2010, Congress and the Obama administration reformed the federal loan program, eliminating wasteful subsidies to private lenders for government-backed student loans and shifting all student loans to the U.S. Department of Education’s direct lending program. To complete the job of reform we would:

  • Provide generous incentives to borrowers with older loans to refinance their debt into the Direct Loan program; and
  • Eliminate the non-profit servicer entitlement by requiring all entities that wish to service Direct Loans to compete for contracts.

Other Student Aid Issues

In addition to the student aid proposals above, our plan would:

  • Reexamine how colleges calculate the Cost of Attendance so that policymakers can consider whether to redefine or regulate it for an increas­ingly diverse student population;
  • Improve and expand the U.S. Department of Education’s Experimental Sites Initiative to pro­mote more innovation in the delivery of federal student aid;
  • Call on the Education Department to study the efficacy of disbursing federal aid in multiple installments throughout the semester to create greater incentives for students to persist, to guard taxpayers and institutions from fraud, and to pro­tect students who during the semester from hav­ing to pay back large amounts of aid; and
  • Restore “Ability to Benefit” program so that stu­dents without a high school diploma or GED can participate in federal student aid programs. This option would be limited to schools that have a proven track record of serving their students well.

Tax Expenditures

In addition to federal grants and loans, poorly targeted tax benefits comprise a substantial share of federal financial aid resources. Our plan would:

  • Redirect more than $180 billion in savings over 10 years primarily to the Pell Grant program by eliminating complicated tuition tax breaks, tax-advantaged savings plans, and the student loan interest deduction.

These programs provide overlapping and often highly regressive benefits. That is, they provide the lion’s share of assistance to upper-income taxpayers with the least finan­cial need. Those funds can be better used providing direct aid for students.

College Outreach

Since the creation of the Higher Education Act in 1965, federal policymakers have supported multiple programs aimed at raising the college aspirations and improving the academic preparation of disadvantaged students. The most promising of these programs is GEAR UP, which provides services using a cohort model aimed at middle and high school students. Our plan would:

  • Triple funding for GEAR UP, while requiring changes in the program to make it more effective.

Accountability, Transparency, and Reform

While financial aid reform is contingent upon distributing available funding more efficiently, the federal government also needs to use federal aid more effectively to encourage institutions to improve student outcomes. Colleges have traditionally received federal financial aid with few strings attached. In order to create new accountability mecha­nisms for improving data collection and to require colleges to provide more information about their success in serving students, we would:

  • Hold colleges accountable for quality and afford­ability by extending broad accountability metrics to all higher education institutions;
  • Create a federal student unit record system to provide a clearer picture of how students fare as they proceed through the educational system and into the workforce;
  • Establish a competitive grant program that will incent state-level policy reforms to improve out­comes for the 80% of students who attend public institutions; and
  • Mandate better and more consistent consumer information, including standardized financial aid award letters, a college scorecard, and improved entrance and exit counseling, so that consumers can make informed decisions before, during, and after college.

Conclusion

These proposals, taken together, rebalance the federal aid portfolio by providing a major increase in support to stu­dents at the margins of college completion, while creating new incentives for colleges to serve students well. They ask more of students and institutions, and they provide more in return.

For more coverage of our paper, check out our sister blog Ed Money Watch.

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