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The Case for Student Aid Reform

Published:  January 29, 2013

[The New America Foundation’s Education Policy Program today 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. In today's post, we make our case for why student aid reform is needed.]

When Rhode Island Senator Claiborne Pell helped create the college student aid program that would become his legacy, American higher education looked very different than it does today. In 1972, the typical college student paid the equivalent of $526 per year in tuition and fees, in today’s dollars, to attend a public university in-state. Private college tuition was often affordable, and undergraduate borrow­ing was all but unheard-of. There were no “for-profit” colleges as we know them now. The large majority of all public support for higher education came in the form of direct appropriations to colleges and universities from states.

The world has changed since then. Profound shifts in the structure of the global economy have put a premium on high-skill jobs that require advanced credentials while many well-paying blue-collar jobs have disappeared. Students have flooded onto college campuses, in America and, increasingly, around the world. At the same time, col­leges and universities began a decades-long campaign in the early 1980s of constant price increases that continues, unabated, today. This happened in part because states, eager to cut taxes and facing rising costs for health care and public safety, reduced the portion of their budgets dedicated to higher education. At the same time, colleges competing for students and prestige ramped up spending year after year.

With middle-class wages stagnant and the post-recession recovery slow, students and parents have been unable to keep up. They know they need a college degree, but they don’t have enough money to pay ever-rising tuition bills. As a result, the federal government has become the funder of last resort in American higher education. As recently as 2002, federal student aid totaled $72 billion per year. By 2012, it had grown to $174 billion—a $102 billion increase in annual aid in just a decade’s time.Most of that money came in the form of federally-backed loans that students are increasingly struggling to repay.

Yet despite this wave of new funding, federal lawmak­ers are struggling to keep vital aid programs afloat. The engine of American higher education will seize up without a steady infusion of new federal dollars, but the demand for those dollars seems without limit. In a period of high-profile national debates about budget deficits and fiscal austerity, this puts higher learning and national prosperity at risk.

At the same time, lawmakers are increasingly question­ing what taxpayers are getting in return for record fed­eral investments in college. Only half of students who start college earn a degree or credential within six years. Traditionally underserved minority students and those backed by need-based aid programs often do even worse. Rival nations, keenly aware of how knowledge workers will determine future economic competitiveness, have increased their rates of degree attainment much faster than the United States.

In short, the present federal financial aid system is no lon­ger up to the demands of the times. It was built in a differ­ent era and has evolved haphazardly over the decades, in response to fiscal exigency and interest group pressures. It has become unwieldy, inefficient, and overly complicated, in a way that wastes taxpayer dollars and fails to provide institutions and students with the resources and incentives they need to complete high-quality college degrees.

More incremental change will not suffice. With the need to support higher learning never greater and fiscal pres­sures acute, the time has come for a top-to-bottom over­haul of how the federal government manages financial aid. Everything should be on the table: grant aid, loan pro­grams, tax credits, and long-standing subsidies to institu­tions. Taxpayers and students need an aid system that is simpler, more understandable, more effective, and fairer.

Fortunately, decades of accumulated policy offer many opportunities for such reform. Tucked away in the system are inefficiencies and obsolete subsidies that can be used for better purposes. Overlapping programs can be consoli­dated in ways that make them more generous and under­standable. Overly expensive programs that have strayed from their original purposes can be made more affordable for the federal government and more effective at helping students earn degrees.

In fact, there is enough waste and inefficiency in the exist­ing system to substantially increase funding for Claiborne Pell’s foundational grant program, put federal aid on a firm budgetary footing, solve the student loan repayment prob­lem, and provide new incentives to spur college gradua­tion—all for no additional cost to the taxpayer above what is already being spent today.

While some of the proposals in our report, Rebalancing Resources and Incentives in Federal Student Aid, eliminate waste­ful spending, others represent real tradeoffs and politically challenging changes in the distribution of federal aid. But there is no path forward for federal financial aid that avoids hard choices. Federal lawmakers have already begun to ration financial aid, narrow eligibility, and cannibalize other federal education programs to keep the old system running. The only choice is whether to continue on that treacherous course, setting policy haphazardly while man­aging a never-ending series of budget crises and watching college opportunities diminish for lower- and middle-class students, or to put the federal aid system on firm footing for generations to come. Our report describes in detail exactly how to accomplish those reforms.

Tomorrow we will provide an overview of our reform proposals. Stay tuned.

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