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Rethinking Student Aid, Radically

September 19, 2008

Under the aegis of the College Board, a baker's dozen of the country's top financial aid thinkers (rather than practitioners) have spent the past two years re-envisioning what the federal financial aid system should look like to best utilize the $86 billion the government provides each year in grants, loans and tax benefits -- and to build the case, ultimately, for increasing that investment.

The leaders of the Rethinking Student Aid panel have described their deliberations as an attempt to balance the philosophically desirable with the politically pragmatic, knowing that some things that might be ideal from an ivory tower perspective -- such as ending tax breaks for college because they do little to help increase access to college, for example -- would raise bloody hell from key constituents.

The plan they've developed, which was released to the public Thursday, does slay some sacred cows. It would not kill the aforementioned tax benefits (though it would consolidate them into a single tax credit), but it does call for significantly shrinking the number of federal student grant programs and, perhaps most controversially, urges the government to stop paying the interest on so-called subsidized loans while borrowers are in college -- recommendations that, when made previously, have greatly troubled some college officials and advocates for students.

But -- echoing arguments made by the Spellings Commission on the Future of Higher Education and many others in recent years -- the time has come for serious rethinking of the current financial aid system, say the lead authors of the report, Sandy Baum of the College Board and Michael McPherson of the Spencer Foundation, which funded the committee's work along with the Lumina Foundation for Education and the Andrew W. Mellon Foundation.

"It is just imperative that we invest effectively in more students achieving success through college," McPherson, Spencer's president, said during a telephone news briefing Thursday afternoon, conducted by the Hechinger Institute, to unveil "Fulfilling the Commitment: Recommendations for Reforming Federal Student Aid." "We need a student aid system that is simple, clear and puts the money in the hands of students who need it. We need to figure out how to get more bang from the buck, as well as how to get more bucks."

The panel's most significant recommendations for doing so, which taken together are aimed at simplifying the system and focusing on access to higher education for low-income students, include the following:

  • Simplifying the student aid application process by eliminating the Free Application for Federal Student Aid and obtaining all needed financial information from the Internal Revenue Service.
  • Basing Pell Grant awards wholly on family size and adjusted gross income (rather than other assets) and linking increases in the value of the maximum Pell Grant to annual changes in the Consumer Price Index. Families that receive "means-tested" public benefits would qualify automatically for Pell Grants. Other programs linked to the Pell Grant, like the recently established Academic Competitiveness, SMART and TEACH Grants, would be eliminated and the funds folded into Pell.
  • Combining all education tax credits and deductions into a single (nonrefundable) tax credit and allowing the credit to be used to cover college-related expenses other than tuition and fees.
  • Ending the in-school interest subsidy on student loans (which move would cost many individual students hundreds of dollars more in interest payments) and redirecting the billions saved from that toward helping students repay their loans, through an expanded income-based repayment program for student loans and a standard repayment system that tilts bigger payments toward later years, when most borrowers are earning more.
  • Establishing tax-free college savings accounts (into which the federal government would contribute each year) for children from low-income backgrounds whose financial circumstances would make them eligible for Pell Grants if they were of college age. The funds could be used only for postsecondary education but could be used at any point in life.
  • Creating block grants for colleges, based on the proportion of Pell-eligible students they enroll and retain to the second year, that provide "incentive" funds the institutions can use in a variety of ways to help low- and moderate-income students. Under the College Board panel's plan, the block grants would eventually replace the existing campus-based financial aid programs: Perkins Loans, Supplemental Educational Opportunity Grants, and Federal Work Study.

Not surprisingly, given the sweeping scope of the panel's plan and the controversial nature of some of its recommendations, reaction to the report was all over the map. The group won widespread credit for producing a thorough, thoughtful set of ideas -- "I was more impressed than I thought I'd be," said Charles Miller, who was chairman of the Spellings Commission -- and most of those interviewed predicted that the College Board study would help spur meaningful conversation about the widely recognized need to do something to fix the student aid system.

"Given the chaotic nature of federal student aid policy, it is refreshing to see a group of people who were willing to sit quietly, without creating a public spectacle, and think it through," said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.

There were lots of details to pick apart, though, and few held back (including Nassirian, who criticized the panel for ignoring the issue of the need for tougher regulatory oversight of the federal aid programs). Somewhat predictably, some college officials and Democratic Congressional aides strongly opposed the suggested elimination of the in-school loan interest subsidy and of the campus-based aid programs, saying it would result in "robbing Peter to pay Paul," as one Senate aide put it. Others questioned the panel's silence on the skyrocketing cost of higher education and said they feared that some of its proposals would feed tuition inflation.

Dramatic calls for change like this one are likely to take some digesting (and cause some significant heartburn in the meantime), most observers agreed.

"There are some very bold ideas in here, and one of the things we're going to have to be patient about is bringing the higher education community along," said Donald Saleh, vice president of enrollment management at Syracuse University. Many of the programs in question have been around for decades, he said, and "the higher education community has learned to get comfortable with them. But I think most people, if they look carefully, realize this amalgam of programs doesn't really meet the needs of the 21st century children of our country, and of the country in general."

Time for Fresh Thinking

That view has been pretty widely embraced in recent years by growing numbers of researchers, policy makers and politicians, amid growing evidence -- most recently in a report released this week by the Organisation for Economic Co-operation and Development -- that the United States is slipping (to 10th now among industrialized countries) in the proportion of young adults who attain some postsecondary education. While financing is only part of the problem, McPherson of the Spencer Foundation acknowledged Thursday, the fact that students from low-income families are so much less likely to enroll in college suggests that financing is a problem, and actual progress in simplifying the process of applying for financial aid and the financial aid structure itself has proven difficult to achieve.

To try to produce some movement, the College Board convened a group made up mostly of researchers and policy experts -- rather than financial aid practitioners or college lobbyists -- and asked them to put aside institutional interests and think creatively about what should be. "We wanted to look at this analytically," said Baum, a senior policy analyst at the College Board and one of the co-chairs. (The list of members appears at bottom.)

The panel's leaders say they spoke to dozens if not hundreds of college officials and other financial aid experts in conducting their analysis, particularly in the early stages of the two-year process, but they also kept their work very closely under wraps, which made the release of their report Thursday an eagerly (and in some circles nervously) awaited event.

Seven principles underscored the committee's work in re-envisioning the financial aid system:

  • The system should have as its main purpose helping those who are unlikely to meet their educational goals without financial help.
  • Federal grant aid, in combination with a reasonable amount of work and loans, should be adequate to make completion of a four-year degree financially possible for all qualified students.
  • Federal aid should be provided as clearly, transparently, and simply as possible. Communication with families and students about college opportunity should be early, proactive, encouraging, sustained and accurate.
  • Federal aid eligibility should be predictable. Individuals and families in given economic circumstances should be able to anticipate confidently the resources that will be available to meet their needs.
  • Programs should be oriented first and foremost to helping students. Concerns about the impact of policy changes on particular institutions such as colleges, banks, or government agencies should take second place.
  • Aid policies should be designed to help students not only to begin postsecondary education but also to succeed after they arrive.
  • Taxpayer funds should be used as efficiently as possible in advancing the principles set out above.

It'd be hard for most people in and around higher education to argue about those principles, but that does not ensure coalescence around policy ideas that might, at least in the eyes of one set of 13 financial aid experts, logically flow from the principles. Take its recommendations about "simplification," for instance.

There was general consensus about the wisdom of the panel's call for eliminating the federal financial aid form, whose "daunting complexity," as the College Board report calls it -- and its novella-like length -- has made it a favorite prop of Education Secretary Margaret Spellings when she wants to illustrate the "broken" financial aid system.

The Rethinking Student Aid panel argues that all of the information the federal government needs to award Pell Grants could be garnered from tax forms filed with the IRS, and that eligibility should be based solely on the applicant's (or his or her parents') adjusted gross income and family size. (Under the plan, the Education Department and the IRS would work together to give states and individual colleges the additional financial and demographic information they might need to determine whether individual applicants qualify for need-based state and institutional financial aid.)

But stripping down the information used to determine a student's eligibility for federal aid will make some financial aid officers nervous because it will inevitably mean that some taxpayers with low incomes but potentially significant assets (houses, etc.) might qualify for aid, said Saleh of Syracuse. Despite that "pushback," he said, "the gain we get out of this, of inspiring children and breaking down access barriers, is way more of a gain than what we would lose by having some small number of dollars go to less needy students."

(A Senate aide also pointed out that the Treasury Department, and the Congressional Joint Committee on Taxation, have in the past opposed the idea of the IRS sharing tax information with the Education Department.)

While most financial aid experts like the idea of "simplification," in theory, they tend to favor simplifying the process of applying for financial aid much more than the other part of the equation -- streamlining the number of financial aid programs from which they can draw.

The College Board's panel would shrink the existing array of federal tax breaks for college (the Hope and Lifelong Learning tax credits and a tax deduction) to one tax credit that would cover the whole cost of attendance for degree- and certificate-seeking students. That suggestion, which is one of the parts of the panel's package that is designed to ensure continued meaningful federal benefits for the politically important category of middle-income students, is relatively noncontroversial.

But the same cannot be said of the other programs that would eventually disappear under the Rethinking Student Aid report. The panel's Pell Grant proposal suggests eliminating the "add-on" programs that Congress has adopted in recent years, including those designed to draw more low-income students into science, mathematics, and teaching, and while many college officials are lukewarm about those programs, they have significant support among their advocates in Congress.

And officials at private nonprofit colleges, especially, consistently and aggressively oppose efforts (undertaken annually by the Bush administration) to eliminate the Perkins and SEOG programs, which are designed to supplement Pell Grants for some low- and moderate-income students. But under the Rethinking Student Aid panel's plan, those programs would eventually be replaced by the "block grants" it proposes creating to reward colleges and universities that enroll significant numbers of Pell Grant-eligible students and ensure that they succeed academically.

Colleges would receive funds (which they could use for a wide range of student-related purposes) proportional to the number of low-income students they enroll and the number of those who progress past the first year of study, creating a program that is "new, more generous [and] better-targeted toward needy students than the current campus-based grants are," the panel's report says.

Such a change would provide significantly more support to public two- and four-year colleges and quite a bit less to four-year private institutions, which receive 46 percent of the current campus-based grant funds (which are based in large part on historical formulas) and would receive about half that under the panel's recommendation.

The panel's reassurance that individual colleges should receive at least as much money as they do now while the block grant idea is being "piloted and tested" did little to blunt criticism of the idea. "We're all for creating incentives for schools to increase graduation rates, but not in place of the existing campus-based programs," said a U.S. Senate aide who asked not to be identified. "These are programs that have a huge impact, and we would protect them and the other programs that the report calls for eliminating. These other programs are there for a purpose."

Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, said that giving up existing programs for block grants tends to turn out badly for recipients of federal funds. "There is a long history of exchanging categorical programs for block grants, and the bottom line is that the block grant almost always goes away," he said.

The panel's leaders said the cost projections they developed showed that a version of their plan could be put in place by redistributing what the federal government now spends on student financial aid, but that the changes could be more effectively achieved if the government significantly increased its spending on helping students.

The most controversial proposal in the College Board report is its call to eliminate the in-school interest subsidy. The U.S. government now covers the interest on federal loans while many low- and moderate-income students are enrolled in college, but those subsidies are based on a family's ability to pay tuition at whichever college their student attends, which means that less-needy students can qualify for the subsidies if they attend an expensive college. "A significant proportion [of subsidized loans] are going to people who would never qualify for them if they didn't go to expensive private colleges," Baum said.

The panel calls for eliminating the subsidy -- which costs the government about $8 billion a year -- and instead expanding financial support to help borrowers repay their loans, both by strengthening the recently enacted Income-Based Repayment option for federal loans and by letting all borrowers repay their loans using a "graduated payment" model instead of the current system of consistent monthly payments that start upon graduation. "We want to strengthen the program to ensure that no students who borrow from the federal government to pay for undergraduate education will ever be required to pay back more than 15 percent of their discretionary income in any year," the report says.

Few ideas have generated as much of a firestorm in higher education policy as when Congressional Republicans, as part of the Contract With America in 1994, called for eliminating the in-school interest subsidy, and the suggestion would certainly face significant opposition this time around, too, since it would increase the costs of federal loans to most student borrowers, several college officials noted Thursday.

Perhaps the freshest idea among the committee's many suggestions is the proposal to create a federal savings program for low-income families that mirrors the 529 savings plans that Congress created for middle- and upper-class families more than a decade ago. The government would not actually provide money to a student until he or she actually enrolled in college, but as in the Social Security program, it would commit funds each year (starting at 5, 12 or some other age) based on a proportion of the Pell Grant amounts the student would qualify for, and the money would accumulate interest tax-free.

"Telling a low-income family that some money has been put aside in an account sends a much stronger signal than telling them 'there's a program you can apply to,' " said Robert Shireman, president of the Institute for College Access and Success. "Money in the bank, when the child is in middle school and still has high aspirations, will help parents and students to plan and prepare both financially and academically."

Despite his overall praise for the panel's report, the savings program struck Miller, the former Spellings Commission chairman, as a "terrible" idea. "This is a new, unfunded entitlement with all the bad problems associated with other entitlements, which we see squeezing the federal budget -- and even higher education spending -- right now," he said.

Through a spokeswoman, Miller's former boss, Secretary Spellings, welcomed the College Board report and noted that her department has its own "team of people working diligently on these issues." "I can assure you," said Samara Yudof, the spokeswoman, that "the secretary will continue to promote and work toward simplifying the financial aid system until the day she leaves office and likely beyond."

In addition to Baum and McPherson, the other members of the College Board panel are:

  • Tom Bailey, George & Abby O’Neill Professor of Economics and Education and director of the Community College Research Center, Teachers College, Columbia University
  • Steven Brooks, executive director, North Carolina State Education Assistance Authority
  • Charles Clotfelter, professor of public policy studies, economics, and law, Duke University
  • Susan Dynarski, associate professor of public policy, Gerald R. Ford School of Public Policy and Associate Professor of Education, University of Michigan
  • Ronald Ehrenberg, Irving M. Ives Professor of Industrial and Labor Relations and Economics, and director, Cornell Higher Education Research Institute
  • Carl Kaestle, professor of education, Brown University
  • Tom Kane, professor of education and economics, Harvard Graduate School of Education
  • Bridget Terry Long, associate professor, Harvard Graduate School of Education
  • Marshall (Mike) Smith, education program director, William and Flora Hewlett Foundation
  • William Troutt, president, Rhodes College
  • Jane Wellman, executive director, Delta Cost Project

 

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