Rethinking Grants and Loans

A white paper, part of the Gates Foundation's project on financial aid, from the National College Access Network calls for overhauling the student aid system to focus on underrepresented students.

December 5, 2012

WASHINGTON -- A report released today calls for an overhaul of the federal financial aid system, including ending subsidized loans, enrolling students in income-based repayment, and directing the savings from the changes to the Pell Grant.

The report, “Increasing Return on Investment from Federal Student Aid,” was written by the National College Access Network and funded by the Bill & Melinda Gates Foundation, part of the philanthropy's push to influence financial aid policy. In all, the Gates Foundation awarded $3.3 million in grants to 16 groups for white papers on how to change the financial aid system to encourage college completion.

The grants had a tight timeframe -- recipients were announced in September -- so the proposal from NCAN is likely to be one of the first of many. Young Invincibles, an advocacy group for Americans under 30, released its white paper in November.

The timing of the white papers -- especially if many call for wholesale changes to the financial aid system, as NCAN did -- is not coincidental, given Gates's desire to effect policy change. The Pell Grant faces a funding shortfall in October, when the government's 2014 fiscal year begins, which is likely to put hard choices about financial aid on the table before Congress. In the next few years, Congress is likely to reauthorize the Higher Education Act, the law governing financial aid programs and the legislative framework for many of the suggested changes.

The focus of the college access network, an association of nonprofit groups, federally funded programs and scholarship providers working with low-income and first-generation college students, is on underrepresented students. The group’s white paper calls for Congress to maintain full funding for the Pell Grant Program, and to fill in the estimated $5 billion funding shortfall for the 2014 fiscal year without making any additional eligibility changes for the Pell Grant.

It calls for bigger changes for other programs -- most notably eliminating the interest subsidy for undergraduate loans, and instead easing loan burdens by automatically enrolling all federal borrowers in income-based repayment upon graduation. (Young Invincibles, the only other Gates-funded group to release its white paper so far, also called for automatic enrollment in the income-based system.)

Congress has chipped away at subsidized loans when looking for budget cuts to sustain other financial aid programs, eliminating subsidized graduate loans and then the interest-free grace period for undergraduates. As income-based repayment has grown, subsidized loans have come under increasing criticism from policy researchers as an inefficient use of federal spending, although the loans still have staunch defenders among private colleges because they reduce the long-term cost of student loans.

NCAN also called for eliminating another politically popular program: some of the tax credits for higher education. The credits have strong support from both parties and from the public -- President Obama called for making one, the American Opportunity Tax Credit, permanent as part of his re-election campaign -- but are sometimes criticized for providing help to middle-class and wealthy students who would go to college without government help.

The white paper calls for the elimination of the tax credit for individuals with incomes over $50,000 or families with incomes over $100,000 per year. Tax credits for high-income families, it said, are “inefficient at best and morally questionable at worst.”

Most of the suggestions have been put forward before by think tanks or panels on the future of financial aid. But while many are considered likely to funnel more federal money toward students who are in the most need of help, the group didn’t explain how many would encourage college completion rather than further improving access -- the overarching goal of the Gates Foundation’s involvement.

The report did include two proposals aimed squarely at completion. One was a revival of the short-lived “year-round” Pell Grant, a program that allowed students to get an additional grant for summer study before it was cut for budgetary reasons in 2011. The other was a proposal to distribute campus-based aid, such as the Perkins student loan or Supplemental Educational Opportunity Grants, based on a competitive formula that takes into account the number of low-income students that a college enrolls and graduates compared to its peers.

Campus-based aid is currently awarded based on several factors, the most significant among them the college's history with the campus-based aid programs.

That proposal could bring “lots of pain for very little gain,” wrote Bill Goggin, executive director of the Advisory Committee on Student Financial Assistance, an independent committee that provides advice to Congress on student aid policy, in an e-mail to Inside Higher Ed.

Goggin, who has called for a framework to easily judge the impact of proposed changes to financial aid, said that awarding campus-based aid based on completion would create hassle but little substantive change, because the differences between peers would be so small as to have a minimal impact on how money is distributed.

More Gates-funded research on higher education is expected to roll in over the coming weeks: all 15 white papers should be issued by the end of January, according to the foundation.


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