Financial aid

Framework for judging impact of financial aid proposals (essay)

Over the last four decades, federal and state policy makers have wrestled with how to design student aid programs to make them fair, efficient, and effective – and how to evaluate and improve those programs, once in place.

Early on it was discovered that competing interests could easily overtake and dominate the policy formulation process. Unsupported claims that programs were inefficient, poorly targeted, or unfairly favored one type of student or institution over another were not uncommon. Even proposals that appeared to alter the intent of the program, disenfranchise a whole class of students, or undermine a particular type of institution were offered with no accompanying data analysis. Often developed behind closed doors, such proposals gave little consideration to the impact of the proposed change on the enrollment, persistence, and completion behavior of affected students.

Over two decades ago, in an attempt to improve the policymaking process, a group of analysts in Washington put in place a nonpartisan, analytical framework to ensure that policymakers could understand the exact nature and likely impact of alternative proposals. The framework involved an agreement to use a standard computer model with known assumptions and populated with the best and most recent data. The model produced standard output when alternative program specifications were entered, such as changes in the maximum award, level of tuition sensitivity of the award, expected family contribution, and other program algorithms.

The output was a standard table that displayed the resulting changes in cells. A simplified version looked something like this:

Impact of Proposal on Students and Institutions
Type and Control of College Total

All Other

Low A        
Middle   B      
High     C    
Total       D E

Data Arrayed in Each Cell

  • Number of Recipients
  • Level of Program Funds
  • Share of Program Funds
  • Average Award of Dependent and Independent Students

The rows of the table (displayed on the left) represented levels of family income; the columns denoted institutions of different type, control, and cost of attendance. For example, cell A included the lowest-income recipients attending 2-year public colleges, cell B included their middle-income peers who attended 4-year public colleges, and cell C included their high-income peers who attended 4-year private colleges.

The bottom row contained program funds received, by type and control of institution. For example, cell D showed total program funds going to all other postsecondary institutions, and cell E showed total program costs. The remaining cells showed other combinations.

Within each cell (displayed on the right), the computer output would array the following data: number of recipients; level of program funds; share of program funds; and average award for dependent and independent students. Once this table was produced for the current programs, proposed changes could be entered into the model to produce a new table, for purposes of comparison to the benchmark table -- the status quo.

Proposals that did not significantly change the existing distribution of program funds, by family income and type of institution, as measured by the shares in the cells, were deemed neutral. Proposals that redistributed program funds toward the northwest portion of the table, that is, toward cell A, were deemed relatively consistent with program intent by most observers; while those that moved funds generally to the southeast portion of the table, toward Cell C, not so much. Even the most challenged participants got the hang of the exercise quickly.

The benefits of obtaining unanimous agreement to use this framework in the policy formulation process were profound. For each alternative proposal, policymakers had at their disposal: any and all changes made to the underlying demographic assumptions of the model; the complete set of all proposed program changes; and the impact on students, institutions, and taxpayers of implementing the changes. One major benefit of using the framework was minimizing, if not wholly excluding, obviously self-serving proposals that ran counter to any reasonable interpretation of program intent. Occasionally, however, such a proposal would slip through, to the great amusement of n-1 participants. (Wow, you really hate community college students, don’t you?)

Use of the framework had another really important advantage. Advocacy (nothing wrong with that!) could be quickly distinguished from analysis. Advocates, analysts, and the all-too-familiar hybrids, who wear multiple hats, had the same information. There was an even playing field with everyone’s cards in full sight on the table. When used to identify and compare equal cost options that held total funding constant and redistributed different shares to participants, a sometimes unsettling zero-sum game unfolded in which losses had to finance gains.
Lively discussions ensued. Some had to be taken outside.

It is important to note that the framework did not provide estimates of the likely impact on student outcomes, that is, actual changes in enrollment and persistence behavior. At the time, there were no reliable data to build into the model that predicted student behavior – particularly any induced positive or negative enrollment effects of the proposal.

But this early effort to standardize at least the analytical portion of the policy process was a resounding success. Because, without these first-order estimates, winners and losers under proposed changes could not be identified, much less educated guesses made about how students might actually behave in response.

As another round of Higher Education Act reauthorization approaches, the higher education policy community, more than ever, needs to develop a similar analytical framework, underpinned by a more sophisticated computer model, driven by far richer data, containing more grant programs – federal, state, and institutional. Creating such a framework would not be all that difficult, the returns would again be enormous, and the data are available.

The table would display students, by family income and dependency, and all institutions, by type, control, and cost of attendance. Separate tables could be created at the program, institutional, state, and national level.

The effort should start with simple questions: What information should be displayed in the cells? Certainly it should include at least those in the simple table above. Should dependent and independent recipients be treated separately? Yes. Should merit-based grants be included? Probably. How about nontraditional students? Of course. You get the idea.

Given today’s budget battles, momentous zero-sum decisions that hold program funding constant will be made at the federal and state level – decisions that will dramatically affect the enrollment and persistence decisions of low- and middle-income students, and institutions as well. Without an agreed-upon framework with which to compare alternative proposals, at least as to who gains and who loses, policy discussions will proceed unproductively as if policymakers were starting from scratch, when, in fact, they are not. Without such a framework, discussions will fail to take properly into account the sobering reality that there are already programs in place that students, parents, and institutions count on, and that changes in existing programs will not only add to complexity and confusion but also have important tradeoffs and consequences.

Building the analytical framework should start now with the Pell Grant program. Given its central importance to millions of students and thousands of institutions, all legislative proposals to modify or alter the program should be specified and evaluated using an up-to-date version of a standard computer model that all stakeholders, including students, can use – a model that includes a common set of inputs and outputs. This is particularly important in the case of proposed changes that would condition the Pell award on the basis of data not currently collected and used in the calculation of award, expected family contribution, or student and institutional eligibility.

Examples include making the Pell award conditional on measures of merit or progress. In such cases, the source of the data must be specified, a new parameter created, and the impact of making the award conditional on that parameter estimated using the model. Winnings must be balanced with losses, and educated guesses must at least be considered about what will likely happen to students affected by the proposed change – particularly those who would lose much needed grant aid if the change were incorporated in the program.

Perhaps most important, proposals whose cost and distributional analyses appear acceptable should be subjected to rigorous case-controlled testing with additional funds – holding students harmless – before implementation. Congress, the Administration, and state legislatures will certainly need this information to make decisions because redistributing a fixed amount of scarce need-based grant aid to meet national and state access and completion goals, while minimizing unintended harm to students and institutions, will be challenging.

Without the light that good data and analysis can shed on the effort, policymakers will again be dancing in the dark.

Bill Goggin is executive director of the Advisory Committee on Student Financial Assistance, an independent committee created by Congress in the Education Amendments of 1986 to provide technical, nonpartisan advice on student aid policy.

Students win tuition money on social gaming site Grantoo

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Recent graduates start a social gaming site where students can win tuition money -- but is it healthy, and can it last?

U.S. should curtail student loans to help taxpayers and students (essay)

Of late, American higher education has been suffering more than its share of the shocks that flesh is heir to.  As a result, we will likely see soon a retrenchment in government-subsidized student loans.

First, the alarm has gone out following the Federal Reserve Bank of New York’s latest study of student-loan debt. In addition to finding that student debt now exceeds $1 trillion, exceeding credit-card debt, the study found that senior citizens are bearing an ever-greater burden of student loans.

Surprised to read “senior citizens” in the same sentence as “student loans”? The study found that fully 18 percent of delinquent student-loan debt now rests on the slumping shoulders of those 50 and older. Parents increasingly are taking out loans to help their children through college. These late-life excursions into debt threaten parents’ retirement prospects, producing the “possibility of another major threat on par with the devastating home mortgage crisis,” says a recent report by the National Association of Consumer Bankruptcy Attorneys.

With this gloomy prediction, Chase, America’s largest bank, appears to agree. Chase just announced that it will stop providing student loans to those who are not its customers. Bad student-loan debt at the bank has increased 72 percent since 2009. So in a move unnervingly reminiscent of the buildup to the housing-market meltdown, Chase Bank has opted to cuts its losses.

But will those ultimately on the hook for these unpaid, government-subsidized loans -- the American taxpayers -- likewise be able to cut their losses? Not according to Vice President Joe Biden.

The vice president took part recently in a Twitter town hall, at which he was asked, "Have you ever thought about lowering education costs by decreasing the role of government intervention in the education business?" His Twittered response conceded that reducing government subsidies “could reduce [tuition] costs.”

Biden’s concession is noteworthy. Generally, defenders of these loans have been loath to admit that the resulting distortion of market forces escalates precipitously both prices and debt in the same manner and for the same reason as occurred in the home-mortgage industry.

But Biden’s extraordinary concession immediately gave way to an ordinary dodge. Even allowing that reducing government intervention could lower tuition costs, it would be “against [the] national interest to do so,” he tweeted, because fewer students would then be able to attend college, cheaper though it may become.

According to the vice president, then, the trillion dollars of loan debt, the rising defaults on these loans, and the skyrocketing tuition prices (average tuition has risen four times faster than inflation over the past quarter-century) are all worth it. They are the price for increased access to a college degree. Refusing to pay this higher price would be “against the national interest.”

Give the vice president credit for honesty. The question then becomes, “What exactly are we taxpayers getting for the increased price he wants us to continue to pay?”

According to Academically Adrift, last year’s landmark national study of collegiate learning, the answer is “not very much.” Of the national sample of students it surveyed, 45 percent failed to show “any significant improvement” in “critical thinking, complex reasoning, and writing skills (i.e., general collegiate skills)” after two years in college. Even after four years in college, 36 percent continued to show only insignificant improvement.

The disappointment produced by these results magnifies when we consider the cost of the drive for greater access. Today, about half of the students who enter college graduate. Of this half, Adrift tells us, only two out of three succeed at demonstrating some substantial learning. In all, then, only one in three college-headed students leaves with both a degree and the learning a degree is meant to certify.

For this sad outcome, Americans are footing an unsustainable debt burden. The vice president urges that we stay the course nonetheless. Will his countrymen follow him, or will they make like Chase Bank and exit before the bubble bursts? Would growing numbers begin to abandon the quest for a college degree?

This is hard to imagine when for decades we have been told, and with some truth, that a college education is the alpha and the omega. Consensus regarding the value of a degree has served to justify the upward spiral of government subsidies, tuition prices, and student-loan debt. But Chase Bank’s move is only the latest bit of evidence that, for some time now, the benefits of college are plummeting proportionately as tuition prices and loan-debt soar.

Nevertheless, Americans, at least for the short term, likely will continue to borrow for college as long as government-subsidized loans are available. But the short term may prove to be very short.

If we continue on the course urged by the vice president, loan defaults will continue to rise, which means that the bill to the federal government, which guarantees the loans, will continue to rise. The increased dollars required to foot this bill can come only through raising taxes, or cutting funding for other programs, or government borrowing. In a still-stagnant economy, raising taxes is knotty.  Cutting other programs has rarely been an option for which our national leaders have shown much stomach, as it creates only a new class of aggrieved constituents.  Equally problematic is increasing government borrowing when the deficit and national debt already stand at historic highs.

What seems likely, regardless of who wins the November elections, is a cutback in government-subsidized student loans. It seems that as Chase goes, so eventually must go the federal government. As the federal spigot closes, so will be the number of students able to attend college, at least initially. But the resulting downward pressure on demand will force universities to reduce prices, restoring market equilibrium in time.

How and when this will transpire is a matter for speculation, but may be explained reasonably, and not without humor, by what is known in investment circles as the “greater fool theory.” According to this theory, market bubbles are caused by overly cheery investors (“fools”) who buy overvalued products believing that they will be able to sell them at a profit to other (“greater”) fools. The bubble stays intact so long as greater fools are available to prop up the market. The bubble bursts when there are no greater fools left. At this point, the last greater fool finds that he is in fact the “greatest fool.”

Mr. Biden’s critics charge him with betting that there are still fools out there (students, parents, and taxpayers) who will continue to invest in the overvalued asset higher education has become. However, a bubble requires more than the credulousness of fools. It also requires that they be solvent. Collective foolishness has driven the country to brink of insolvency, leaving even the foolish among us with no option save self-restraint.  As the maxim has it, “The wise man does at once what the fool does at last.”  In higher education, the country may be poised finally to do the right thing, having exhausted all other alternatives.

Thomas K. Lindsay directs the Center for Higher Education at the Texas Public Policy Foundation. He served as deputy chairman and COO of the National Endowment for the Humanities during George Bush’s second term.

Cooper Union will charge for some programs so three undergraduate programs can remain free

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Cooper Union, tuition-free for more than a century, will keep its traditional undergraduate divisions free by cutting expenses and charging for some new programs.

Obama's focus on loan interest rate means another short-term fix

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The looming interest rate increase for subsidized student loans replays a familiar storyline: crisis, last-minute fix, another crisis. Meanwhile, the loans' future is in jeopardy.

Essay proposing changes in federal treatment of military education benefits

Although long overdue, there is finally a debate in Congress, the White House and the news media over how the federal government should address rapidly increasing college tuition. President Obama has repeatedly attacked rapidly rising tuition in speeches. Peter Thiel controversially called higher education the biggest bubble since real estate circa 2008. And for the first time in a long time, the wisdom of the access-to-college-at-all-costs mantra is being questioned by more than just the fringe on both sides of the aisle. Senator Richard Durbin’s (D-IL) recent proposal turned some heads, but the consensus is that his proposal has little chance of passing — and is definitely a nonstarter in an election year.

Durbin suggests changing the so-called 90-10 rule -- wherein for-profit and career colleges must earn at least 10 percent of their revenue from sources other than federal student aid to be eligible to receive any federal aid -- in two key ways.

First, he proposes that the required revenue split be shifted to 85-15, which means that these colleges would have to earn more revenue through non-federal aid sources. (It was actually this way when the idea was first enacted into law, but was softened to 10 percent amid lobbying by career colleges.) And more important, he proposes that revenue earned from military benefits such as the Post-9/11 GI Bill be included in the 90 (or 85) percent, in recognition of the reality that military benefits are de facto federal aid.

Today’s 90-10 rule creates a powerful incentive for for-profit and career colleges to recruit aggressively anyone eligible for military benefits -- but not for the right reasons. Indeed, because military benefits count as part of the 10 percent of “non-federal money,” for every one military student a college signs up, it can acquire nine non-military students paying full tuition with federal loans.

Durbin’s proposal to include military benefits in the 90 percent has some common sense behind it; after all, these are federal funds. Although doing this would probably increase prices in the short-to-medium term as for-profit and career colleges raised tuition to be sure that 10 percent of aid was coming from non-federal sources, in the longer run properly accounting for federal costs will make the true cost of education more transparent and create more room for start-up higher education institutions that are lower in both price and cost to emerge.

Although it’s a shame on the one hand that this looks unlikely to pass, it may open an opportunity to improve the legislation both for the short and long term in some important ways.

In the short term, Durbin should modify the language of the proposed bill in a few ways. First, drop the idea of moving the policy to 85-15 in order to garner consensus and get the bill passed.

More importantly, he should change the bill to address people, not revenue. The difference is subtle, but critical. Instead of requiring 10 percent of revenue to come from non-federal dollars, require that at least 10 percent of students pay full tuition out of pocket. This is, in essence, how some of the regulations were written for the GI Bill shortly after World War II when there was considerable -- and justified -- fear that government dollars were going to flow toward unethical and poor-quality institutions. The idea behind this was simple. People with sufficient means to pay the tuition outright have the social capital to identify if the education is of high quality and if the value proposition is likely to have a positive return on investment, even if that return takes nearly a lifetime.

Many people correctly point out that 90-10 in its current form actually drives up tuition by incentivizing colleges to raise prices so that student loans and grants don’t quite cover the cost and they can receive 10 percent of revenue from non-federal aid sources.

By making 90-10 about people, not revenue, we give these schools a way out without raising prices: recruit students with the means to pay or lower prices enough so as to be priced attractively for many more individuals to be able to pay full tuition. Doing this would also make other proposals that might be logical under the current 90-10 construct — such as allowing institutions to limit the amount of federal loan dollars students can take out or to subsidize low-income students by paying the federal government back for excess federal aid received so that the college is in compliance with the 90-10 rule — largely irrelevant.

Thirdly, the 90-10 rule should apply to all colleges regardless of tax status, not just to for-profit and career schools. To our knowledge there are no nonprofit or public colleges that are close to 90-10, so it shouldn’t affect them considerably, but their inclusion gives an important nod to the role that for-profit companies can and should play in reducing costs and driving educational quality. Additionally, applying the rule uniformly addresses the perspective that heightened scrutiny reflects bias against for-profit actors in the education space and capitalism more generally.

Looking Longer Term

These quick fixes will eliminate the perverse incentives to recruit veterans regardless of program quality or fit, but they do not address the more persistent problem of massive annual tuition increases. Doing that requires a substantial realignment of federal financial aid with a longer-term view -- and it means moving beyond the clunky 90-10 rule entirely.

Given the amount of money the federal government provides to higher education, it’s perfectly reasonable for it to use those dollars to promote affordable, high-quality options.

We recommend establishing a new track for institutions to access federal loans and grants based on measures of quality and student satisfaction relative to total cost, not just tuition price. The better a school performs on this measure compared to its peers, the higher percentage of its educational operation it could finance with federal aid -- thereby eliminating the all-or-nothing access to federal dollars and encouraging students to make decisions based on quality and cost, which will drive innovation.

To create this metric -- an institution’s Quality-Value Index -- the government could add together four measures: job-or-school placement rate 90 or 120 days after graduation (assuming the student isn’t already in a job); graduates’ earnings change as a percentage based on students’ risk profile -- over some amount of time -- relative to the total revenue the institution received (regardless of source and including grants, subsidies, gifts, expenditures from endowments and so forth); alumni satisfaction; and loan repayment.

The devil is in the details, so implementation should take a few years. Nevertheless, changing the funding dynamic in this way would accomplish several things.

It would move the focus away from judging colleges and universities on inputs such as student-teacher ratios and arbitrary outputs such as degree attainment, to more tangible student-centered outcomes based around how well the experience improves students’ lives relative to the total price students and society pays.

It avoids controversial discrimination between for-profit and nonprofit providers.

And given that providers are motivated to follow dollars and innovate aggressively, innovation would focus on lowering costs, increasing speed of learning and aligning offerings with the evolving niches of employer needs -- not on aggressive recruiting.

Getting this right ultimately would accomplish goals on which everyone can agree: allowing many more students to receive a high-quality education without breaking their banks or the nation’s.

Gunnar Counselman is founder and CEO of Fidelis, a company that works with colleges and veterans organizations to help military employees make a transition to the work force. Michael B. Horn is the co-founder and executive director of the education practice of Innosight Institute, a nonprofit think tank devoted to applying the theories of disruptive innovation to problems in the social sector.

Company hopes to get alumni to provide private loans to students

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A company out of Stanford's business school hopes to transform the loan market by getting alumni to invest in students.

Higher education proposals in 2013 Republican budget

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A proposal announced Tuesday would cut Pell Grants and make student loans appear more costly on federal balance sheets.

Essay: Hauptman revise Pell to focus on neediest students

Despite its many accomplishments since its enactment in 1972, the Pell Grant program has strayed in key ways from the initial conception of the Senator for whom it is now named. Instead of disadvantaged students and their families knowing years in advance of their eligibility for aid, the process of applying for and receiving a Pell Grant (and federal student aid more generally) is excessively complicated and often serves as a barrier to access.  Also, roughly one in two undergraduates now receive a Pell Grant, meaning that it is far less targeted to the neediest students. 

This expansion of eligibility also means that it takes a lot more money to fund Pell Grants at any given level of maximum award.  Moreover, there is reason to be concerned that the recent large increases in Pell have had the unintended effect of accelerating the trend for more than a decade in which institutions move their own aid up the income scale because Pell is viewed as taking care of the neediest students.  

In short, there is little evidence that the large investments over time in the Pell Grant program have moved us much closer to meeting national goals such as narrowing gaps in the participation, completion and attainment rates of rich and poor students and those from different ethnic and racial groups.  In a world of more plentiful resources, this ineffectiveness might be less of a problem, but in the current climate of soaring federal deficits, it is neither likely nor desirable for Pell Grants to continue to be shielded from a sharp-eyed review of their effectiveness. 

The Forgotten Middle Class
In a companion essay,
Hamid Shirvani argues for
expanding Pell by ending
federal tuition tax credits.

One way to react is to make further modifications in the current program structure in the hope that such changes will lead to greater effectiveness. But this seems a faint hope. The hundreds of pages of program rules that have accumulated over four decades are virtually indecipherable; further patches will make them more so.

A better way to proceed, in my view, is to start from scratch, including a reaffirmation or an adjustment in principles for modern times and then designing a program that meets those principles.  Luckily, contrary to student loans where hundreds of billions of dollars of outstanding loans make the process of starting from scratch much more difficult, in the case of grants, every year represents a chance to start anew.

My candidates for reform principles would include a radical simplification of the application process and a better targeting of benefits to the neediest students.  I would also include as a principle that Pell Grants should be better integrated with other federal policies so that they work in concert to meet key policy goals rather than the current situation where they too often work at cross-purposes.

To achieve these purposes, I suggest the following elements of a redone Pell Grant program:

1) The FAFSA should be eliminated and replaced with a provision whereby parents and students can apply for aid by allowing their federal income tax submissions to be used to calculate their eligibility for all forms of federal student aid. Families who don’t submit income tax forms but who are eligible for welfare, Medicaid, food stamps or the Earned Income Tax Credit (EITC) would be automatically eligible for the full amount of Pell Grants and other federal student aid.

2) The rules for determining eligibility for Pell Grants would be based on the 1040A income tax provisions. These tax-based amounts could be translated into categories of eligibility rather than precise dollar amounts so that students with the least family resources would have the highest category of eligibility and thus be eligible for the maximum Pell Grant award.

3) Eligibility for Pell Grants would be more restricted than is currently the case in at least two key ways. The family income of students qualifying for Pell Grants would be limited to a certain percentage of national median income or some other indicator of family financial strength.  In addition, eligibility for Pell would once again be limited to students enrolled half time or more. To address the legitimate needs of the groups of students who would no longer be eligible for Pell grants, their eligibility for tuition tax credits could be enhanced (see below).

To make the overall student aid system more effective, in addition to changes made to Pell Grants, other student support policies should be changed to allow for more effective integration with Pell Grants.  Three specific examples of this are:

1) Integration with tuition tax credits.  For any given student, as family income increases, eligibility for tax credits should increase up to the maximum credit as Pell Grant eligibility recedes. This integration would recognize that tuition tax credits can be a more effective way of providing aid to middle-income students and students enrolled for only one course than cramming these students into Pell Grant eligibility and thereby reducing the effective maximum award for any given level of program funding.

2) Distributing other federal student aid.  The formula for distributing campus-based student aid funds to institutions and LEAP funds to states should be changed so that in the future any appropriated funds would be distributed on the basis of the number of Pell Grant recipients who graduated in the previous year from that institution or institutions within a state. Institutions and states should also be given greater autonomy to spend those funds as they see fit to enhance the chances of Pell Grant recipients graduating from college.

3) Limiting in-school interest subsidies.  Eligibility for in-school interest subsidies in the federal student loan programs in the future would be limited to Pell Grant recipients.

The collective effect of these changes would be to reduce substantially the $60 billion in federal funds that are currently expended annually on federal student aid, thus contributing to the overall federal deficit reduction effort.  These changes also would help to make federal student aid investment more effective in meeting the goals of increasing college participation, completion and attainment and to narrow chronic equity gaps in these indexes.

Arthur M. Hauptman is a public policy consultant specializing in higher education finance issues.


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