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Redesigning Financial Aid System Could Make College More Accessible and Affordable

Oct. 23, 2013, 1:40 PM

The summer 2013 bipartisan showdown in Washington over student loan interest rates highlighted the crisis in college affordability once again. The cost of college outpaces student financial aid and median family income in most states, rising faster than any other sector of American society and shutting more than 100,000 qualified low-income students out of higher education each year. For more and more middle-class and low-income families, the dream of sending a child to college seems just that—a dream. All this as the U.S. system of higher education falls farther behind the rest of the world in producing postsecondary degrees and certificates.

Vanderbilt University Professor William Doyle proposes a means of curbing college costs by replacing the existing federal aid system with a more-efficient model that emphasizes need-based aid and changing the way student loans are repaid to lower the default rate. With the largest declines in real average family incomes among those in the lowest 20 percent of the population, he argues that such reforms are crucial if college is to be more accessible and affordable.

“What’s happening with college costs is very similar to what’s been going on in health care—the price of this vitally important service keeps going up, and we’re scrambling to figure out where we’re going to find the money to pay for it,” says Doyle, associate professor of public policy and higher education at Vanderbilt University’s Peabody College of education and human development. “In recent years, it has become abundantly clear that there just won’t be any more money. So, we need to figure out a way to use the resources we have for the greatest benefit for society.

“Higher education is an instrumental good. It improves lives in society as a whole, and the people financial aid can most affect are those who have the least resources. At all levels–institutional, state and federal—aid should focus on those students who would not go to college without additional funding. This is the most efficient use of scarce resources.”

Doyle studies trends in higher education politics and policy, including finance. His Committee of Economic Development report, “A New Partnership: Reshaping the Federal and State Commitment to Need-Based Aid,” released earlier this year, details a plan for overhauling financial aid. Despite two presidential administrations that both funded the Pell grant at unprecedented levels, he says, the proportion of college tuition and required fees covered by the Pell grant has gone down. His plan’s primary proposal would combine Pell and all other federal grants into one federal-state matching grant program to provide portable student aid. Several criteria would determine how funds would be awarded to states, with states required to match federal spending at a rate of one state dollar for every four federal dollars. For states to be eligible, grant funding would have to be awarded based on need, and tuition increases at public institutions of higher education would be limited to the rate of increase in family income.

“Some have called this plan radical, but if you think about it, this is how we handle a variety of other areas,” Doyle says. “It was designed, in many ways, to be very similar to the structure of Medicaid, to the structure of the Affordable Care Act, to the structure of the president’s early childhood education initiative—with the states and the feds working together.”

Although the federal aid system established almost 50 years ago was intended to ensure access to a college education for low-income students, colleges have increasingly used aid to attract high-achieving and affluent students who could attend without assistance. How has the federal financial aid system gotten so out of balance? Doyle blames competing strains within higher education.

“The problem comes when essentially all of the payoffs have to do with meeting some poorly designed standards for excellence and there are almost no payoffs for ensuring equity. So, the idea here would be to use the resources that we have to both increase participation among those who wouldn’t otherwise go to college and—this is what’s really different about this plan—change the incentives structures for states and for institutions so that ensuring equity is one of their goals.

“Public college prices have increased over the last decade in large part because state appropriations have gone down and institutional leaders have turned to students and families to cover the overall cost of providing higher education, with state leaders allowing this to happen. We can align the incentives up and down the system and leverage federal investment to get states to increase their involvement and investment. We haven’t done this in higher education, and we’ve seen states and institutions go off in their own directions, assuming that the feds can take care of access. We just can’t assume that anymore.”

Many public institutions have used aid to try to compete in a sort of higher education arms race for the prestige and rankings that can attract more funding. The changes Doyle proposes for public institutions in limiting tuition and in their use of financial aid in particular would take them out of that arms race.

“It’s very difficult for them to compete with private institutions anyway,” he says. “They’re using a pretty large amount of taxpayer dollars to compete in a game that they’re almost predestined to lose. If people knew exactly how this is playing out, I don’t think many would support it. There’s nothing in my proposal that would decrease the quality of education these institutions offer, but it might change where they are in these relative rankings.

“The purpose of the financial aid system isn’t to support institutions. It’s to support students. We’ve gotten a little confused on that part. We had this debate at the inception of the Pell grant itself. We have to start being as aggressive about other solutions as we have been about using tuition to support institutional roles.”

A New Partnership also addresses the current student loan system. Of students enrolled in public colleges and universities, half carry student loans. A Fidelity survey of 750 members of the class of 2013 reported that the average graduate owed $26,000 for government loans. To diminish this debt burden and reduce the number unable to repay loans after graduation, the plan proposes making income-based repayment the standard option for loan programs, with payments handled through payroll withholdings much as federal insurance contributions are.

And to simplify applying for financial aid, Doyle propounds using tax returns to determine eligibility. Now, families must file taxes and complete the Free Application for Federal Student Aid (FAFSA) before they learn if they are eligible for aid. His plan would also eliminate tax credits for higher education, which primarily fund students who would attend college anyway. Using the $18.2 billion savings from removing those credits could support a competition like the Obama administration’s K-12 Race to the Top for state-level innovations to improve access through student financial aid. Such a system could also fuel an ambitious, campus-based incentive program to reward institutions for funding need-based aid that also encourages student success.

“We relied on institutional good will for a long time,” Doyle says. “At institutions like Vanderbilt, you can see that it still goes a long way. They actually do spend a lot of money on funding for low-income students even though they don’t really have to. But we’ve come to the point at which we can’t rely just on institutional good will any longer. We have to structure incentives for educational institutions so that they continue to ensure equity as one of their goals.

“We’ve backed into a policy solution to paying for college that extracts more and more from students and families. Institutions have a real responsibility to become more effective in their use of families’ money and to rein in college costs. I think that the time is coming when people are going to start taking alternatives like online courses seriously. Some of these alternatives may end up putting pressure on institutions to ask themselves how they can present something that’s high quality without constantly increasing the price.”

 

 

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