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MARCH-APRIL 2007
It’s Time for Serious Reform of the Student-Aid System by Sandy Baum It is time to consider serious reform of the complex system of federal, state, and institutional subsidies that has evolved to support postsecondary students. A rational long-term planning process never would have generated the array of programs that today’s students face, with complicated application processes, inconsistent rules and regulations, and problematic interactions when students seek aid from multiple programs. Given the billions we spend on student aid and the critical role of these subsidies both in opening opportunities and in developing a skilled and flexible workforce, we can no longer ignore the system’s inequities and inefficiencies. Federal and state governments, colleges and universities, employers, and other private sources of support distributed about $135 billion in financial aid to students during the 2005-06 academic year, almost double the funding a decade earlier after adjusting for inflation. Without these grants, loans, tax benefits, and work subsidies, many of the nation’s 17 million undergraduate and graduate students would be unable to continue their education at the institutions of their choice. Yet the gap between family and student ability to pay and the price of college continues to grow. More funding is only part of the solution, though, because current funds are not optimally distributed. While some existing programs have opened up educational opportunities, others are so poorly targeted or so complicated that many parents and students are unable to take advantage of them. Despite its significant contribution to increased college enrollments over the past 25 years, the patchwork of grants, loans, and tax benefits available to students has failed to close the gaps in college participation between middle- and upper-income students and their lower-income counterparts with similar academic backgrounds. College-enrollment rates among high-achieving low-income students, in fact, now are similar to those among the lowest-achieving students from the upper quarter of the family-income distribution. The increasing amount of money devoted to student financial aid and the urgency of the problems it is designed to solve make it imperative that we examine the current system in search of ways to use its dollars more efficiently and equitably. It is too easy for higher-education advocates to ignore questions of student-aid policy, urging increased funding but viewing program specifics as technical details best left to experts. Yet these policy issues must be addressed if we are to succeed in narrowing the gaps in educational opportunity that persist in our society—and that are likely to deepen as its demographic composition changes. The Federal Government and Equal Opportunity While states provide the core funding for public colleges and universities and share in the mission of providing educational opportunities, the federal government has primary responsibility for furthering equality of opportunity among Americans. The federal government has recognized this responsibility at least since it established the Pell Grant program (then called Basic Educational Opportunity Grants) in 1972. Targeted at low-income students, these grants allow many to enroll in college regardless of their financial circumstances. The Pell Grant program provides an average of about $2,400 annually to over 5.3 million students, but this average grant has failed to keep up with inflation since 2002. Currently, the $4,050 maximum Pell Grant covers slightly more than half as http://www.changemag.org/se/util/display_mod.cfm?MODULE=/se-server/mod/modules/semod_printpage/mod_default.cfm&PageURL=/Archives/Back%20Issues/…
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much of the price of a year at a public four-year college as it did 20 years ago. Restoring the purchasing power of the Pell was a central theme in the recent report of the Secretary of Education’s Commission on the Future of Higher Education, and the new Democratic Congress and President Bush have both identified increasing financial-aid funding as one of their top budgetary priorities. But the increases in the President’s proposed budget would be bought at the expense of other programs targeted at needy students, such as Perkins loans. And the budgetary implications of serious increases in the Pell make it difficult to be optimistic that it will be raised to its former purchasing-power level in the foreseeable future. Instead of increasing the funding for Pell Grants, in 2006 Congress instituted two new grant programs for a subset of Pell recipients. The first, Academic Competitiveness Grants, provides an additional $750 to first-year Pell recipients who have completed a rigorous high-school curriculum with at least a B average. These students are eligible for an additional $1,300 in their second year of college if they maintain a B average there as well. The second new program, SMART Grants, provides $4,000 a year for third- and fourth-year Pell Grant recipients majoring in science, mathematics, engineering, and selected languages. How many and which students will be supported by these grants is not yet clear, but the bureaucracy and complexity surrounding the programs already pose problems for the government, institutions, and students. Moreover, these programs provide no assistance at all to students whose incomes are just a few dollars too high to qualify for Pell Grants. The federal government has not, as is commonly asserted, shifted its support of college students from grants to loans. Although postsecondary students are increasing their borrowing from banks and other private sources at an alarming rate, the ratio of federal grants awarded to loans awarded has fluctuated only slightly over the past decade. However, the federal government now awards about half as many dollars to students in the form of tax credits and deductions as it does in the form of Pell Grants. It also provides subsidies to families that save for college in specified accounts and allows them to deduct some student-loan interest payments. Unlike Pell Grants, these tax benefits are not targeted at low-income students. Because only households that pay taxes are eligible for these subsidies, they miss the very poor entirely, favoring middle- and upper-income families over lower-income families. Less than half of the benefit of the federal education tax credits, and less than a quarter of the benefit of the tuition tax deduction, go to taxpayers with incomes below $50,000. Over 40 percent of the benefit of the deduction goes to those with incomes between $100,000 and $160,000. Although politicians frequently promote tax credits or deductions as means to increase educational opportunity, advocates for students tend to see them as diverting funds from the students most in need. The strengths and weaknesses of this tax policy, begun in 1998 with the introduction of the Hope and Lifetime Learning credits and augmented with the tuition-and-fee tax deduction in 2002, provide useful insights into the fundamentals of sound student-aid policy. The downside of the current strategy is apparent. Despite a clear national interest in increasing college-going rates, there is no evidence that the tax credits and deductions have any measurable impact on enrollments. Instead, tax benefits subsidize students who would attend college anyway. Timing of the benefits exacerbates the problem: Reduced tax liabilities put money in people’s pockets in the spring of the year following the calendar year in which tuition was paid, and sometimes more than a full year later. This is no solution for students who can’t pay the bills to begin with. Moreover, unlike other student-aid programs, the tax benefits cover only tuition and fees, not room, board, or other education-related expenses. The fact that tuition and fees form a relatively small proportion of the expenses incurred by students at low-priced institutions, such as community colleges, further skews the benefits away from the most needy students. Also, in the current system taxpayers must choose among the three credit and deduction options. In other words, savvy students benefit most from these policies; government estimates suggest that about a third of eligible taxpayers do not claim the credits and deductions. Grant aid that is delivered to the student or the institution at the time of enrollment is a much more direct and transparent means of providing support. http://www.changemag.org/se/util/display_mod.cfm?MODULE=/se-server/mod/modules/semod_printpage/mod_default.cfm&PageURL=/Archives/Back%20Issues/…
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Nonetheless, good arguments exist for using the tax system to subsidize students. Certainly many families with incomes up to $110,000—those eligible for the credits in 2006—struggle to pay the full price of a college education. And while the exclusion of low-income students from the benefits is difficult to justify, making the credits refundable, following the model of the Earned Income Tax Credit, could rectify the problem. Moreover, there are clear political advantages to the tax strategy. Unlike traditional student-aid funds, tax expenditures do not need to pass through the Congressional appropriations process. Tax benefits generally remain in effect unless they are repealed. In addition, public support is greatly strengthened by broad eligibility. Unlike programs such as Pell Grants, which are narrowly targeted at the neediest students, tax benefits have a large constituency among voters. In 2005-06, almost 9 million citizens reduced their tax bills through use of the tuition tax credits and deductions, while fewer than 5.4 million students received Pell Grants. In sum, the current tax credits and deductions are not well-designed. But it does not follow that the tax code cannot be an effective means of delivering student aid. State Governments’ Subsidies to Colleges The major contribution from state coffers to higher education is the appropriations provided to subsidize institutions’ budgets. In addition to improving educational quality, these subsidies lower the price students pay. The higher the state subsidies, the lower the tuition and fees at public colleges and universities. A critical difference between appropriations to institutions and aid awarded directly to students is that subsidies to institutions benefit all enrolled students, not just those to whom the institution chooses to give a discount. This is problematic since grants don’t just go to students with need. Appropriations could be designed to target low-income students by subsidizing institutions that tend to enroll less-affluent students. But this seldom occurs; affluent students are heavily concentrated at the flagship universities that provide relatively high-cost education, while lower-income students are disproportionately represented at community colleges, where faculty are paid less, campus facilities are less elaborate, and less is spent on the education of each student. Although the system of state appropriations is integral to both college access and college quality, a discussion of the studentaid system must focus instead on state policies that provide subsidies directly to students. All but two states have grant programs that award funds directly to students. In fact, states distributed almost $7 billion in grant aid to postsecondary students in 2005-06. This aid constituted about 12 percent of the total grant aid all students received and a slightly higher percentage of the grant aid undergraduates received. States have taken a wide variety of approaches towards student aid. Some rely heavily on grant aid to support higher education. South Carolina spends about a third of the amount it appropriates for higher-education operations on student grants, and Georgia, New York, and Vermont all spend between 21 and 24 percent. At the other end of the spectrum, grant aid equals 10 percent of appropriations in Michigan and Minnesota and less than 1 percent in Alabama, Alaska, Arizona, Hawaii, South Dakota and Wyoming. It is difficult to find consistency in grant-aid policies even across states with similar approaches to tuition. Among hightuition states, in 2004-05 New Jersey granted almost $1,000 per student compared to a national average of $562, but New Hampshire awarded only $76 per student. Among low-tuition states, New Mexico awarded over $700 in 2004-05, while Wyoming awarded only $7 per student. It is not only the level of grant funding combined with the level of tuition and fees that determines college affordability, but also how the funds are distributed. As recently as 1993, 90 percent of states’ grant money was distributed on the basis of need. That percentage had declined to 81 percent by 1998 and to 73 percent by 2004. In 1993 Georgia introduced the Hope Scholarship program, which promised free tuition and fees at state universities to students who graduated from Georgia high schools with at least a B average. While a family-income cap of $100,000 was initially imposed, that restriction was lifted in 1995. In 2005, 99 percent of freshmen at the University of Georgia and 40 percent at public institutions statewide paid no tuition and fees. Because of the eligibility criteria, middle- and upper-income http://www.changemag.org/se/util/display_mod.cfm?MODULE=/se-server/mod/modules/semod_printpage/mod_default.cfm&PageURL=/Archives/Back%20Issues/…
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students are more likely than lower-income students to receive these grants. Many states have since followed Georgia’s example, each with its own variation on the theme of basing awards on academic credentials and of making a clear public announcement about the program so that students will know from an early age that if they meet the criteria, they will have the funds to enroll. Not surprisingly, these merit-based state grant programs are quite controversial. There are differing opinions about the extent to which college-enrollment rates—as opposed to enrollment at state institutions rather than at out-of-state institutions—are actually improved by these programs. There is also evidence that the programs in some states exacerbate the gaps in enrollment rates across racial and ethnic groups. On the other hand, widespread support exists among collegeaccess advocates for public programs that guarantee low-income students early on that they can receive aid for college, thus encouraging them to prepare academically. Arguably, the cost of these programs squeezes out other, more progressive forms of aid. Georgia and South Carolina are examples of states that have very high levels of grant aid per student but virtually no need-based aid. Other states have maintained their commitments to need-based grant aid for students. New York has the highest level of grant aid per student in the country, all of it need-based. California also has a generous need-based grant program—combined with relatively low levels of tuition and fees. A unique and geographically specific program is the Tuition Assistance Program in Washington, D.C. Because there is only one public four-year institution in the District of Columbia, the federal government provides subsidies for students to enroll at public institutions or historically black colleges and universities anywhere in the country or at private colleges in the Washington area. This program has dramatically increased college enrollment rates among D.C. high-school graduates. As this overview suggests, even if the federal financial-aid system is rationalized and simplified, students across the country will face complicated and inconsistent options unless coordination between state and federal policies is improved. Financial Aid from Institutions In 2005-06, colleges and universities awarded about 30 percent more in grant aid to their students than did the federal government. As is the case with state funding, this grant aid supplements general institutional subsidies that lower tuition for all students. Student-grant programs in the form of discounts to published tuition and fees allow institutions to charge different prices to different students. Some institutions grant discounts to almost all of the students they enroll but believe that students respond more positively to an individual award than they would to lower across-the-board tuition. The practice of tuition discounting or “price discrimination”—charging different students different prices for the same educational opportunities—is a longstanding feature of private higher-education institutions, which rely almost entirely on non-public sources to fund the subsidy. Institutional grant aid—funded via state and local appropriations and, increasingly, private giving—also has become more common at public colleges and universities in recent years. The percentage of full-time undergraduates in public four-year colleges and universities who receive grant aid from their institutions increased from 16 percent in 1992-93 to 28 percent in 2003-04. Fourteen percent of full-time students at two-year public colleges received institutional grants in 2003-04, up from 10 percent in 1992-93. Just as increasing proportions of federal student-aid funds are devoted to unsubsidized loans and tax benefits, and as many states have moved from need- to merit-based aid, institutions increasingly use their grant aid to meet strategic enrollment goals. These goals go beyond increasing access and diversity to include raising the academic or athletic profile of the student body or increasing the size of the entering class. Despite wide variation, on average public four-year institutions devote less than 10 percent of their gross tuition and fee revenues to need-based aid, compared to almost a quarter at privates. But they devote almost as much to non-need-based aid as do the privates. Specifically, at public two-year colleges and private four-year colleges, about two-thirds of the institutional grant aid goes to needy students; the remaining one-third subsidizes students who, according to the needanalysis formula, have access to adequate funds without those grants. At public four-year colleges, over 60 percent of institutional aid goes to students who could afford to attend without an institutional discount. http://www.changemag.org/se/util/display_mod.cfm?MODULE=/se-server/mod/modules/semod_printpage/mod_default.cfm&PageURL=/Archives/Back%20Issues/…
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Of course, higher tuition levels at private colleges result in many students who would not have need if they attended a public college being “needy” if they want to attend a private institution. Yet although a significant portion of the non-need-based aid goes to athletes or to categories of students who receive state-mandated tuition waivers, it is clear that public colleges and universities are directing significant dollars to attracting students who will enhance their prestige, rather than focusing on increasing access. (While there is strong evidence that the proportion of need-based grant aid from institutions has decreased over the past decade, this trend appears to be leveling off.) Differences among private institutions also are important for understanding the relationship between institutional aid and college access. In high-priced private colleges, which tend to enroll relatively few low-income students, grant aid is inversely related to family income: Lower-income students receive significantly more-generous institutional awards than their moreaffluent classmates. On the other hand, lower-priced private colleges, which enroll much larger proportions of low- and moderate-income students, more often base their awards on non-academic criteria. These institutions are less well endowed than the more expensive colleges and almost never have the option of meeting full need for all of their students. Rather, it is vital to their financial stability that they enroll more students who do not have high need and who can bring them tuition dollars. But regardless of the explanation, the impact on students is the same. Those low- and moderate-income students who are fortunate, motivated, and talented enough to gain admission to highly selective institutions are likely to receive generous funding. The highly publicized programs of elite privates and flagship publics—including Harvard, Princeton, Stanford, the University of Pennsylvania, the University of North Carolina-Chapel Hill, and the University of Virginia, among others— remove the financial barriers for these select few students. But they do not and cannot solve the problems facing the vast majority of students from similar backgrounds. Grant aid from private sources, including employers, foundations, and other organizations, increased from about 12 percent of the total in 1995-96 to 15 percent a decade later. While foundations and other scholarship organizations frequently focus their awards on needy students, employer subsidies are much more likely to go either to adults with significant earnings of their own or to the children of employees of financially secure organizations. It is clear that only public policy can improve the targeting of financial subsidies so that they do more to narrow the gaps between the haves and the have-nots. Growth in Student Loans Total grant aid to postsecondary students (undergraduate and graduate) grew by almost 90 percent in constant dollars between 1995-96 and 2005-06, and total grant aid to undergraduates grew by 144 percent. Grant aid per student increased more slowly because of increasing enrollments but still rose by 43 percent for undergraduates and by 46 percent for all students over the decade. But at the same time, the cost of attending college has grown even more rapidly and has far exceeded growth in incomes, with the possible exception of the wealthiest families. Thus, the overall growth in grant aid meets only a fraction of the need generated by the growth in college prices. As a result, students are increasingly turning to loans to finance their education. The composition of student loans has changed dramatically in recent years. A decade ago, subsidized Stafford loans, on which the federal government pays the interest while students are in school, constituted over half of borrowing for education. By 2005-06, that proportion had declined to one-third. Part of the decline resulted from an increase in borrowing under the unsubsidized Stafford program, which is available to all students regardless of their financial circumstances. Instituted in 1993, this program accounted for about a quarter of student loans in 1995-96 and a third 10 years later. Borrowing by parents under the Parent Loans for Undergraduate Students (PLUS) program also increased during this period. But the real story is in private, unsubsidized loans. Relatively insignificant a decade ago, loans from banks and other private lenders now account for about 20 percent of education borrowing. Eighty percent of the $17.3 billion in private loans issued in 2005-06 went to undergraduate students. We have limited information about these private student loans, which involve no subsidy and are not actually part of the http://www.changemag.org/se/util/display_mod.cfm?MODULE=/se-server/mod/modules/semod_printpage/mod_default.cfm&PageURL=/Archives/Back%20Issues/…
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student-aid system. We do know that unlike the Stafford program, under which dependent undergraduates can borrow a maximum of $23,000 over their undergraduate careers, private education loans can be as high as the cost of attendance, minus any other financial aid received. Students also do not have to complete the daunting Free Application for Federal Student Aid (FAFSA) to get these loans. On the other hand, private loans have differential interest rates based on credit scores and no limits on the interest rates that can be charged. Also, the deferment and forbearance provisions of federal loans that protect students in difficult financial circumstances do not apply to private loans. In other words, private lending is serving an important function in providing liquidity for students who otherwise might not be able to enroll in college, or at least not in the college of their choice. But similar to the movement towards federal tax benefits that exclude the truly needy, the increase in state grants based on academic credentials without regard to financial circumstances, and the strategic use of institutions’ grant dollars for enrollment management, the movement towards private student loans has deepened the gulf between the haves and the have-nots. The System Overall On one hand, our student-aid system is a success story. Responsibility for financing higher education is divided among students, families, state and local governments, colleges and universities, and the private sector. Consistent with the structure of the U.S. economy, there is no master plan for the division of the burden. But the market’s “invisible hand” has created a partnership that has supported an increase in the college enrollment rate of 18-to-24-year-old high-school graduates—from 34 percent in 1967 to 46 percent in 2004 (despite flat participation rates for the past decade). In addition, the number of older college students increased sharply during the 1970s. Much of the aid that enabled this growth has been in the form of grants that students do not need to repay, while federal student loans have provided access to funds for students without credit histories, the majority of whom will be able to repay their loans without undue burden out of the increased earnings that will result from their education. But the story could be much better. Unacceptable gaps persist in college participation and success among students from different socioeconomic backgrounds, and there is no doubt that inadequate and ineffective financial support for poorer students perpetuates those gaps. More money for existing need-based aid programs would certainly help, as would strategies for reducing the rate of growth in the cost of producing high-quality college education and in the prices institutions charge for it. But part of the solution also must come from reform of the student-aid system. The current system allows too many students to fall through the cracks and creates unnecessary bureaucratic and logistical burdens for those who manage to navigate its complexities. Moreover, it subsidizes too many students whose behavior is not measurably affected by receiving the assistance, while too few dollars go to students whose opportunities are severely restricted by inadequate funding. A complete and realistic plan for reforming student aid can only emerge from a concerted effort by all those knowledgeable about, and involved in, this vital aspect of public policy. One such effort is under way at the College Board, which has embarked on a major Rethinking Student Aid project to develop new ideas and generate a national conversation about improving the effectiveness of student aid. Meanwhile, some fundamental points are very clear. 1. The system should be simpler. We probably need fewer separate programs, but most important is the need for consistency in the rules governing the different programs. Currently, for example, permanent residents qualify for Pell Grants but not for Academic Competitiveness Grants. Less-than-half-time students are eligible for Pell Grants but not for Stafford loans. Federal grants can be applied to room-and-board expenses, but federal tax credits and deductions cannot. The application process is also unduly complicated and could surely be simplified for students. It is unreasonable to expect students and families to be able to navigate the current system successfully. http://www.changemag.org/se/util/display_mod.cfm?MODULE=/se-server/mod/modules/semod_printpage/mod_default.cfm&PageURL=/Archives/Back%20Issues/…
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2. Aid should be more effectively targeted. Some aid policies may be explicitly designed to encourage study in particular disciplines or to be part of the compensation for military service. But aid policies in general should be designed to increase educational opportunities. Tax deductions concentrated on households with incomes above $100,000 a year are unlikely to have this effect. General grant programs requiring high standardized test scores are unlikely to have this effect. Straightforward, income-based eligibility criteria might go a long way towards expanding educational opportunity for those now unable to afford it. However, not all subsidies should be distributed on the basis of pre-college financial circumstances; students’ earnings after college should also be taken into consideration by, for example, making income-contingent loan repayment generally available. 3. Aid programs should be designed not only to further postsecondary enrollment but also to improve both academic preparation and persistence to degree. Progress in recent decades in encouraging more students to enroll in college has not been matched by progress in actual completion of degrees. The design of student-aid programs must be more tailored towards encouraging students to graduate, not just to getting them in the door. There is widespread recognition that it is both equitable and efficient to provide access to higher education for all who can benefit from it. Higher education opens the door to upward mobility and financial independence. While not everyone is interested in going to college and it is not the right course for every individual, financial constraints should not be the deciding factor in who enrolls and who does not. It is not fair that accidents of birth should determine educational opportunities. And it is not efficient for society to be deprived of the potential productivity of individuals who are unable participate and succeed in higher education because of their limited financial resources. We have developed a complex and expensive system of subsidies for college students because as a society we recognize these equity and efficiency arguments. The system has produced some important successes resulting from increased funding over time and from a partnership among public and private entities that share a concern over access and equity. But unfortunately, budgetary constraints, competing priorities, and political pressures from a middle class straining under rising college prices have interfered with the design and financing of optimal public policies. At the same time, competition among institutions for students and for prestige, combined with other cost pressures, has diverted too many colleges and universities from their focus on expanding educational opportunities. As a result, we have a complicated and poorly integrated array of financial-aid programs that must be redesigned if we hope to meet the needs of future generations of students—from all socioeconomic backgrounds. ©2010 Taylor & Francis Group ·∙ 325 Chestut Street, Suite 800, Philadelphia, PA ·∙ 19106 ·∙
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