“The system creates an incentive for colleges to increase prices to capture the federal subsidy. This is particularly true with loans,” said Iris Palmer, senior policy analyst at New America. “It also allows colleges to take federal aid on one end for low-income students and re-attribute their institutional aid to higher-income students they’re trying to recruit. And it has encouraged states to shift their funding to other places because the federal government fills in some of the state disinvestment.”
Yet proposals from presidential candidates in the Democratic Party for free or debt-free college are built on that system, with calls for expanding student grants and tax credits to improve affordability. Because analysts say the system is beyond repair, any reforms that keep it in place are doomed to fail.
New America wants to start from scratch, with the federal government spending $38.6 billion more a year to reconfigure the financial aid system and states kicking in an additional $17.9 billion. The foundation is calling for a bold new system that would require some heavy lifting by states and colleges that analysts say have shirked their responsibility to make higher education affordable.
The proposal calls on the federal government to give grants to states that agree to maintain their higher education funding per full-time student at a level equal to the average of the last five years, provide at least a 25 percent match for the grant, and hold college accountable for their performance and costs.
Considering that economists at the Center on Budget and Policy Priorities say the average state is spending $1,805, or 20 percent, less per student than it did before the 2008 financial crisis, the investment New America is calling for would be a tremendous feat.
If states contribute more money to the newly imagined system, they would receive a bonus for every dollar above the threshold. States would then allocate that money to public, private or for-profit colleges willing to meet financial need by not charging students any more than their expected family contribution determined by the FAFSA (short for the Free Application for Federal Student Aid).
Families with higher incomes and therefore higher expected contributions could turn to banks and other financial firms for loans, but analysts say that would mean the government would have to impose tougher consumer protections, including letting borrowers discharge student debt in bankruptcy.
Charging students only what their families can contribute would force many schools to lower tuition or increase institutional aid for needy students, instead of relying on the federal government to pick up the slack, the paper said. Colleges would have to ensure that at least 25 percent of students are low-income, based on Pell eligibility. Analysts say 89 percent of schools already meet or exceed that threshold. All institutions would also have to submit data tracking student progress to the state and federal government.
“We need to make sure that we are serving the students who could most benefit from a higher education and serving them well,” said Amy Laitinen, director for higher education at New America. “That would mean looking at completion and earnings. We’ve seen lots of programs putting folks at near poverty level wages. With a bachelor’s degree, you shouldn’t face that.”
Schools that choose not to participate or fail to enroll a substantial share of low-income students would not receive any federal aid. States could also opt out but would forfeit all federal subsidies for college and universities within their boarders.
For this re-imagined system to work, all of its many moving parts would have to operate together. Given the political climate in Washington and the strength of the education lobby, it would be difficult to get bipartisan support for anything quite as radical as New America is proposing.
Still, the plan does satisfy concerns across the ideological spectrum by giving states control over how the money is spent, treating for-profit and public colleges as equals in accountability measures, and directing the greatest assistance to the neediest students.
At a time when 43 million Americans are saddled with nearly $1.3 trillion in student loans, the fastest growing form of household debt, there is consensus that the current system is unsustainable.
Congress is gearing up to reauthorize the Higher Education Act, the sweeping legislation that among other things governs federal financial aid. And members of both parties agree that the burden of debt is affecting economic mobility, but there is minimal agreement on how best to address the problem.
Still, with presidential candidates tossing ideas into the ring, now may be the perfect time for a new vision for a financial aid system that leaves too many families struggling to pay for college.
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