A Dozen Ways to Fix How We Pay for College

Rather than adopting big ticket ideas such as making college tuition-free or doubling the Pell Grant maximum award, we can fix how we pay for college in the U.S. without spending more public funds than we already do

There are many domestic functions such as health care, childcare, and public transportation that require additional government support to make them work better. Higher education is not one of them. America’s colleges and universities spend twice the amount per student as the average of all developed countries. Moreover, federal, state, and local governments collectively spend more than $200 billion annually in support of American higher education (and that doesn’t even include COVID-related assistance).

Although we already spend a lot of tax dollars on higher education, proposals to spend much more have dominated the debate in recent years. These include making public colleges tuition-free, cancelling large chunks of student loan debt, doubling the maximum Pell Grant, or bailing out states with a federal matching program. Each of these ideas, however, would cost tens of billions of dollars every year more than what governments already spend on higher education. Moreover, it is very possible that these ideas if adopted will make things worse, not better.

With this high level of support, America’s colleges and universities historically have been widely regarded as the best in the world. And that remains the case in key regards such as world-class levels of student participation (despite recent enrollment declines), institutional diversity, and research capacity.

Four Big Financial Challenges Facing America’s Colleges and Universities

But it is also the case that America’s colleges and universities face four big financial challenges. These include: exploding costs and prices; excessive reliance on student debt; chronic equity gaps in participation, degree completion, and attainment; and growing concerns about the quality and relevance of the education and training being provided beyond high school. If these challenges are not addressed, America’s traditional hegemony in higher education will be further eroded.

Meeting these challenges require bending back the college cost curve and reducing the reliance on loans. It will also require reforms that close chronic equity gaps and improve the quality and relevance of a broad range of postsecondary education and training without spending more than we already do on higher education.

The good news is that there are ways to meet these very tough challenges that require little or no additional taxpayer funds beyond what is currently spent. The key to doing so, though, is to rethink the basic principles that have governed public policies for higher education for decades and replace them with principles and policies that better fit the modern era.

Rethinking Basic Principles — Changing the Policy Signals

How American higher education is financed is a complicated question, but there is a relatively simple but compelling answer to what went wrong: Federal and state policies provide signals to institutions and students that lead to unintended and often adverse behaviors. These policies exacerbate the natural inclinations of many faculty and institutional officials to enroll fewer students and to maximize resources per student. To wit:

· Federal and state policies in many ways encourage both public and private institutions to spend more and charge more than they otherwise might.

· Federal policies over time have contributed directly to the excessive reliance on student loans as they encourage or require many students to borrow large sums to pay for their education.

· While the rhetoric of policymakers focuses on the need to reduce chronic inequities, the reality is that many federal and state policies and funding decisions have exacerbated equity gaps over time.

· The policy push over many decades to create more access to college often may have contributed to lax efforts to maintain or improve quality and relevance of the education and training being provided.

Advocates of big-ticket ideas such as doubling Pell Grants or free tuition seem not to recognize that many of the problems with how we pay for college today can be traced back to federal and state decisions taken fifty years ago. To be sure, the policies that flowed from these decisions have had many positive effects, including sharply increased participation in higher education and growing levels of degree attainment in the face of rapidly increasing prices. But these policies, as described below, have also been key factors in creating the financial challenges that American higher education now faces because they often do not reflect the realities of today.

At the federal level, policies first established in the key federal legislation in 1972 include relying on a system of vouchers in the form of Basic Grants (now Pell Grants) to help students pay for college. That legislation also created Salle Mae which helped spur the tremendous growth in loans over decades to allow students to pay for spiraling costs. In addition, the 1972 legislation was the first-time students attending a wide variety of for-profit schools were allowed to participate fully in federal student aid programs.

One reason these policies have not produced the hoped-for results is that vouchers like Pell Grants don’t work well when prices are rising rapidly as the providers, not the students, are the ones who primarily benefit from the use of vouchers. Moreover, political pressures have led to spreading Pell Grants and other subsidies more broadly up the income scale, thereby defusing efforts to target aid on those who need it the most. In addition, the federal focus on increasing direct aid to students has occurred while too few incentives have been provided to institutions to recruit, enroll, and graduate low income and minority students.

Regarding loans, the legislative creators of student loans and Sallie Mae did not sufficiently anticipate that it would lead to tremendous increased reliance on borrowing to finance higher education in this country. At the same time, not nearly enough has been done to limit this reliance on loans. And the creation of thousands of for-profit schools over time has contributed to diminished quality and many instances of fraud because the federal government traditionally has failed to exercise sufficient due diligence in monitoring the activities of many of these schools.

At the state level, two national commissions in the early-1970s argued that tuitions should rise from their historical level of less than one-tenth to one-third of costs or providing public higher education. The intent of this recommendation was and is a good and proper one — that what public institutions charge should more accurately reflect the private benefits which accrue to the students who attend them, including much higher incomes in their lifetimes.

But one effect of states sharply increasing over time the share of costs borne by students and their families — which now provide close to one-half of public higher educational resources — is that public sector tuition and fees are now viewed more as a means of financing public higher education than as measure of what many students could reasonably afford. This philosophy thus has encouraged public colleges and universities to charge and spend more rather than moderate their charges and spending.

A Dozen Reforms to Meet the Four Big Challenges

To fix how we pay for college in this country, the four major challenges facing American higher education must be addressed. The dozen recommendations described below are designed to address the challenges of exploding college costs, excessive reliance on student loans, chronic equity gaps and too little attention on quality and relevance. Moreover, these reforms will help meet these challenges within what federal, state, and local governments already spend in support of higher education.

These twelve reforms would achieve these purposes chiefly by rethinking the federal and state roles in higher education. State policies would be reoriented to focus more on the need for state residents to be able to afford a public college education and focus less on financially supporting public institutions. For federal policy, the reforms laid out here would alter the signals which have led institutions to raise their prices and thus have required students to rely more on loans to finance their education.

To be most effective, any set of reforms also must recognize the diversity of America’s 5000 or so colleges and universities and of the 20 million students who currently attend them. Given this diversity, policies must recognize that one size does not fit all when it comes to institutions or to students. For this reason, the recommendations below will vary in their potential impact on different kinds of institutions and on student needs.

1.Simplify the Student Aid Application Process. Most everyone agrees that the process for applying for student aid is much more complicated than it needs to be or should be. Families and students often must spend many hours filling out the Free Application for Federal Student Aid (FAFSA) providing answers to questions regarding their income and assets which are not even required to fill out income tax forms. To simplify and streamline the application process:

• Parents or financially independent students should be able to submit their most recent income taxes to apply for student aid.
• Students from families on public support welfare, Medicaid, SNAP or EITC should automatically qualify for full federal grant aid.

2. Redesign Pell Grants to cover the living costs of low-income students. A primary concern with the existing program is that many Pell-eligible students must borrow to meet some of their living expenses while enrolled. It is unlikely that big jumps in the Pell Grant award will solve this problem as much of the increase will be eaten up by payments for tuition and fees.

• Rather than double the maximum grant, the Pell program should be targeted to cover the living costs of students from low-income families. This would help ensure that poor students could afford their living expenses while they are enrolled at least half-time.
• For this policy change to work, states and institutions would need to become primarily responsible for ensuring that tuition and fees are affordable for a broad range of students.

3. Expand Tuition Tax Credits for middle-income families and lifetime learners to offset some of the income taxes they pay. Roughly three-fifths of all tax expenditures related to higher education are spent for tuition tax credits. The number of recipients of tax credits exceed the number of Pell Grant recipients in part because several million families who don’t pay income taxes are eligible to receive refundable tax credits. Changes in tuition tax credits could help make them more effective in helping middle income tax-paying families pay for college. These changes include:

• The American Opportunity Tax Credit (AOTC) should be expanded to help students from middle-income tax-paying families pay for their tuition and fees, which would help facilitate changing the focus of Pell Grants on allowing low-income students to cover their living expenses.
• The Lifetime Learning Tax Credit should also be examined and revised to help ensure greater college affordability for those already in the work force.

4. Require all institutions to spend 5 percent of their endowments to maintain their charitable status. College and university endowments have grown to previously unimaginable levels in recent decades. Even after declines in 2022, the value of endowments have increased ten-fold increase after adjusting for inflation since 1980. Yet despite this remarkable increase in assets, tuitions more than doubled in real terms over the same period. Congress in 2017 enacted an excise tax on endowments and some politicians are calling for sharply increasing this tax. But the reality is that this tax affects only those institutions with the biggest endowments, and it has largely been unenforceable. There is a much better way to deal with university enrollments, namely:

• Rather than tax the endowments of institutions with the biggest endowments, a much better approach would be to treat all institutions with endowments the same way that foundations have been treated since 1969, namely, they must spend five percent of their assets every year to maintain their charitable status. The best result would be if at least some of any increase in payout be applied to tuition reduction rather than fed into financial aid that allows tuitions to continue to rise.

5. Reform State Policies to Promote Efficiency, Degree Completion, Growth, and Equity. The popular notion that states have underinvested in higher education for decades is largely a myth. The reality is that states now spend more when adjusted for inflation than they ever have for higher education and institutions spend more per student than any other country. The problem is that state policies are not well designed to promote efficiency, degree completion, growth, or equity. For example, the vast majority of state funds are allocated based on how many students enroll not on how many graduate. Similarly, state policies tend to exacerbate underlying inequities rather than improve them. To do better, states should change their financing policies in the following ways:

· Make public colleges affordable for all students by basing public sector tuitions on what the average family can afford to pay, as measured by a share of state GDP per capita. This share should be higher for more selective public institutions and less for more open access institutions.

· Ensure enough state financial aid is available to cover tuition at all public institutions for families with incomes below average. This combination of reasonable tuition levels and more aid for needy students is a far better approach than making public colleges tuition-free for all students.

· Make higher education more relevant by increasing the share of funds allocated to community colleges and other training programs and to work more with the federal government to encourage apprenticeships.

· Encourage greater efficiency by using normative costs rather than institution-reported costs per student to allocate public funds to public institutions.

• Require public institutions to enroll targeted number of state residents to receive full funding from the state.

· Create a government-paid fee to layer on top of student-paid fees to help fund the growth of public institutions above target levels.

· Set aside some funds to pay all public and private institutions for the Pell Grant recipients they enroll and graduate.

6. Create a counseling network to help borrowers sort out their options for loan repayment. Repayment options over time have multiplied and the result is tremendous confusion for borrowers, institutional officials, and servicers alike. For most borrowers, loan servicers are the only way they can find out about their options, but they often may not provide accurate information because of conflicts of interest. Any effort to deal with the student debt problem is likely to fail if borrowers remain confused about their options.

· The federal government should establish an independent counseling network online and in locales around the country so that every borrower could consult with a qualified advisor to work out an individualized repayment plan. To be most effective, these counselors should be empowered to identify viable options and to provide relief for borrowers having trouble making their payments. The costs of creating this counseling network would be modest relative to the costs of default and nonpayment but the benefits large if the full range of borrowers were more aware of their repayment options.

7. Cancel the debts of borrowers who got ripped off by the system. The biggest category of defaulters are borrowers who attended schools of poor quality, mostly but not entirely for-profit schools offering short-term training. Making matters worse, delinquent borrowers are regularly hounded for repayment while the poorly performing schools continue to operate and profit from the borrowers’ misfortune. This buildup of debt represents a failure of the government to exercise due diligence, which allowed these loans to be made in the first place. To correct this government failure:

· The debts of students who borrowed to attend substandard programs should be fully forgiven and the poorly performing schools should be shut down.

· Those students who borrowed under the Public Service Loan Forgiveness provisions and repaid regularly should be excused from their remaining debts because the federal government has grossly mismanaged the program.

8. Allow all student borrowers to refinance their student loans into a single loan at a cost that is reasonable to the taxpayer and the borrower. The first federal income-based repayment plan was enacted in 1994 and since then several others have been created. The result is a maze of schedules that few fully understand. Interest rates for many of the loans are higher than they need or ought to be. Many borrowers end up owing more than they borrowed because of negative amortization when unpaid interest is added to principal. As a result, too many borrowers are forced to pay into middle age and even beyond. These concerns can be addressed as follows:

· All borrowers who still owe money should be able to convert all their student debt into a single note that is reasonable in cost both to the taxpayer and to borrower based on their income after graduation.

· To do this, the new loan should offer lower interest rates, eliminate any interest that has accrued for borrowers who couldn’t meet their loan obligations and allow for cancellation of remaining debt after 20 years of repayment.

· Perhaps most important, income-contingent repayment of loans in the future should be made through payroll withholding into Social Security Fund at a rate that varies between 5 to 10 percent of their wages and salaries depending on how much they initially borrowed.

9. Reduce Reliance on Student Loans in the Future. To make the system financially sustainable, it is not enough just to deal with current student debt. It is also critical to reduce the reliance of loans in the future. Three ways to do this are as follows:

· Institutions should no longer charge tuition for students taking remedial courses below the college level and students should not be allowed to borrow to pay for these courses. Instead, public funds should be used to reimburse the various providers of remediation based on how well they raise the basic skills of these students.

· The federal government should limit how much students can borrow for living expenses and rely on Pell Grants to cover fully the living costs of low-income students.

· All institutions should be required to pay a modest risk-sharing fee on all new loans inversely reflecting the historical default experience of their students. The higher the repayment rate, the lower the fee the institution must pay.

10. Redesign the federal SEOG program to encourage all institutions to increase the number of Pell Grant recipients they enroll and graduate. The federal SEOG program, which predates the Pell Grant program, has outlived its usefulness for several reasons, including that well-endowed institutions get more than their fair share of funds because they have participated in the program for the longest time. In addition, institutions under current rules are required to use these funds to provide grants to eligible students rather than be given leeway to use these funds to maximize their effectiveness in increasing the participation and graduation of disadvantaged students.

· To increase its effectiveness, the federal SEOG program should be redesigned to encourage institutions to try various strategies to increase the number of needy students who enroll and graduate. To do this, federal funds should be allocated based on the number of Pell Grant recipients that institutions enroll and graduate and then they should be allowed to use these funds as they see fit. Accountability would be achieved because allocations in future years would be tied to how well the institution did in the preceding year in enrolling and graduating Pell Grant recipients.

11. Enact a new federal matching program to encourage states and NGOs to establish and expand early intervention programs. Early intervention efforts like “I Have a Dream” which include counseling, mentoring, and last dollar financial assistance aimed at classes or groups of disadvantaged students have been spectacularly successful in raising the college participation and completion rates of these students. The essence of early intervention is that it is based in the community rather than in the schools. Yet there is little federal support for early intervention in the community. Instead, the federal government has funded the TRIO programs for many years and GEARUP more recently, both of these work through the schools and the colleges.

· To stimulate improvement in participation and completion rates of the most disadvantaged students, the federal government should establish a new program in which federal funds would match what is spent by states and community groups on early intervention. Spending $1 billion on early intervention would increase the participation and completion rates of disadvantaged students more than an $100 increase in the maximum Pell award which now also costs $1 billion per year.

12. Resort responsibilities for quality assurance. For decades, we have relied on a triad of the federal government, state governments, and accrediting agencies to help ensure quality assurance. But many believe this division of responsibility has not worked well. The accreditation process is often viewed as the weakest link as few schools lose accreditation and far too many are allowed to continue their participation in the aid programs despite a lack of financial integrity, poor educational quality, low employment prospects, and high default rates. To ensure better quality in the future, responsibilities under the triad should be resorted:

• The federal government would take full responsibility for judging the financial integrity of institutions. It also could take responsibility for developing a national qualifications framework which has worked well in a number of other countries.
• States would be responsible for licensing public institutions, approving new programs, and keeping track of output measures such as graduation rates.
• Accrediting agencies would remain responsible for judging the academic quality of all institutions. This would include denying accreditation to institutions that fail to meet minimal standards, and promoting the improvement of fully accredited institutions.

* * *

The good news is that we don’t have to break the bank to fix how we pay for college in this country. Through cutbacks in the reliance on loans, reductions in loan subsidies, targeting benefits on the students with the most financial need, and reallocating current funds to meet the highest priorities, the dozen reforms discussed above can be fully paid for within what federal, state, and local governments already spend in support for higher education every year. And with much better results.