American Higher Education Under Siege: Steering a Smarter Course

Federal, state and local governments collectively now spend $200 billion annually in support of education beyond the secondary level. Despite this very high level of resources, American higher education faces a number of challenges to its historical hegemony in the world, including: exploding college charges; excessive reliance on student loans; overinvestment in academic programs relative to more vocational training; chronic equity gaps in participation, completion, and attainment; and growing concerns about the quality and relevance of the education and training provided.

Many on the left have argued for the need to increase federal and state funding to make public higher education tuition free and to reduce or eliminate the need for students to borrow. Many on the right argue instead for further deregulation of the sector and more for-profit provision to increase innovation and competition. The emerging moderate position is to increase funding for Pell Grants sharply, to make community colleges tuition free, and to eliminate or reduce excessive student debt burdens.

The problem, though, is that none of these three approaches will fully address the pressing challenges facing American higher education. Free tuition and debt-free college will cost many tens of billions of additional dollars yet likely will help middle-class families more than the poor. More deregulation and depending more on for-profit schools will only exacerbate growing concerns about both equity and quality. More funding for Pell Grants, free community college and wiping out existing debt burdens represent an effort to double down on what is an essentially broken financing system.

This paper, instead, takes as its starting point that substantial public funds are already spent on higher education. It argues that the smarter policy course is to consider how existing funds could be spent more effectively to address the very real challenges the sector faces. This smarter course would entail states taking more cognizance in their policies of student and family needs, moving away from their traditional focus on meeting institutional needs. It also would require federal officials to recognize the unintended and often adverse effects of student aid policies on student and institutional behavior including possible inflationary effects on price and negative effects on equity and quality. A series of recommendations adhering to these principles are provided in this report for both state and federal policies to address the challenges the sector faces. These include the following:

To moderate or reverse the growth in college tuitions and other charges: Tuitions at public institutions should be based on the average family’s ability to pay as measured by a percentage of the state GDP per capita rather than as a share of spending per student. At the same time, states should ensure enough student aid is available to cover the tuition costs for students from families with below average incomes. In addition, private institutions should be required to make a minimum payout from their endowments to maintain their charitable status similar to the requirement in effect for foundations since 1969.

To improve access and help close chronic equity gaps in participation, completion and attainment: The need for a FAFSA should be eliminated by allowing parents and financially independent students to submit their income tax forms to apply for federal student aid. Relatedly, students from families who receive income support (Welfare, food stamps, Medicaid, EITC) should be fully eligible for federal aid.

Pell Grants and tuition tax credits should be integrated with eligibility for Pell and other student aid based on the taxes that students and their families would pay based on the 1040A tax calculation while eligibility for tuition tax credits should be based on the income taxes that families actually paid.

A Federal Partnership program should be established in which the federal government would match what states and NGOs spend on early intervention programs of mentoring and last dollar financial aid.

To encourage greater completion rates among disadvantaged groups of students, federal and state governments should pay institutions for the Pell Grant recipients they enroll, transfer and graduate.

To reduce the adverse effects of existing student loan debt burdens, the debts of borrowers who attended programs where federal due diligence was not fully exercised should be forgiven. For both current and future borrowers, the federal government should replace the multiple schedules of income-contingent repayment with one straightforward schedule in which all borrowers can refinance their student loan obligations at a reasonable cost to themselves and to the government. Also, we should study whether future payments should be geared to payroll taxes rather than income taxes.

To reduce reliance on loans in the future: All institutions should be required to pay a risk sharing fee on all new loans made to their students, with the fee the largest for institutions with the highest non-repayment rates among their previous student borrowers. We should also limit how much students can borrow for living expenses. To facilitate this change, Pell Grants should be redesigned to focus on helping students who are deemed to lack enough family resources to cover their living expenses.

To improve student loan program administration, a public-private partnership should be re-established with the federal government providing student loan capital while private and state agencies would provide loan counseling and servicing for those loans not being repaid on an income-contingent basis.

To help ensure that all students are college or career ready, states should reallocate funds toward community colleges and other more vocationally-oriented programs such as apprenticeships. In addition, students taking remedial courses should no longer be charged tuition and not be allowed to borrow to pay for these courses. Instead, we should move to a performance-based system in which the providers of remediation would be paid based on how well they raise the basic skills of these students.

To improve quality: Responsibilities in the existing quality assurance structure should be resorted with the federal government taking full responsibility for reviewing the financial integrity of institutions, states assuming the primary role of measuring outputs such as graduation rates, while accreditors would be responsible for ensuring minimal academic standards and spurring improvement and innovation.

These changes need not require any more funding than what the federal, state and local governments already spend on higher education. Risk sharing fees, refinancing remediation, and limiting how much students can borrow for living expenses will generate significant savings that can be used to pay for the reforms listed above. In addition, the subsidy for in-school interest could be eliminated to pay for adoption of other more effective polices. In terms of state reforms, they can be accomplished within the $85 billion that states already spend per year on public higher education institutions and students.

Art Hauptman has been a public policy consultant specializing in domestic and international higher ed finance issues for nearly a half century.

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