Fixing How We Pay for College: A Baker’s Dozen of Ideas

Once the COVID-19 crisis is over, we can’t afford to go back to how we have paid for college in the past. Different approaches are needed that meet the large challenges facing American higher education.

How we pay for college in this country, in many ways, is broken. It is easy to reminisce about the good old days and cite progress on key variables such as the fact that more female, low-income, and minority students now participate and complete college. But the reality is that even before the pandemic, our system of financing higher education was not sustainable in the long run.

Too many colleges charge too much, too many students borrow too much, we’ve made too little progress in equalizing opportunities for poor and minority students, and there are legitimate concerns about the quality and relevance of the training received at too many colleges and universities.

The COVID-19 crisis has magnified these cracks in how we pay for college in this country. While it is possible to imagine that eventually we will get back to bucolic college campuses and fall football games, it is hard to imagine we will be able to go back to how we have paid for college for the last half century.

Recent experience confirms the need a different approach going forward to make the system financially sustainable. Before and since the pandemic, many have advocated for free tuition and erasing student debt, doubling Pell Grants funding, and/or creating a new federal program to help states meet their higher education financial obligations. But none of these proposals will meet the challenges without massive infusions of public funds.

A Baker’s Dozen of Ideas to Improve the Financing System

Rather than propounding big funding hikes, an alternative route is to make key changes for improving the system within long term resource limitations. To that end, a baker’s dozen of ideas are presented below that would reduce college costs, lower student loan burdens, close chronic equity gaps, and improve the quality and relevance of higher education in this country.

These ideas collectively would require no more public funds than the more than $200 billion that the federal, state, and local governments annually spent on higher education before the pandemic. Governments must spend more in the next year or two to maintain quality in and access to higher education while the pandemic persists. But it is critical that whatever steps governments take now do not make much-needed longer term reforms more difficult.

To Make College More Affordable and Accessible

1.Base Public College Tuition on the Average Family’s Ability to Pay. In most states, public college tuition is set primarily to help institutions meet their financial needs. Going forward, states should become more cognizant of student needs by requiring their public colleges and universities to charge tuition based on what the average family can afford to pay, as a share of state GDP per capita. At the same time, states must make sure there is enough financial aid to cover tuition for students from families with below average resources. This would be a much more effective way is to make college more affordable for all than making public colleges tuition free for everybody.

2. Encourage Greater Efficiency and Enrollment Growth. The financing system in most states tends to encourage public institutions to spend more, not less. And it encourages many public institutions to enroll more out-of-state and international students because they pay much higher tuition than state residents. To encourage greater efficiency, state should allocate funds to public institutions based on what they ought to spend per student, not what they report spending. And to encourage public institutions to enroll more state residents, states should pay them a fee for each state resident that a public college or university enrolls. These two steps will increase accessibility for state residents while at the same time reducing spending per student.

3. Require Minimum Payouts from Endowment. College endowments have grown at an extraordinary rate over the past several decades. Even with the recent market slide, a dozen institutions now have endowments of more than $10 billion and 100 have endowments in excess of $1 billion. To address this excess, the federal government should require all institutions spend at least 5 percent of their endowment each year to maintain their charitable status, as foundations have required to do since 1969. This would be a better way to channel endowments to lower tuition and/or provide more aid than the tax on endowments enacted in 2017 which has proved to be ineffective.

To Reduce the Excessive Reliance on Loans

4. Performance-Based Funding of Remediation. One of the most objectionable aspects of the current financing structure is that many of the students who take remedial courses must borrow to pay regular tuition. Colleges should not charge tuition for below college-level courses nor should students be allowed to borrow for these courses. Instead, federal, state, and local governments should provide enough funds to pay the providers of remedial courses based on how well they raise the basic skills of students.

5. Forgive Loans for Defrauded Student Borrowers. The biggest source of defaults are students who borrowed to attend poor quality schools where the federal government failed to exercise due diligence. Making matters worse, these borrowers are often hounded for repayment while many of the poorly performing schools are allowed to continue to operate. To redress this wrong, the debt burdens that students borrowed in order to attend these programs should be fully forgiven and poorly performing schools should be shuttered.

6. Improve Income Contingency for All Student Borrowers. The existing structure of income contingency is a hodgepodge of repayment schedules that are costly to the government and confusing to borrowers. Instead, a single income contingent repayment schedule should be created and tied to payroll withholding. This would allow all federal student borrowers to refinance their loans at reasonable cost to themselves and the taxpayer.

7. Introduce a Risk Sharing Fee. One reason that student loans and defaults have grown so much over time is that institutions have no skin in the game — when borrowers default, it costs the institution they attended nothing. To reduce future borrowing and help pay the costs of defaults, all institutions should have to pay a modest fee at loan origination that varies inversely with the default experience of that school’s borrowers.

To Close Chronic Equity Gaps for Poor and Minority Students

8. Allow Parents to Submit their Taxes to Apply for Student Aid. The student aid application process is unduly complicated and serves as a barrier to access to higher education for far too many students. To streamline and simplify the application process, parents should be able to apply for aid simply by allowing the IRS to share their tax information with the proper authorities. Moreover, students from families who don’t pay income taxes and who are eligible for welfare, Medicaid, SNAP, the EITC, or extended unemployment should be automatically eligible for full federal student aid benefits.

9. Redesign Pell Grants to cover the non-tuition expenses of poor and moderate income students. Pell Grants have become the fundamental form of federal aid and many observers have suggested doubling the funding for Pell Grants as the way to solve the college affordability crisis. But the reality is that chronic gaps in participation, completion, and attainment have not closed significantly since Pell Grants were created as Basic Grants in 1972.

Moreover, big increases in Pell are unlikely to close the gaps going forward for several reasons. For one, the program’s basic purpose was to provide vouchers to economically disadvantaged students regardless of which institution they attend. The problem is that vouchers only work well when prices are stable. When prices are exploding, much of the benefit of vouchers goes to the provider in the form of higher payments for the same set of services.

In addition, the Pell program has become so large — it provides awards to one-third of all undergraduates — that it now takes $1 billion to increase the maximum award $100. And under the existing program design, funding increases bring in even more recipients as well as raising awards for existing recipients. As a result, a big increase in funding will not solve the problem of Pell awards not keeping pace with the explosive price hikes. A good case can be made that funding increases will exacerbate tuition inflation.

To make Pell Grants more effective, the program ought to be redesigned. One way to do that would be to make it into a program that seeks to cover the living costs of truly disadvantaged students. This would provide a more stable basis for evening the playing field than the current program. Moreover, Pell grants for living costs would mean that students’ Pell award would no longer reduce their eligibility for other tuition aid, which is why many of the existing state free tuition plans tend to provide more benefits to middle class students.

Redesigning Pell Grants would also require rethinking other aid programs. More families now receive tuition tax credits or other tax benefits than receive Pell Grants, but the average tax benefit is much less than the average Pell Grant. Under a new Pell formulation, tuition tax credits could be re-focused as the principal form of non-repayable aid for middle income students. And it would also be wise to limit how much students can borrow for living costs as these expenses are a primary source of borrowing under current rules.

10. Create a federal matching program to encourage early intervention. Over the past quarter century, there is much evidence that early intervention efforts which provide mentoring and last dollar financial aid to middle school and high school students have been extraordinarily effective in lifting their college participation and completion rates. But there is little public funding for these efforts. To rectify this, the federal government should enact a program that would match funding that states and NGOs spend on early intervention. This would be much more effective in helping disadvantaged students go to college than equivalent funding increases in Pell Grants.

11. Provide institutional incentives for graduating low income and minority students. College completion rates in the U.S. are relatively modest when compared to countries which have more elite higher education systems. Recent efforts to improve the US completion rates have centered mostly on providing more aid to students to encourage them to complete their program. But a more effective way to increase completion rates of disadvantaged students may be for both the federal and state governments to use a portion of funds to pay institutions for the Pell Grant recipients they enroll and graduate.

To Improve the Quality and Relevance of Post-secondary Education

12. Reallocate state funds toward post-secondary vocational training. In this country, in funding and other ways, we have tended to prioritize academic programs and under-invested in vocational training, with the result that we have chronic shortages in many vocational fields. To help right the balance, states should reallocate some of their higher education funds toward community colleges and other vocationally-oriented training programs.

13. Resort responsibilities for quality assurance. In the U.S., to help ensure quality of post-secondary education, we have relied on a “triad” of federal certification, state licensing, and private accreditation. But the large number of low quality schools that qualify for federal student aid is testimony that this traditional reliance on the triad has not worked well. To achieve better quality assurance, existing responsibilities should be resorted by having: the federal government judge the financial integrity of all institutions; states track outcome and output measures; and have accrediting agencies responsible for ensuring minimal academic standards and for stimulating innovation.

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These thirteen ideas, taken together need not cost more than the more than what federal, state, and local governments spent annually on education beyond the secondary level before the pandemic struck. Once the COVID crisis subsides, the ideas described above are a better way meet the challenges facing American higher education in a fiscally responsible way than making public colleges tuition- free or deregulating the sector and hoping for the best.