Fixing How We Pay for College: Ten Observations

The way we pay for college in this country is in need of serious repair. The good news is we don’t need to break the bank to fix it.

American higher education faces two distinct but related challenges. One is to maintain stability in the face of the COVID pandemic. The other challenge is to recognize that how we pay for college in this country is broken in some fundamental ways and that a series of federal and state policy reforms are needed to fix the existing financing system.

To help in this effort, below are ten observations that might guide federal and state officials as they enact policies that would encourage greater efficiency, equity, and effectiveness in American higher education in the years ahead.

First, it is important not to conflate what needs to be done to respond to the COVID pandemic with the need for longer term financing reforms. Whatever governments do in response to COVID should not make the much-needed longer-term reforms more difficult to achieve.

Second, two federal initiatives that would help in responding to the pandemic are: 1) replacing a significant portion of the revenues that public and private institutions have lost from the pandemic in exchange for some much needed belt tightening and 2) enacting a vouchers program (similar to the GI Bill) that would provide education and retraining for the millions of workers who the pandemic has displaced permanently. These vouchers would not only help displaced workers get their life back in order but provide schools suffering from pandemic-related reductions with much needed students and revenues.

Third, we should recognize that federal, state, and local governments already spend $200 billion per year in support of higher education institutions as well as providing financial aid to students in the form of grants, subsidized loans, college work-study, and a variety of tax benefits including tuition tax credits.

Fourth, despite this high level of government support, the way we pay for college in many ways is broken — college costs too much, too many students borrow too much, chronic equity gaps for low income and minority students persist, and there is too little quality and relevance at too many institutions.

Fifth, in response to these concerns, major initiatives have been put forward to: make public colleges tuition free, to cancel large amounts of student loans or to establish a federal program that would provide additional support to state and local governments in exchange for greater control over institutions. Each of these initiatives would require large amounts of additional funding but it is far from clear that they would meet the challenges the sector faces.

Sixth, it makes little sense to layer large amounts of additional government funds onto a system that is poorly functioning. Instead, we should make much needed longer-term reforms before investing large sums of additional funds.

Seventh, the good news is we don’t need to break the bank to achieve much needed longer term reforms. There are many steps that the states and the federal government can take that would substantially fix the financing system within the $200 billion a year they already spend annually in support of higher education institutions and students.

Eighth, to achieve these necessary reforms, however, key changes are needed in the traditional state and federal strategies. States through their funding decisions historically have focused mostly on meeting the financial needs of institutions while the federal government for the past half century has focused primarily on helping students through a voucher system of grants and loans. Effective reforms require states to become more cognizant of the needs of students, particularly those from low income and minority communities. On the other hand, federal policies need to be more cognizant of unintended adverse effects on institutional behavior, including that the ready availability of student aid has been factor in the runup of tuition over time.

Ninth, to accomplish these objectives, states should move to a policy in which public college tuition is based on the average family’s ability to pay and that enough student aid is made available to cover fully the tuition and fees of students with below average family incomes. States also should re-focus their funding allocation policies more on promoting efficiency and equity than has traditionally been the case. Another blog will lay out the specific steps states should take to promote these goals.

Tenth, federal policymakers need to recognize that vouchers like Pell Grants and student loans do not work well when prices are unstable, for whatever reason. This rethinking might entail making Pell Grants into a program that meets the basic living costs of low-income students whose families are unable to cover these costs. Federal policy initiatives should also be designed to address the major challenges facing higher education including: bending back the college cost curve; reducing the excessive reliance on loans now and in the future; building more equity into federal and state funding of higher education; and establishing policies that maintain or improve the quality and relevance of the education and training that is being provided.

Subsequent blogs will lay out ways in which each of these strategies can be achieved in a cost-effective manner.

In sum, the reforms outlined above need not cost more than what federal, state and local governments already spend on higher education. But for these reforms to be effective , policymakers at all levels need to be much smarter about addressing the challenges that the higher education sector faces.

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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