Fixing the Broken Higher Education Financing System

We Don’t Need to Spend More Money to Make College More Affordable and Equitable

The American way of paying for college is broken. This is not news, of course. Exploding tuition and fees are leaving far too many graduates and drop-outs alike with crushing debts. The marquee aid programs designed to ease the burden, chiefly Pell Grants, aren’t helping enough. And we have historically under-invested in post-secondary vocational training or apprenticeships.

These problems have been obvious for years. Less obvious is how to fix them. More money might help, but federal, state and local governments first need to do a better job of directing the $200 billion they already spend per year on education beyond the secondary level. We also need a better way to measure how much bang we are getting for all those bucks.

Proposed political solutions vary widely. Many on the left argue for making public higher education tuition free and would reduce or eliminate the need to borrow. Many on the right, including the Trump administration, favor more deregulation and the creation of more for-profit schools, believing that the resulting competition would lead to greater innovation. In the middle many are now advocating sharp funding hikes for Pell Grants, new federal funding to shore up state systems, tuition- free community colleges and widespread forgiveness of existing and future student debt.

None of these, though, will do the trick. Free tuition will cost tens of billions of dollars and almost certainly will help middle-class students more than the poor. Deregulation will do little or nothing to improve quality of output or equality of access — it could well make matters worse. More money for Pell Grants and state systems, debt forgiveness, and free community colleges amounts to a doubling down on the broken current financing system.

Those making these proposals seem not to notice how existing federal and state policies have contributed to the problem. The ready availability of federal aid, particularly loans, has enabled the run-up in tuition and other charges over time. Moreover, the investment of hundreds of billions of dollars in federal aid over the decades has done little to close the gap between rich and poor students in participation, completion or attainment rates.

At the state level, funds are usually slanted to universities that already have the most resources, while the needs of disadvantaged students are typically under-funded. Also, states have too often relied on tuition to fund growth rather than taxpayer dollars and their funding formulas typically reward enrollment over degree completion.

How did we get here?

Since the creation in 1972 of what became Pell Grants, the federal approach to student aid has essentially relied on vouchers — grants and loans to qualified students who could use them wherever they wished. When tuition tax credits came along in the 1990s, they hewed to this model as well. But experience suggests that vouchers only work well when prices are stable.

Contrary to arguments that states have dis-invested in higher education for many decades, state and local funding grew in constant dollars throughout the second half of the 20th century, peaking in 2007 as the Great Recession hit. At the same time, the student share of public higher education spending soared from less than 10 percent in the 1970s to 50 percent today. Prices rose as demand grew for higher education (although this increase is partially being borne by out-of-state and international students who pay full freight).

The primary role of local governments in funding higher education is providing support for community colleges which didn’t exist before the Second World War. States play a minority role there, concentrating on four-year schools, while many local governments lack the property tax base to adequately fund their community colleges.

A Better Way: Rethink Responsibilities

Rather than commit many billions in new funding to address the very real challenges, we should first insist that the existing $200 billion in public funds be spent more effectively, as suggested below.

Design a performance-based approach to pay for remediation. The current system requires students taking remedial courses to pay regular tuition and then far too many must borrow to pay this tuition. Instead, the federal, state, and local governments should fund a system that would pay the providers of remediation based on how well they improve the test scores of these students. This important reform could be paid for by savings from lower loan subsidies and defaults as students taking remedial courses would no longer be charged for these courses and thus would not be allowed to borrow to pay for them.

Set public tuition based on the average family’s ability to pay. Most states traditionally set tuition as a share of spending per student. Under a more student-oriented approach, states would require institutions to set their tuition as a share of state GDP per capita. The idea would be that programs and institutions of higher quality and in greater demand would charge a higher share of GDP per capita than those in less demand. For this approach to be equitable, states would need to fund student aid sufficiently to ensure that students from families with below average incomes were able to cover their tuition and fees at each public college and university.

Encourage greater efficiency at public colleges and universities. Most states allocate dollars to public institutions based on what they report spending per student which encourages them to spend more. The system could encourage efficiency if state dollars were allocated instead based on what institutions “ought” to spend. This change would in turn result in some reallocation of state funds towards lower-cost community colleges and apprenticeships.

Require all institutions with endowments to make a minimum payout of five percent to maintain their charitable status. This would be similar to the 1969 federal requirement for foundations. And this would help slow tuition growth if some of the additional payout is used to tamp down tuition.

Recognize the adverse effects that student aid policies often have on student and institutional behavior. This could include redesigning Pell Grants to pay for just basic living expenses and books for low-income college students, while leaving it to states and institutions to provide enough aid to cover tuition and fees for low income students. For middle class students, tuition tax credits and a reasonable dependence on loans would be necessary. Also, all institutions should be required to provide discounts to those students who must borrow.

Reduce the adverse effects of excessive borrowing in several ways. The federal government must take the lead in reducing reliance on student loans. It should begin by forgiving the debts of borrowers who went to schools of dubious value where adequate federal due diligence was not exercised. The existing multiple income-contingent repayments schedules also should be replaced by a single schedule whose cost is reasonable to both borrowers and taxpayers. Any additional costs could be paid by limiting how much students can borrow for living expenses, requiring all institutions pay a small fee on new loans inversely based on the default experience of their students and eliminating the longstanding provision in which the government pays the interest while borrowers are in school, instead adding interest to principal.

Address chronic equity concerns. The federal and state governments should allocate a significant amount of their funds to pay institutions for the Pell Grant recipients they enroll and graduate. And to recognize the demonstrated value of early intervention efforts in raising college participation and completion rates of low income students, the federal government should create a new program that matches what states and NGOs spend for mentoring and last dollar aid for classes of the most disadvantaged students.

All of this need not cost any more than what is spent today, as proposed program expansions could be paid for by reallocation of existing funds and reductions in the federal costs of loans. While this approach admittedly is not as sexy as making college tuition-free or eliminating all student debt, it would be a much more practical and financially sustainable way of achieving key objectives such as bringing down college costs, reducing excessive reliance on loans, closing chronic equity gaps, and improving quality and relevance.