Rethinking How We Pay for College

How we pay for college in this country is broken in key ways. To fix it, we need to reconsider traditional aspects of financing.

Higher education is in the spotlight because of exploding college costs, crushing student debt burdens, and chronic equity gaps. Many groups advocate reforms which view tuition charged as a given and then propose funding increases to make those climbing tuitions affordable for low income and middle-income students.

Implicit in this advocacy is a continued reliance on the long-standing federal strategy of providing vouchers and agreement that the primary role of states is to provide adequate support to public institutions. This has led to various proposals in which governments increase financial support to continue with these strategies.

But the federal voucher-based strategy and the institution-focused approach most states pursue have not met essential goals. Equity gaps persist, government policies have been a key factor in the explosion of college charges, and student debt burdens are unsustainable. All governments collectively now spend more than $200 billion annually on higher education. One result: America’s colleges and universities spend more per student and the U.S. spends more on higher education as a share of GDP than any other country.

More money is not the answer. Instead, the federal reliance on vouchers and the states’ devotion to supporting public institutions should be reassessed. Federal and state policy signals now encourage public and private institutions to charge and spend more and force millions of students to borrow more. To meet essential goals, these policy signals must change. Policymakers also should recognize the changing realities of higher education over the past 50 years by reassessing traditional strategies. To do this, a key recommendation is as follows:

-Pell Grants should be redesigned to cover basic living expenses for low-income students enrolled at least half-time in a wide range of postsecondary education and training programs, including apprenticeships. This support should be geared to the living circumstances of the student. Room and board should be fully covered for Pell recipients living on campus. Pell recipients living at home or off campus should be eligible for $1000 for each month they are enrolled.

For this key reform to be effective, states and public institutions must develop tuition and aid policies that make college more affordable for students from a wide range of family incomes. To do this, states should peg public tuition to the average family’s ability to pay — measured as a share of state GDP per capita - with institutions in greater demand charging more while other institutions would charge less. States then must provide enough funding for student grants to ensure tuition is covered for students from families with below average resources. States should also institute reforms that encourage greater efficiency, equity, completion, and growth.

Private institutions also should reassess their tuition and aid policies regardless of whether Pell Grant policies change. The private college discount rate — all the grant aid and discounts they provide as a share of the sticker price — now exceeds 50 percent and institutional aid is now three times larger than funding for Pell Grants. This has largely happened because most private colleges have hiked their tuition faster than inflation and then provide more aid to try to keep up. A more sustainable policy requires private colleges to ratchet down tuition over time which will ultimately reduce the need to provide more and more aid and discounts.

To help make that happen, the following changes in federal policy are needed:

- Expand tuition tax credits to help taxpaying middle-income students and lifetime learners pay their tuition. This would be a good way to replace the Pell Grants that middle income students currently receive.

- Modify student loan policies to help moderate how much institutions charge. A key change would be to limit how much students may borrow to an average price for a sector rather than using the actual prices charged by each institution.

- Require all institutions to spend 5 percent of their endowments to maintain their charitable status, as foundations have had to do since 1969. If payouts are used more to restrain tuition growth, this would reduce pressure to discount.

- Allow parents and financially independent students to submit their most recent income tax filings to apply for financial aid. Also, students from families on public support should qualify automatically for full federal financial aid.

- Use simplified income tax rules to determine the relative ability of families to contribute to their student’s educational costs.

- Redesign SEOG to encourage all institutions to enroll and graduate more Pell Grant recipients. This is a more effective way to raise college completion rates than depending on student aid or competitive grants to some institutions.

- Establish a new federal program that matches spending by states and community-based groups to expand early intervention programs that provide mentoring, counseling, and last dollar financial aid. These efforts over time have been very effective in raising participation and completion of the most disadvantaged groups of students.

Shift the funding of prisoners from Pell Grants (as they have no college-related living expenses) to a system where governments fund prison systems adequately to provide a range of quality education and training programs.

The changes recommended above would cost a fraction of what it would cost to double the Pell Grant maximum award or other big-ticket proposals such as free tuition yet would be much more effective in meeting key goals. Those additional costs could be fully paid for by introducing much needed changes in the federal student loan programs, including:

-Allowing all borrowers now and in the future to refinance their debt at terms that are reasonable in cost to the borrower and the taxpayer.

- Allowing all borrowers to repay based on their income with repayments paid through the payroll tax system and funneled into the Social Security Trust Fund.

It is also critical to reduce reliance on student loans in the future to fix how we pay for college, including doing the following three things:

- Replace the current system in which students taking below-college level courses are charged tuition and often need borrow to pay for them by paying the providers of remediation based on how well they raise the basic skills of the students.

- Require all institutions to pay a modest fee on all new loans to help fund future defaults. The fee would be based on how many of their students have defaulted in the past. The more their students have defaulted, the more the fee would be.

- Reduce the amount of living expenses that students may borrow because many defaults are a function of excessive borrowing for living expenses. Redesigning Pell Grants to focus on living costs would improve the efficacy of this change.

In sum, we don’t need to spend more public funds on higher education to get better results. What we do need to do is be smarter in how we spend the funds that are already available. The reforms called for above would go a long way to achieving this objective and fixing how we pay for college in this country.