Institutional Aid

Guest Post: Bolder Steps are Needed to Help Low-Income Students Avoid Debt

Ed Policy — Wed, 30 Sep 2009 16:45:00 -0400

By Mark Kantrowitz

While the Obama Administration's proposal to index the maximum Pell Grant to one percent over the inflation rate is a step in the right direction, it would not do enough to increase the number of low income students enrolling and graduating from college. Congress needs to take much bolder steps to enable and encourage the pursuit of a college education, such as eliminating debt from the financial aid packages of the lowest income students.

Contrary to popular opinion, low income students do not get a free ride. Pell Grant recipients are forced to borrow more for their education than non-recipients even though they have a greater aversion to debt. Moderate and upper-income families don't like debt, but it doesn't prevent them from enrolling in college. Among low-income families, however, the prospect of debt can have a chilling effect on enrollment, retention and graduation rates.

According to the U.S. Department of Education's latest student loan borrowing data, Pell Grant recipients in 2007-08 who obtained a bachelor's degree were 73 percent more likely to graduate with debt than their more-affluent peers, and their average total debt load was $3,405 higher. In fact, only 13.1% of Pell Grant recipients who obtained a bachelor's degree graduated without debt, compared with 49.8% of bachelor's degree recipients who never received a Pell Grant. Middle and upper income students were almost four times more likely to graduate without any debt than Pell Grant recipients.

Let's consider the out-of-pocket cost expressed as a percentage of total income among students graduating with a bachelor's degree. (Out-of-pocket cost is the net cost of attendance after subtracting grants.) The out-of-pocket cost represents 61.3% of total income for low income families earning less than $50,000 a year, compared with 22.9% of total income for middle income families earning $50,000 to $100,000 a year and 13.8% of total income for upper income families earning more than $100,000 a year. Among students from families with exceptional financial need (earning less than $25,000 a year), the out-of-pocket costs represent 78.6% of total income. Imagine spending more than three-quarters of your family's total income paying for college!

The federal student aid system currently expects low income students with exceptional financial need to assume more debt for their education than their parents earn in a year. Nearly 90 percent of bachelor's degree recipients who applied for federal student aid and whose families have total income less than $25,000 graduated with an average of $24,959 in cumulative education debt in 2007-08 ($26,830 if Parent PLUS loans are included). One-third graduated with more than $25,000 in student loans.

A decade ago Princeton University adopted a "no loans" student aid policy, replacing loans with grants in the financial aid packages of low income students in 1998-1999. The rest of the Ivy League followed their lead, along with more than five dozen elite colleges with large endowments (about two-fifths of colleges with endowments in the billion-dollar-plus range). After they implemented no loans policies, many of these colleges have experienced substantial growth in the number of low income students enrolling and graduating.

To eliminate loans from the financial aid packages of Pell Grant recipients nationwide would require doubling the maximum Pell Grant to $10,600 in 2009-10. Increasing the maximum Pell Grant by $5,000 would cost an additional $35 billion a year. Congress appears to lack the political will to pursue such a change. But perhaps there's a less expensive approach that will increase bachelor's degree attainment by the most financially needy of Pell Grant recipients, namely students with a zero Expected Family Contribution (EFC). These are students whose parents earn so little money that the federal government doesn't expect them to contribute any money to their children's education.

Congress could establish a supplemental annual $2,500 grant for zero-EFC Pell Grant recipients that would be contingent on the college agreeing to replace all loans with grants in the financial aid packages of students who received this grant. Such a policy would challenge colleges to increase the amount of need-based institutional aid they provide to students with exceptional financial need. The availability of these funds would encourage zero-EFC students to enroll at colleges that adopted no loans policies, putting pressure on colleges with less generous financial aid policies. It would also encourage elite colleges that already have no loan policies to increase the number of Pell Grant recipients they enroll.

This proposal is similar to the idea of providing colleges with a bounty for graduating Pell Grant recipients (as Robert Shireman, the Deputy Undersecretary of Education, proposed in The Chronicle of Higher Education in 2004, and officials at the California State University System are currently championing), but would provide an intermediate and up-front reward for colleges that improve their retention of Pell Grant recipients, would focus aid on the neediest of the needy, and would leverage increases in institutional need-based grants. Depending on the number of colleges that adopted such no loans policies, this would cost between $1.8 billion and $7.0 billion per year.

How would Congress pay for the new program? Part of the cost could be obtained by eliminating the subsidized interest on federal student loans. Subsidized interest does not increase access to higher education because the benefit is mostly realized after the student graduates and enters repayment. Providing supplemental aid to Pell Grant recipients would be a much more effective means of encouraging low-income students to pursue a college education since it would provide the financial aid up front when students need the money to pay their college bills.

Mark Kantrowitz is the founder and publisher of FinAid.org, a leading source for financial aid information, advice and tools; and publisher of FastWeb.com, a free scholarship matching site. He has written extensively on issues surrounding financial aid and student debt. His most recent book, FastWeb College Gold, is a step-by-step guide for students and their families to pay for college. His views are his own and do not necessarily reflect those of the New America Foundation.

How Would You Spend $87-Billion?

Stephen Burd — Thu, 18 Jun 2009 19:20:00 -0400

Yesterday, at Higher Ed Watch, we urged Democratic Congressional leaders to keep their eye on the ball and move forward with President Obama's plan to make Pell Grants into a true entitlement for low-income students.

But what if eliminating the Federal Family Education Loan (FFEL) program doesn't produce enough savings for Congress to achieve this lofty goal (as recent media reports suggest)? Or what if opposition to creating a new Pell Grant entitlement program is strong enough among fiscally conservative Democrats and appropriators to kill the proposal? What then should be done with the tens of billions of dollars the government would save by providing loans entirely through the Direct Loan program?

We have a few ideas at Higher Ed Watch about how that money could be spent -- none of which involve extending the interest rate reduction that we wrote about yesterday.

Boost the Maximum Pell Grant

Using the mandatory money that would be saved by eliminating FFEL to provide another substantial boost in the maximum Pell Grant is the obvious solution that lawmakers would undoubtedly pursue. There are advantages to this approach. After years of neglect, and skyrocketing college prices, the grant's purchasing power remains disappointingly low. A massive infusion of funds could potentially restore the purchasing power of the maximum grant to what it was 20 years ago -- 60 percent of the average in-state tuition at a public four-year college (today the maximum award is worth about half that amount). That would be a worthy goal.

This approach, however, also has some significant downsides. For one thing, funding provided through budget reconciliation bills is often temporary due to complicated budget rules. If lawmakers do not provide a sufficient amount of funding to make the increases permanent, Congress will once again face the difficult choice of either substantially decreasing the Pell Grant (by thousands of dollars) or finding billions more per year just to keep the maximum award constant. And, without FFEL around, lawmakers will no longer be able to rely on lender subsidy cuts to make up the difference.

In addition, the progress that Congress makes with this infusion will be fleeting if lawmakers do not make a commitment to increase the maximum grant every year. With college prices continuing to escalate, a couple years of flat funding could drive the program's purchasing power back down. The Obama administration recognized this danger. "It is not enough just to make Pell Grants more generous and to put on a short-term patch," administration officials wrote in February, explaining why the President felt it was necessary to make Pell Grants an entitlement program. "Fourteen times since 1973, the maximum Pell Grant has failed to increase even in nominal dollars." The President's proposal would guarantee yearly increases in the maximum grant that exceed the rate of inflation.

On balance, it probably makes sense to use a large share of the savings to boost spending on Pell Grants if Congress is unable or unwilling to stick to the President's proposal. But given the limitations of this approach, we think it's critical for Congress to take other steps to increase college access and completion for low-income students.

Expand the Government's Early Intervention Efforts

Inside Higher Ed recently ran a column by Arnold Mitchem, the president of the Council for Opportunity in Education, arguing that increasing spending on "the Pell Grant alone will not solve the problem of getting first-generation and low-income students through college." He called on the President and Congress to take "a more comprehensive approach" by making a substantial investment in the federal government's early intervention efforts such as the TRIO programs, for which his organization advocates. "What is desperately needed instead is a more comprehensive view of student aid that reflects the recognition that low-income and first-generation students face multiple barriers -- class, cultural, informational, academic, and social -- to postsecondary education, and not just a lack of funds."

We wholeheartedly agree, although we think that Congress should concentrate its efforts on significantly expanding the Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP), which research suggests offers the most promising model for preparing and motivating low-income students for college. Under GEAR UP, colleges partner with schools to provide counseling, mentoring, academic support, and college outreach services to entire grades of disadvantaged students. The partnerships serve these students for seven years, starting no later than seventh grade and continuing through at least high school graduation.

Funding for the GEAR UP, however, has been stagnant for much of the last decade, limiting the program's effectiveness. For example, many partnerships have been serving only one grade level in a school, rather than multiple cohorts, as the program's creators envisioned. The benefit of directing savings from ending FFEL to GEAR UP is that a relatively modest increase - doubling or tripling the program's budget, which is currently about $313 million - would go a long way to improving its performance and expanding its reach.

In exchange for the additional money, Congress should require the partnerships to serve multiple cohorts or even whole schools of low-income students, rather than just individual grade levels at the schools.

Reward Colleges for Serving Low-Income Students

Colleges currently have little incentive to enroll low-income students and their institutional aid policies increasingly reflect that fact. Under the sway of enrollment managers, many public and private colleges are using their limited institutional aid budgets to provide merit aid to the kind of high-achieving students that improve their rankings in U.S. News & World Report and other publications. Others use "merit" aid to attract high-income students who will otherwise be able to pay the full cost of attendance.

Congress could begin to reverse these trends by creating a new program that would reward colleges for enrolling and graduating low-income students. Under the program, colleges that admit a certain percentage of economically disadvantaged students would receive an institutional grant award from the government. Additional aid would be provided when these students graduate. Institutions would primarily use the money they receive for academic tutoring and student support services to help these students adjust to and succeed in college.

Variations on this proposal have been put forward by the leaders of the California State University system, the College Board's Rethinking Student Aid panel, and student aid expert Rupert Wilkinson in a guest post he wrote for Higher Ed Watch and his 2005 book Aiding Students, Buying Students: Financial Aid in America "Creating financial incentives for [higher education] institutions to remain committed or to recommit themselves to the public needs of society should be among the federal government's highest priorities," Charles Reed, the chancellor of the California State system and F. King Alexander, the president of Cal State-Fullerton, wrote in a column that ran in Inside Higher Ed in March. We couldn't agree more.

Those are our suggestions. But we'd love to hear what you think. Please write in with your recommendations.

Guest Post: A Question of Priorities at Public Colleges

Ed Policy — Wed, 14 Jan 2009 15:00:00 -0500

By Sandy Baum

While most discussions of tuition discounting -- including those recently appearing on this site -- focus on private colleges, it is the policies and practices of state colleges and universities that most deserve our attention. The vast majority of students attend public colleges, which rely heavily on taxpayer funding and have the clear mission of providing educational opportunity for the citizens of the state. The unfortunate reality is that public four-year colleges are directing a significantly smaller proportion of their institutional aid dollars towards meeting the financial need of students than are private colleges.

Almost half of the non-athletic institutional grant aid at public four-year colleges and universities goes to students who do not have documented financial need, or for whom the aid they are receiving exceeds the need they have. In comparison, more than two-thirds of institutional grants are awarded on the basis of financial need at private colleges.

Need-based aid can be defined in a variety of ways. Many people focus on the motivation for awarding discounts. Is the student paying a lower price because he comes from a low-income family, or is she being rewarded for her academic accomplishments? In reality, the most important question is this: Are the discounts that colleges offer being directed towards students whose enrollment would be impossible without the assistance? Or are these discounts subsidizing students who would have little difficulty paying for college without this help - but who might choose a different institution if they were not treated so generously? It is these questions to which these figures refer. In 2006-07, the latest year for which reliable data are available, 54% of the non-athletic institutional grant at public four-year colleges helped students meet their financial need. The remaining 46% did not. At private colleges, 70% of the institutional grants went to meet financial need, while 30% of the funds went to students who could afford to enroll without assistance.

Perhaps it is encouraging to note that six years earlier, the proportion of non-need-based aid at public colleges and universities was even higher - 55%. Unfortunately, part of the explanation for this change is that as prices at these institutions have risen more rapidly than family incomes for all but the most fortunate, a greater proportion of the aid awarded without regard to financial circumstances ends up meeting need. But it is also possible that campus policy makers are becoming more aware of equity issues -- and of the reality that without more assistance, increasing numbers of low- and moderate-income students will be shut out.

Public flagship universities tend to have somewhat higher proportions of their discounts going to students with need. This may be because they are more expensive and therefore, students in general have more need, or it could be that they are more dedicated to meeting the need of their students than are other state colleges. Certainly some flagship institutions, such as the University of North Carolina at Chapel Hill and the University of Virginia, are engaged in bold efforts to increase the socioeconomic diversity of their students. On the other hand, it may also be the case that more selective institutions have the luxury of attracting well-qualified students without having to offer generous merit scholarships.

The key issue, however, is that relatively wealthy students are receiving larger public subsidies than their less privileged peers to attend the same public colleges. While we don't know yet the extent to which such policies are harming college access, we do know that this is an inefficient public policy. In effect, state colleges are subsidizing students to do exactly what they would do at higher prices, or perhaps drawing them into public institutions when they would otherwise pay for private higher education. The funds of taxpayers who themselves have not gone to college - which could be used to provide opportunities to the next generation of needy students - are instead going towards increasing institutional selectivity or making the lives of the more privileged somewhat easier.

It is important to remember that all in-state students enrolled in public colleges, including the wealthiest ones, receive significant subsidies from taxpayers, allowing them to pay tuition and fees that fall far short of the cost of their education. This is entirely reasonable, given the benefits that accrue to all of us from living in a society that has an educated workforce and that provides opportunities for people to attend college regardless of their financial circumstances.

There are also legitimate reasons for providing some financial aid based on academic accomplishments. Perhaps these programs lead students to work harder in high school. Perhaps they increase the quality of the student body and the overall intellectual experience on some college campuses. But in an environment where many students are unable to pay for college, where state budgets are strained to an unprecedented extent, and where many public colleges are unable to accommodate all qualified students who wish to enroll, tuition discounts to the affluent are difficult to justify. Allowing the rich to benefit from the general subsidy is one thing. Consciously allocating the most generous subsidies to the most affluent students is another thing all together. Current patterns of institutional grant aid in the public sector do exactly this.

The policies of private colleges certainly merit examination. But the policies of state colleges raise the most troubling questions. It is time to step back from the competitive pricing policies that have characterized higher education in recent years and articulate clear principles for differential pricing policies at public institutions. Our primary goal should be to provide access to high quality, appropriate postsecondary education for all qualified students. Dollars should not be diverted from those who need them to those who merely want them.

Sandy Baum is an economics professor at Skidmore College and a senior policy analyst at the College Board. She has written extensively on issues relating to college access, college pricing, student aid policy, student debt, affordability and other aspects of higher education finance. She is the co-author of Trends in Student Aid, Trends in College Pricing, and Education Pays: The Benefits of Higher Education for Individuals and Society for the College Board, and of Tuition Discounting: Not Just a Private College Practice. Her views are her own and do not necessarily reflect those of the New America Foundation.

A Senator's Legacy

Stephen Burd — Thu, 08 Jan 2009 15:00:00 -0500

At Higher Ed Watch, we were saddened to learn of the recent death of former Sen. Claiborne Pell, the Rhode Island Democrat whose work on Capitol Hill helped open the doors of college to tens of millions of low-income students. The Pell Grant program remains the cornerstone of the federal government's efforts to help the most financially-needy students obtain a higher education.

As Maura Casey, an editorial writer for The New York Times wrote in a moving tribute to the Senator on Tuesday, "Pell Grants have been around so long that few remember how much opposition they had to overcome or how revolutionary they once seemed."

In fact, Senator Pell -- "a wealthy New England aristocrat," as Casey described him -- had to fight an epic battle in 1972 against his Democratic colleagues in the House of Representatives and the higher education establishment to create the grant program that he first dreamed up, legend has it, on a ski slope in Switzerland. [Whether or not he had ever skied at all is a matter of much debate.]

Pell's vision was to create a new grant program to aid low-income students modeled on the GI Bill, which had helped pay for his graduate education. Under the Senator's plan, federal grants would go directly to students who could use them at the college of their choice. The idea, however, was met with fierce opposition from the leading national higher education associations who wanted the money to go straight to their member institutions. They argued that college officials were in the best position to determine which students were in most need of financial aid funds. The college groups had powerful allies on the House education committee, who fought on their behalf.

A battle between the Democratic leaders in the two chambers waged for two long and grueling months in the spring of 1972. The dispute was ultimately resolved in the early morning hours of a mid-May day when Rep. Carl Perkins of Kentucky, who chaired the House education committee, finally relented.

Since then, more than 55 million low- and moderate-income students have benefited from the program. That is quite an accomplishment.

Unfortunately, funding for the Pell Grant program has not kept up with skyrocketing increases in college prices over the past three decades. As a result, the grant's purchasing power has, with some exceptions, been mostly in decline during that period of time.

College lobbyists, who have become champions for Pell Grants, place the blame squarely on the government for failing to adequately finance the program. But the truth is that Democrats and Republicans alike have legitimately grown tired of boosting spending on student aid, only to see their efforts squandered by ever-escalating tuition increases.

Colleges' increasing reliance on enrollment management and financial aid leveraging techniques to create award packages has also harmed the effectiveness of the Pell Grant program. All too often, schools use Pell Grants to replace institutional aid they would have provided financially-needy students otherwise, and then shift the money they save into merit aid to attract the kind of high-achieving students that improve their rankings. The upshot is that low- and moderate-income students are expected to supplement their Pell Grants by taking on heavy loads of debt.

In addition, as lawmakers have increased eligibility for the awards, the program has become extremely expensive. The Department of Education estimates that each $100 increase in the maximum award costs about $400 million. And that's not counting the $4-5 billion shortfall that the program is currently facing -- and an even bigger one looming in fiscal year 2013 when mandatory money that is currently propping up the maximum grant runs out.

While the Pell Grant program will always be a centerpiece of the government's efforts, federal officials need to find new ways to better leverage college and state support to ensure that the doors of college remain open to low-income and working-class students. If we have any hope of at least maintaining and hopefully building on the gains in college accessibility over the last 40 years, we desperately need colleges and states to stop working at cross purposes with the stated goals of the Pell Grant.

It's just too bad that we don't have a visionary like Senator Claiborne Pell to lead the charge. In this battle and others, the patrician Senator from Rhode Island will be dearly missed.

Don't Pass the Buck

Ben Miller — Tue, 02 Dec 2008 17:15:00 -0500

With Thanksgiving behind us, it is officially the start of the gift-giving season. Unfortunately, students at public colleges and universities across the country can already expect an unwanted present from their governors -- tuition and fee increases. At least coal could have been used for heat.

Students are going to face increased tuition burdens, both for next semester and the following academic year, because governors and state legislators often turn to higher education when they need to make budget cuts. But increasing tuition could lead more students to drop out or delay enrollment -- lowering graduation rates and stranding students with debt. To prevent these negative outcomes, we urge states to make a sustained commitment to higher education, while asking schools to reexamine their financial aid and revenue allocation policies.

The coming months are going to be gloomy for higher education funding. Several states have already announced plans for postsecondary education cuts, and many more are sure to follow suit. The governors of New York and California -- the two states with the largest public higher education systems in the country -- recently proposed a new round of budget cuts on top of ones that these colleges endured earlier this year.

In New York, Democratic Gov. David Patterson is proposing a cumulative $353 million higher education cut -- $115 million this year, $238 million the following year. Colleges would make up this drop in funding by raising tuition $600 over the next year -- including a $300 hike this spring. That's a 10 percent increase at the State University of New York, Binghamton, and a 14 percent increase at the City College of the City University of New York -- the flagship schools in New York's public university and community college systems. Community colleges, meanwhile, would see an estimated 10 percent reduction in aid per student.

California, meanwhile, is calling for $464 million in higher education cuts -- including $332.2 million from community colleges and $66.3 million at the California State University System. These cuts could increase tuition by as much as 10 percent, some faculty members warn. It could cause the Cal State system, which enrolls a large number of low-income students, to drop enrollment by 10,000.

California and New York's willingness to pass college costs on to the least affluent students and schools could lead price-sensitive low-income students to drop out, reduce their attendance to part-time status, delay enrolling, or forgo college altogether. This would lead to a series of negative outcomes for students, such as not attending college at all or leaving school heavily indebted without gaining a credential, increasing the likelihood that they will eventually default on their student loans and ruin their credit.

Rather than turning to tuition as a revenue source, we implore governors and legislators to remember they are not the only ones making sacrifices to invest in higher education. The federal government spends tens of billions of dollars each year on student aid and federal loan guarantees, while students take on substantial debt and pay thousands of dollars in their own money to attend a postsecondary institution. Shifting more of the burden to federal taxpayers and students is both inequitable and unfair.

If states are unwilling to keep this commitment to higher education on their own, then the federal government should assist them with both carrots and sticks. There is already a legislative provision that would make states ineligible for certain grants if they do not maintain their higher education spending at or above their five-year average. But this program, College Access Challenge Grants, only has guaranteed funding for a few years. At Higher Ed Watch, we believe that the federal government should hold more funds at risk -- such as administrative payments to state boards of education or requested U.S. Treasury bail out funds to states and local governments (as suggested by former Higher Ed Watch Editor Michael Dannenberg) -- for states that slash higher education funding. At the same time, those that keep their funding level or increase it should either receive access to a special funding stream for low-income students or priority in competitive pilot programs.

But states aren't the only higher education actors whose practices should be scrutinized. It is also worth looking at schools' aid packages. Every single public college contacted for a recent survey by the National Association for College Admission Counseling said it provided non-need based assistance, or "merit aid." The same survey found that merit aid made up 41.9 percent of public institutional funds, only slightly less than the 46.6 percent devoted to need-based institutional aid. This is troubling because "merit aid" is not targeted at low-income students, and is instead used to compete for the best (and sometimes the wealthiest) students to boost prestige and fundraising. Schools should not be allowed to continue to spend their limited financial aid budgets on non-needy students when low- and moderate-income students are being asked to shoulder ever-larger tuition burdens.

Finally, colleges should see if they can lessen tuition increases by finding savings in their current spending practices. In an insightful Washington Monthly article about using technology to reduce college costs, Kevin Carey of Education Sector cites data from the Delta Project on Postsecondary Education Costs that show schools are spending less on instructional costs -- often their biggest expense -- while taking in more tuition revenue. This would suggest that a growing portion of their revenue is going to non-essential functions. Carey also discusses several tactics taken by Virginia Tech University to use technology to substantially reduce the cost of some expensive introductory courses without harming student achievement. Employing these type of programs on a larger scale could also help reduce the need to heap more tuition on students.

It is undeniable that the future outlook for state budgets is far from rosy. But states and schools should not take the knee-jerk, easy way out of passing more costs on to students by raising tuition. Instead, they should view the lean times ahead as an opportunity to reexamine their own spending and aid policies to increase efficiency and better target their own aid to low-income students. Doing so would recognize and match the sizable commitment the federal government, students, and parents already commit to higher education, rather than just passing the buck.

Paying the Price at Private Colleges

Stephen Burd — Thu, 23 Oct 2008 19:38:00 -0400

For years, expensive private colleges have pretty much been able to raise their prices without having to worry about scaring off students -- as the widespread availability of easy credit made it possible for students and their families view these schools as affordable. Lenders have been all too willing to ensure that these students had all the money they needed, through the federal and private loan programs, to be able to afford to attend.

For these high-cost colleges, particularly non-elite ones that heavily rely on tuition to cover operating expenses, the lenders' eagerness to provide high cost private loans to financially needy students at their institutions presented a win-win situation. It allowed them to free up their institutional aid dollars to recruit "more attractive" students (merit scholars, etc.). And, for the most part, the schools had the luxury of not having to worry about the difficulties many of their students would encounter repaying these loans.

But now with all the turmoil in the financial markets, and private loan default rates on the rise, these policies are coming back to bite high-priced schools. That much is clear from a survey that the National Association of Independent Colleges and Universities (NAICU) released on Tuesday. The group, which lobbies on behalf of private colleges, questioned its members about the effect the credit crunch is having on student loan availability at their institutions.

Few of the 504 colleges that responded reported having any problems associated with federal loans. Many, however, said that they had run into trouble obtaining private loans for at least some of their students. This is because most lenders are no longer willing to waive or substantially loosen their credit requirements to provide unsecured debt to high-risk students -- a once commonplace practice that helped fuel the growth of private loan borrowing on these campuses.

Of the schools that responded:

54 percent said they had more than 10 students who were unable to secure a private loan this year.
11 percent said they had more than 50 students who were unable to obtain a private loan.
46 percent said they had some students taking the semester off or switching to part-time status because of their difficulty obtaining financing.

Meanwhile, about 18 percent of respondents said that fewer previously enrolled students returned this semester than expected, and 19 percent reported having a smaller incoming freshman class than they had expected.

While at first glance these statistics are alarming, the NAICU survey raises more questions than it answers. For instance, are the students who are not showing up simply going to less expensive schools? According to recent reports, students are increasingly considering less costly options.

Also, are private colleges responding to the credit crunch by reexamining their institutional aid policies? Specifically, are they shifting money they currently spend on merit aid to need-based financial aid so that the students who truly need the help get it?

But perhaps most vexing to us is the following question: Did private colleges really believe that the path they were on was sustainable? That they could just continue to jack up their prices and expect financially-needy students to take on more and more debt to attend?

Some college lobbyists and lenders are undoubtedly hoping to use the survey's results to try to press lawmakers for further federal loan limit increases. We are hearing reports that lawmakers may be considering opening up the federal PLUS loan program to undergraduates - allowing them to borrow up to the full cost of attendance at their institutions. Under this proposal, students attending the most expensive private colleges would be able to borrow more than $200,000 in federal loans during their college careers.

At Higher Ed Watch, we can't think of a more irresponsible and destructive proposal. If we should have learned anything from this credit crunch, it is the hazards of overloading debt on people who can ill afford it. Don't forget that by definition most traditional college-age students are subprime borrowers, as they lack established credit records.

If the NAICU survey tells us anything, it's that times have changed and that high-cost private colleges need to rethink the assumptions they have been operating under.

Guest Post: A Better Solution for Campus-Based Aid

Ed Policy — Wed, 13 Aug 2008 15:18:00 -0400

By Rupert Wilkinson

The Bush administration has repeatedly called for simplifying the federal student aid system by eliminating two of the main "campus-based" aid programs, which provide colleges with federal funds for needy students that they allocate themselves. Under the administration's plan, funds from the Supplemental Educational Opportunity Grant and Perkins Loan programs would be transferred into expanded Pell grants, the government's main source of grant aid for low-income students.

A better solution would be to restructure the campus-based aid programs so that they do a better job of leveraging college support for students who are promising but disadvantaged.

In America's decentralized higher education system, the ultimate responsibility for meeting (or not meeting) student financial need lies with the college itself. Outside an elite band of well-endowed institutions, most four-year colleges do not meet all need -- because they are either unable or unwilling to use their own grant aid to fill the gap between the cost of attendance and the family resources and financial aid (including federal loans and a reasonable amount of College Work-Study employment) that students are able to cobble together. Estimating that gap is tricky, but it is the widest for poor students -- probably well over 20% of what they need.

Expanding the Pell Grant program won't close the gap because unfortunately, each added Pell dollar does not necessarily produce an extra dollar for Pell recipients. Many four-year colleges use Pell grants as budget relief, diverting their own aid to middle- and even upper-income students. In fact, at some less selective private colleges, rich students actually get bigger institutional aid awards (in the form of "merit" aid) than poor ones. Of course, this isn't true at smaller state colleges that don't offer student aid of their own. But a study of state universities by Michael J. Rizzo and Ronald G. Ehrenberg has found that the these institutions tend to cancel out the value of increased Pell grants by raising their prices.

Instead, what are needed are new federal "student-program" grants to colleges aimed at encouraging them to give more of their own money to low-income students, while recognizing that these students need more than financial aid to help them persist. Colleges would be required to spend a certain proportion of the money they receive on financial aid for low-income students. The rest of the money could then be spent on academic back-up and support services for these students. The academic programs should be especially relevant to disadvantaged students but need not be confined to ‘remedial' tutoring. They could include, for example, courses in writing and argument that could benefit other students as well.

Funding for these grants would be allocated to colleges based on two criteria: the number of low-income students enrolled and the institutions' own effort to support them. Allocations, at least for four-year institutions, might be weighted according to the proportion of a college's total budget spent on institutional aid to Pell Grant recipients.

The new grants would not dry up college aid to middle-income students (who are also the main beneficiaries of federal tuition tax credits). In modern market conditions, affecting public as well as private colleges, the incentive to use some aid to buy advantaged, high-scoring students is not easily dislodged. And many colleges, especially under-enrolled private ones, would continue using aid as a form of price discounting to get more students, needy or not. The new grants, however, would create a counterveiling incentive for colleges to seek more economic diversity.

The grants would have something in common with existing state programs such as New Jersey and New York's "opportunity" grants, given to colleges for supporting disadvantaged students with financial aid and academic back-up. The "student-program" grants would also fit in well with the new College Access Challenge Grant program, which provides federal matching grants to states for aid and outreach to "underserved populations." Congress created the program last year as part of the College Cost Reduction and Access Act.

The whole idea of matching grants -- giving money to other players in return for their own contribution -- is an old tradition in America. With the exception of the GI Bill, almost all federal student aid until the 1970s was campus-based and involved matching grants. One problem with federal matching grants is how to ensure that the federal funds bring in new, added money that would not have been contributed anyway. On this and other grounds, the new student-program grants could do a better job than the current SEOG program.

To suggest replacing SEOG with this new grant program is to enter a potential bear pit, reopening past acrimony between defenders of the campus-based aid programs and their critics. But that is true of any proposal to terminate or radically revise a federal student aid program. One reason why federal aid programs have proliferated over the years is that each has acquired its own impassioned constituency with supporters in Congress. That makes it easier to add a new program than axe an old one.

SEOG consists solely of financial aid; there is no subsidy to the college for academic programs (the original Pell grant legislation actually provided for that but it was deleted). The supplemental grants are supposed to go to students with "exceptional financial need" and colleges have to give recipients one dollar for every three that they get from the government. But this contribution can include state student aid and outside scholarships obtained by students from private donors. More importantly, as Higher Ed Watch noted yesterday, the grants are allocated to colleges on historical and biased formulas that tend to give the most aid per student to elite institutions (private and public) that have relatively few low-income students.

The future demographics of higher education -- involving many more lower-income students -- require a new and better targeted campus-based grant program. Not just more money for Pell Grants.

Rupert Wilkinson is the author of Aiding Students, Buying Students: Financial Aid in America (Vanderbilt University Press, 2005), a wide-ranging history of student aid in America, including recommendations for making the programs more equitable. His views are his own and do not necessarily reflect those of the New America Foundation.

Targeting Campus-Based Aid

Stephen Burd — Tue, 12 Aug 2008 18:34:00 -0400

Now that Congress has completed work on legislation to reauthorize the Higher Education Act, momentum is growing among student-aid experts and some policymakers for a fundamental redesign of the federal student aid system. A key question they are asking is whether the federal campus-based student-aid programs are still needed.

The campus-based programs -- College Work-Study, Perkins Loans, and Supplemental Educational Opportunity Grants -- are intended to supplement Pell Grants for low-income students and to provide aid for students who just miss the cutoff for the grants. Unlike Pell Grants, which are awarded directly to students, campus-based aid is distributed to colleges, which add their own dollars to the programs and then give the money to students.

By requiring colleges to provide matching funds, these programs have long played an important role in enticing colleges to spend their own money to help support low- and moderate-income students. The programs, however, are no longer serving the neediest students well. The formula the government uses to distribute the aid overwhelmingly benefits elite private colleges and public flagship universities, even though low-income students predominantly attend community colleges, state colleges, and trade schools.

Of particular concern are the disparities among colleges participating in the SEOG program, which is meant to supplement Pell Grants for the most financially-needy students. Under the program, which received $758 million from Congress this year, colleges are required to award SEOG funds first to Pell Grant recipients who need more money to pay for school and then to other students who are deemed to have "exceptional need." Because they receive a disproportionately small share of funding, many community colleges are forced to ration SEOG funds -- and often run out of money before they are able to provide awards to all their students who are eligible for the maximum Pell Grant. In contrast, wealthier schools sometimes have to return excess SEOG funds to the government because they don't have enough students on their campuses who fit the "exceptional need" designation. [In 2003, a group representing 31 elite private colleges tried to persuade Congress to relax the rules so that they could use the money to provide awards to less needy students.]

The roots of these disparities date back over 40 years. In the campus-based aid programs' first couple of decades, the federal government set aside money for each state. Regional boards reviewed applications submitted by colleges for the funds and made decisions based on the students' financial need as reported by the schools. Over time, federal officials became concerned, however, that wealthier institutions were benefiting disproportionately because they tended to employ savvy aid administrators who were particularly skilled at grant writing.

To address these concerns, Carter administration officials called for a new method of allocating the funds. That plan, dating to the late 1970s, phased out institutional shares, or "base guarantees." The entire pool of money was to be awarded based solely on the financial need of the students attending the colleges

But this new method threatened high-priced private colleges and public flagships that were poised to lose significant sums. So lobbyists for these schools pushed Congress in 1980 to reverse the Carter administration's action and to guarantee that participating institutions would continue to receive the same proportion of aid money they had received since the start of the program.

The results of this law continue to be felt today. Because funds are distributed based largely on the formula set in 1980, a choice group of institutions, many of them wealthy and elite, benefit the most. An astounding two-thirds of funds appropriated each year for SEOG go to colleges that have dominated the programs for decades, leaving little money for the schools that enroll a much larger share of low-income students. This problem has been compounded in recent years, as the program's budget has stagnated.

For these reasons, the SEOG and Perkins Loan programs are attractive targets for those looking to redesign the federal student-aid system to make it more equitable.

Leading the charge are Bush administration officials in charge of the U.S. Department of Education. They have told college leaders that they hope to issue recommendations for overhauling the federal student aid programs before President Bush leaves office. Speaking last month at a Department summit on higher education, Sara Martinez Tucker, the under secretary of education, said that the recommendations would include proposals to eliminate the SEOG and Perkins Loan programs and use the money saved to increase spending on Pell Grants. According to Inside Higher Ed, she estimated that the savings derived from terminating these programs, as well as others, would be enough to raise the maximum Pell Grant, which is currently $4,731, by $370.

Also considering these issues is a group of higher-education researchers and student-aid experts, known as the Rethinking Student Aid Study Group, that has been meeting for about 18 months to develop recommendations for revamping the federal financial aid programs. The group, which was assembled by the College Board, plans to release a report in October outlining its proposals. It's unclear whether these analysts will back the Bush administration's proposal to eliminate the two campus-based aid programs, but it's widely assumed that the group will call for an overhaul of these programs.

At Higher Ed Watch, we certainly believe that the federal student aid programs need to be made more equitable. But we're not sure that the Bush Administration's plan is the best way to go. After all, a $370 increase in the maximum Pell Grant doesn't seem like a big enough bang for the buck.

Tomorrow, guest blogger Rupert Wilkinson, author of Aiding Students, Buying Students: Financial Aid in America, will offer an alternative proposal for revamping the campus-based aid programs that we believe is worthy of consideration. Stay tuned.

Our Biggest Disappointments (With Final Higher Ed Bill)

Ed Policy — Thu, 31 Jul 2008 21:23:00 -0400

By Ben Miller, Stephen Burd, and Sara Mead

Yesterday, Higher Ed Watch highlighted our favorite provisions in the final version of legislation to reauthorize the Higher Education Act. With Congress poised to approve the bill today and send it to President Bush for his signature, we take a critical look at the parts of the legislation that fail to close loopholes, open new areas for potential exploitation, and weaken existing accountability frameworks.

Easing Restrictions on Trade Schools

For-profit colleges' lobbyists are exuberant about the reauthorization legislation. And who can blame them? Congress has gutted a key consumer protection provision that the career college lobbyists have been trying to kill since it was first introduced in 1992. The provision, which is known as the "90-10 rule," was intended to crack down on unscrupulous trade schools. It requires proprietary institutions to receive at least 10 percent of their revenue from sources other than federal student aid in order to participate in the aid programs. Congress' legislation would keep the requirement in place, but takes all the teeth out of it.

The bill substantially increases the sources of funds that proprietary institutions can count toward the 10 percent threshold, including institutional need- and merit-based scholarships and loans the schools make to their students. In addition, schools that violate the rule would no longer become automatically ineligible to participate in the federal student aid programs. Instead, they would now have to exceed the threshold for two consecutive years before being penalized. (The bill gives the Education Secretary the option of removing such institutions from the aid programs but does not actually require it.) The legislation would also temporarily exempt from the 90-10 calculations recent federal loan limit increases Congress approved as part of the Ensuring Continued Access to Student Loans Act. This means some federal student aid will not count toward the 10 percent cap.

We find it extremely troubling that lawmakers would consider weakening the government's limited tools for protecting students and the integrity of the aid programs at a time when trade schools recruiting practices are coming under so much scrutiny from federal and state regulators.

Taking the Truth Out of Tuition Calculations

The House of Representatives' version of the higher education reauthorization contained a bipartisan provision called "Truth in Tuition," which the New America Foundation has long favored. Designed to provide parents and students with a better idea of future charges, this provision would have required colleges to provide all incoming freshmen with a four-year schedule of expected tuition and fees. While schools could raise tuition from one year to the next, the schedule would help students prepare for the possibility of large cost hikes in future years. Unfortunately, instead of requiring colleges to help their students plan ahead, the bill requires the Department of Education to develop a multi-year tuition calculator, which bases its estimates solely on colleges' past increases. In essence, the calculator takes the responsibility away from schools to provide earnest and thoughtful estimates of future fees, and replaces it with a tool of questionable predictive value. As a result, most students will likely remain in the dark about what lies ahead.

Keeping a Veil on Institutional Aid Policies

Lobbyists for traditional colleges have fought vigorously Congressional efforts to shed more light on institutional financial aid practices, and it appears they have been victorious. The final bill requires colleges to report the average amount of grant aid they provide their students out of their own coffers. It doesn't, however, require them to disaggregate the data by family income of student recipients, as the original House version of the bill did. While the legislation requires colleges to disclose the average net price (the sticker price minus all financial aid a student receives) charged to students, broken down by income, it directs colleges to include only students who have received federal financial aid in its calculations. As a result, colleges will not have to reveal the extent to which they provide non-need-based "merit" aid to students from affluent families.

The government, as we have previously said, has a right and responsibility to know whether colleges are helping or hindering public policy goals. Specifically, are they using federal student aid dollars to supplement their own institutional financial aid to insure that low-income students don't have unmet financial need? Or are they using federal funds to replace institutional aid dollars they would have spent otherwise on needy students, and using that money to attract better, and often wealthier, students? Unfortunately, this bill won't provide policymakers with those answers.

Growing Guarantor Roles

Student loan guaranty agencies are no longer needed to serve their original purposes, so they are increasingly branching out into new roles to justify their existence. As we wrote recently, advocates for guarantors convinced lawmakers in 2006 to add language to a budget reconciliation bill that explicitly required the agencies to promote college access efforts. Now, in the reauthorization legislation, Congress goes a step further and involves guarantors in colleges' efforts to promote better financial literacy. Under the bill, guaranty agencies would be required to develop materials for parents and students on "budgeting and financial management, including debt management and other aspects of financial literacy, such as the cost of using high interest loans to pay for postsecondary education." These are certainly worthy goals, but do we really need guaranty agencies to do them? The agencies would be directed not only to engage in these activities, but they would also be allowed to count these efforts towards the default reduction activities they are required to carry out. Moreover, the legislation doesn't include any mechanisms for measuring the effectiveness of the guarantors' efforts.

We are also perplexed by a requirement in the legislation that guarantors be included in the pilot PLUS loan auction. Under the bill, winning lenders will receive a 99 percent guarantee against default by guaranty agencies -- rather than from the Education Secretary, as the initial legislation mandated. The federal government is already responsible for the cost of defaults anyway, so why do we need to insert a middleman?

Leaving States to Define "Low-Performing" Teacher Prep

While the reauthorization bill takes some positive steps to improve accountability for teacher preparation programs, it fails to accurately target "low-performing" prep programs. Like the 1998 Higher Education Amendments, the legislation does require states to identify "low-performing" teacher prep programs, which can then be subject to penalties. Unfortunately, this measure, like the 1998 law, leaves it solely to the states to define the criteria by which they will judge programs to be "low-performing." As we've seen over the past decade, most states have set laughably low standards that hold few or no programs accountable. By not mandating any parameters for how states define and judge teacher prep programs, the legislation continues to let lousy programs off the hook.

Ensuring that Default Rates Remain Toothless

The version of the reauthorization legislation that was approved by a key House committee last November contained a promising provision to increase the measurement window for student loan cohort default rates -- a metric used to hold schools accountable if too many of their students don't repay their loans. Unfortunately, by the time it got to the final bill, that provision was substantially weakened. Like the committee's version, the final bill would include in the cohort default rate all students who don't make payments on their loans within three years of leaving college, rather than two, as is in current law. That's a good change. The bill, however, would also increase the default rate threshold at which sanctions kick in. Under the new law, a school would be penalized only if 30 percent of its former students defaulted on their loans within three years, instead of 25 percent, as is currently the case. While the longer window will more accurately capture defaults, the higher threshold will make it easier for schools to avoid sanction. The legislation further weakens the measurement by allowing schools to get out of sanctions due to "mitigating circumstances," such as enrolling a substantial number of low-income students. In addition, the bill increases the minimum percentage of student borrowers a school must have to be subject to penalties. The net result of these actions is that Congress has made an accountability measure that was already pretty toothless even weaker.

Next week, Higher Ed Watch will take a closer look at other parts of the bill, including our views on provisions attempting to remove "pay for play" conflicts of interest from the student loan programs. Stay tuned.

Guest Post: Six Principles for Financial Aid Reform

Ed Policy — Tue, 13 May 2008 14:00:00 -0400

By Art Hauptman

There is widespread agreement among financial aid analysts and practitioners that our country's student aid system is not working as effectively as it could be. Many believe that the solution to this problem is to have the federal government substantially increase the amount of money it spends on the existing student aid programs.

I disagree. The federal government currently spends roughly $40 billion for grants, college work study, loan subsidies, and tax breaks for college -- more than enough to achieve the programs' goals if they were operating effectively and efficiently. As I argued last week, the current structure of student financial support in this country needs to be changed in fundamental ways.

Federal aid programs and tax benefits should be molded into a more comprehensive and comprehensible whole. This would entail some program consolidation and a much better coordination of federal programs and policies with each other. The federal government should also strengthen the incentives it provides states, colleges, and the private sector so that these entities complement, rather than complicate, its public policy goals. Such a system should adhere to the following six principles:

It should be much simpler for students and their families to apply for aid and for college officials to administer it. The current application process serves as a huge barrier to access for many students and families, especially those most at-risk.

A modest amount of self help in the form of loans or work should be required of all students, although institutions should be encouraged to cover some or all of this self-help component for students from the most impoverished circumstances.

The largest proportion of assistance should be targeted on the most at-risk students. This greater commitment to targeting of benefits should include federal and state policies, institutional practices, and private sector initiatives.

Tuition tax breaks should be the primary form of non-repayable aid for middle class students and lifelong learners who are already in the work force. Tax benefits are much better suited for these two groups of students than cramming them into the already strained traditional student aid programs.

The federal student loan programs should be restructured to reduce the adverse effects of growing debt burdens and to stem instances of program abuse. The policy focus should shift from the traditional emphasis on when the loan is made to more attention being placed on helping borrowers when they enter repayment.

Greater reliance should be placed on non-financial aid activities to improve the preparation and increase the aspirations of students most at-risk. Student aid is clearly not enough when it comes to the riskiest students; reaching them in various ways while they are in grade school or middle school is clearly key to greater success.

By taking the following three steps, policymakers can accomplish the kind of reform that is needed without spending any additional money:

Federal student aid programs and tuition tax benefits should be integrated in a systematic way. Many student aid advocates have suggested doing away with the current range of tuition tax benefits and using the savings to increase spending on need-based financial aid. Others have suggested making the tax credits refundable. A better approach is to recognize the need for tax benefits -- both to offset current tuition expenses and stimulate more college savings -- and integrate the tax system with federal student aid programs: before, during, and after college.

The federal government should be more aggressive in seeking to increase the access and success of the students from the lowest income families. Federal policy makers have tended to rely on expanding Pell Grants as the means for helping low-income students. But it is increasingly obvious that other policies are needed to achieve this goal, including more early intervention through GEAR UP and related efforts, and providing incentives for institutions to require less borrowing from these students. It would also be worthwhile to consider establishing college savings accounts for poor but promising students to raise their aspirations.

A student-centered seamless federal student loan structure should be created. Federal student loan policies and practices have been central to postsecondary policy debates for the past several decades, with the primary focus over the past 15 years on whether loans should be financed directly by the federal government or privately financed. But the ‘direct loan' debate has obscured a number of other critical issues related to the provision of student loans, including the complexity of the system and whether federal policies contribute to rapidly mounting student debt burdens. We should consider how the federal student loan structure can be streamlined so that all loans have the same terms and conditions and real relief is provided to borrowers in trouble when they reach repayment.

These three sets of reforms could be paid for largely through changes in the student loan programs that would: restrict the in-school interest payments that the government makes on behalf of students in the subsidized Stafford Loan program to Pell Grant recipients; increase the share of federal student loans provided through the Direct Loan Program; and use auction mechanisms to determine a market rate of return on federally guaranteed loans and thereby drive down federal payments to lenders. In addition, improving coordination between the Pell Grant and tax credit programs would create some savings by making students from middle-income families ineligible for Pell Grants. This change would justify increasing tuition tax benefits for middle-class students and their families through the consolidation of existing tuition tax breaks into a new single expanded tuition tax credit.

Future posts will consider how adopting these reforms could lead to a reinvigorated system of student financial support in this country.

Art Hauptman is an independent consultant on higher education finance issues. His guest blog column will continue to appear each Tuesday in the month of May. The views expressed herein are his own and do not necessarily reflect the positions of the New America Foundation.

Institutional Aid

Guest Post: Bolder Steps are Needed to Help Low-Income Students Avoid Debt

By Mark Kantrowitz

How Would You Spend $87-Billion?

Guest Post: A Question of Priorities at Public Colleges

A Senator's Legacy

Don't Pass the Buck

Paying the Price at Private Colleges

Guest Post: A Better Solution for Campus-Based Aid

Targeting Campus-Based Aid

Our Biggest Disappointments (With Final Higher Ed Bill)

Easing Restrictions on Trade Schools

Taking the Truth Out of Tuition Calculations

Keeping a Veil on Institutional Aid Policies

Growing Guarantor Roles

Leaving States to Define "Low-Performing" Teacher Prep

Ensuring that Default Rates Remain Toothless

Guest Post: Six Principles for Financial Aid Reform