Our Dysfunctional Financial Aid System

By Richard Vedder

One of the modest successes I achieved during my service on the Spellings Commission on higher education was to get the word "dysfunctional" inserted into the report with respect to the financing of the system, and in particular student financial assistance (Chairman Charles Miller liked the term as well, and pushed for its inclusion). One of the gravest weaknesses of the commision's report was that it spoke very little about our Byzantine system of providing financial assistance to students. Chairman Miller's one personal effort --to point out the useful role played by private unsubsidized lenders --was removed by him after some flak from misguided student groups (to my grave dismay).

It is important to note that the vast rise in participation in our system of colleges and universities occurred before the federal government got much involved in the lending business. In the era from 1945 to 1975, when college enrollments soared, the largest federal involvement in university education was the GI Bill. It was a type of voucher system that by all accounts was quite successful in improving student access. The era of massive new federal assistance programs has been a period where there has been an abrupt slowing in rising college participation. It may be on net that the major single impact of the "more than 17" (Spellings Commission) programs of the modern era has been to increase college tuition costs.

Catherine Reynolds, a fellow commission member who made a very good living in this business before retiring, showed me an interesting set of statistics at our last meeting, showing that of $135 billion in student lending (some of it consoldiation of previous loans) in a recent year, the overwhelming majority had no needs-based component to it. The federal government is in the business of lending to kids from moderately affluent middle class families, most of whom would go to college in any case (although perhaps not at the institution or in the style in which they do now). Question: in the absence of student loans, how many climbing walls and luxury dorms would there be at American universities?

The whole system needs revamping. I would have hoped the Spellings Commission would have recommended something really radical, like killing most of these programs, perhaps going to a single much expanded voucher (Pell Grant) system for lower income kids, and getting out of the loan business. As they are demonstrating by their rapid expansion, private, subsidized loans can do whatever job that needs to be done. The Commission ignored the compelling testimony of Miami University President Garland. On the loan side-- if there is going to be a federal loan program at all --we need to rethink what we do. Should we go from a debt to an equity approach to financing --students sell "stock" in themselves instead of issuing bonds? (the current IOU system is akin to bond financing). Should we look at alternative repayment schemes, such as used in Australia, or as proposed by the indefatigable Arthur Beroz? Why not talk to truly innovative thinkers on higher education finance, like Wick Sloane?