Reforming Federal Student Aid

By Richard Vedder

This is my bi-monthly pitch to reform federal student financial aid. I start with a confession: deep down, I believe the Feds should get out of the student financial aid business altogether. I think higher education is mainly a private good, and most aid is in the form of subsidies to individuals to enhance their future earnings --akin to financing an investment. I believe the fed should stay out of the business of trying to influence investment decisions, be it human or physical capital creating ones.

But I know my views are considered kooky and are politically unattainable. And, I appreciate that there is a very strong egalitarian tradition in our nation that provides some intellectual basis for federal student aid for some students. It is considered unjust for lower income students to be denied the opportunity for college because of steep financial constraints. Therefore, I can support some sort of federal assistance program.

The current system, however, is dysfunctional and crazy. Many persons are turned off by the incredibly complex FAFSA form, so that they simply opt out of applying for aid --and that includes many low income persons. We have a bewildering array of options --Stafford loans, both subsidized and unsubsidized, Pell Grants, federal work study, Perkins, SMART, SEOG grants or loans, federal tax credits, etc.

Research has shown that the complexity of the system has added enormously to compliance costs but done little to target money in desired fashions. So here is my proposal:

1) Eliminate all federal programs.

2) Replace the Pell Grants with a new Educational Opportunity Scholarship. It would be awarded to about 7 million Americans at an average award of $3,500 and a range on awards from $1,500 to $6,000. In short, it would be considerably more generous than the current Pell Grant program and would cost nearly $25 billion a year, about $10 billion more than we are probably spending this fiscal year on Pell awards. The cancelling of other programs would save more than that amount, however --a net savings to the taxpayer. If need be, the savings could be spent in other ways on higher education --more federal research support, for example (I am not advocating this, however).

3) The Pell Grant amounts would increase annually by the Consumer Price Index --period. The notion that colleges can raise tuition by huge amounts and Fed loans then increase roughly proportionally would end.

4) Upper income Americans (say with family incomes of $90,000 or more) would not be eligible for the Educational Opportunity Scholarships. Below that, award size would vary with income mainly. However, aid would be restricted to four years for those in a bachelor's degree program --with the exception that part time students could receive pro rated Pell Grants over a longer time horizon.

5) Aid would be given to students, not to financial aid offices. Indeed, the federal disbursers of the scholarships would be prohibited in sharing information on them with universities, other than to report aggregate statistics on the number of recipients attending each school, etc.

6) Aid would NOT vary with the price of the institution attended. The aid would be designed to provide an opportunity for low income students to attend a community college and most four year public institutions at a relatively low personal cost, and would offer a modicum of relief to middle income students as well.

7) Students who graduate early would receive a bonus. For example, if a student graduates in 3 years (perhaps by taking college courses in high school, going to summer school), she would receive a bonus check equal to at least one-half year federal scholarship. Students lingering around college, changing majors repeatedly, etc., would be out of luck. Society cannot afford to subsidize able bodied young persons indefinitely.

Such a system would be efficient, simple, easy to administer, give students more say over the dollars spent. It should promote more timely graduation of students. It could be set up to reward excellence and punish mediocrity by introducing a performance dimension to it, although that adds to complexity and the egalitarian nature of the award. In the long run, it would increase pressure on colleges to cut tuition increases as the elasticity of demand for college would increase somewhat --people would become more price-sensitive.

Students could still borrow as they like from private lenders if necessary, as at present. Such loans would be made by banks and other institutions only when the rewards to them were perceived to exceed the risks --making students borrow the same way the rest of us have to do, an important lesson that young persons should learn. States wanting to have their own assistance programs could continue to do so.

This blog is reaching the length of a mini study, so I will stop even though there is more to say. Shortly, my colleague Andy Gillen will weigh in on the student loan issue in a thoughtful study that I commend to you.