Monday, June 15, 2009

Commandment #4: Simplify and reform financial aid

Commandment #4: Simplify and reduce or eliminate for non-poor students federal financial assistance programs

by Andrew Gillen

As college has become expensive, more and more students are turning to financial aid. However, both the process and the outcome of financial aid currently leave much to be desired. Two changes to financial aid could significantly improve higher ed.

First, murder the FAFSA.

This monstrosity imposes large costs on students, schools and the government. The bulk of these costs are unnecessary - the distribution of aid is not affected to a significant degree by the radical reduction in the number of questions (see this paper by Susan Dynarski and Judith Scott-Clayton). Moreover, the complexity and confusion lead many students who would qualify for means tested aid to avoid applying altogether. While we favor reforming the entire aid calculation, merely simplifying the existing form would still be a huge improvement.

Second, eliminate financial aid for non-poor students.

Aid is currently too widely available. The Department of Education reports that 35.4% of dependent students from families making $100,000 or more received Federal Stafford loans, and 15.6% received the subsidized kind. The Government Accountability Office reports that just under a third of all unsubsidized Stafford loan dollars went to families making more than $100,000.

This has two main drawbacks. One, for any given amount of aid money, giving more to the well off means there is less available for the not so well off. Two, as our recent report documents, when financial aid is too widely available, it results in higher tuition. Higher tuition, of course, is the opposite of what financial aid programs are supposed to achieve.


Cowboy said...

Andrew - I agree with your assessment of FAFSA. Your predecessor had an interesting idea that information from the IRS be used (or something to that effect).

I would be interested in those families who make $100k or more. First, I think I would set the breakpoint much higher. Second, a family sending more than one child to college gets expensive. Third, I am interested in disposable income. Fourth, I am wondering how many candidates are being turned away due to lack of financial aid. Fifth, I would be quietly concerned about the perception or actuality of "class warfare". Finally, I believe that if I estimated the average family's essential expenses (home mortgage and maintenance, taxes, utilities, groceries, car loan payments, phone, fuel, out of pocket health care expense, and so forth), I would find that a $100k family would probably need some financial assitance unless that family invested in a college education from the time that the child was born - and as you know, there is no guarantee that investments will produce a return.

My hunch is that $100k is low. So I don't think your idea or opinion is bad. I would just bet you two shooters and a beer that $100k is too low.

Steve said...

Families making x dollars is code-word for "the child who is going to college has parents who make x dollars." The child going to college who should be responsible for the cost of college has no control over that money.

Federal financial aid is based on the assumption that the government designates a dollar amount and the parents give it to their children, but this is rarely the case when the dollar amounts are large (full cost) and the families are in the middle class (just above Pell Grant eligibility).

The botttom line is that financial aid is used too much as a way to redistribute money from taxpayers to poor people's children. This doesn't sound too bad until you consider that since these people are going to college they're probably gong to make good wages and not be in poverty later in life so this is effectively a wealth transfer to the upper-half of the income distribution. It doesn't make much sense and in fact aid in general isn't too appealing if that is the goal in this sense.

But education probably has some positive externalities, and because of hyperbolic discounting people don't interpret the financial incentive to go properly so maybe aid could function well as an incentive. Unfortunately I don't think it works well on that count.

I like the Bright Futures model. It's cheap, applies to everyone, provides incentives for success not just attendance, and has the psychological benefit of making college "free" when in reality it only pays tuition. It has some serious flaws but it's good.