Federal student aid should reward success, said Richard Vedder at a Brookings Institution event last week. An Ohio University economist, Vedder directs the Center for College Affordability and Productivity.

Despite rapid growth in federal student aid since 1971, lower-income students make up a smaller share of college graduates, Vedder pointed out. As federal aid expands, state governments spend less and universities charge more.

He believes financial aid has “contributed to high dropout rates, mediocre levels of student work effort and academic performance” and underemployment for college graduates.

I think we are probably over-invested, not under-invested, in higher education in the United States, creating a credential inflation arising from using degrees as an obscenely expensive screening device, one involving massive wastes of potentially highly productive human resources.

Phasing out federal aid isn’t politically viable, at least in the short run, so we need to “correct two perverse incentives,” Vedder argues.

First, there needs to be rewards for good academic performance and negative financial consequences for poor performance. . . . Second, colleges should have skin in the game. Their inappropriate admissions decisions or inattention to floundering students massively contributes to loan defaults, yet they face no adverse consequences. That needs to change.

Beyond that, simplify the system, restricting aid to more affluent families, doing away with PLUS loans and tuition tax credits, in line with RADD (Reimagining Aid Design and Delivery) recommendations.  We also should convert Pell Grants into progressive performance vouchers. . . . No full-time student should get money for more than five years. “A” students graduating in less than four years should get a small bonus for saving the government money and as a reward for high academic achievement.

Federal policy should encourage private approaches to financing, such as letting students “contract to forfeit part of post-graduate earnings in return for financial support of college,” Vedder argues.