A “more understandable effective and fair” student aid system doesn’t need to cost taxpayers more money, concludes a New America Foundation report, Rebalancing Resources and Incentives in Federal Student Aid. The study was funded by the Gates Foundation’s Reimagining Aid Design and Delivery project.
To eliminate any future “funding cliffs,” Pell Grant funding should be guaranteed, turning it into a true entitlement, the report recommends. In addition, the maximum grant should be increased and year-round funding restored to help students complete degrees more quickly. The “ability to benefit” provision would be restored, opening the door to students who lack a high school diploma or GED.
All this would cost more money, but the report also calls for limiting Pell eligibility to 125 percent of program length to encourage students to move along. In addition, eliminating “the outdated Supplemental Educational Opportunity Grant program that disproportionately benefits wealthy private institutions” would save money that could help fund Pell Grants.
The report proposes a Pell bonus for community colleges with a graduation and transfer rate of at least 50 percent. “Eligible schools could either use the additional money to reduce the net price they charge their neediest students or to create support programs to help low income students earn their degrees and transfer to four-year colleges.”
Other recommendations would redesign student loans and tax credits.
• Significantly simplifying the federal student loan system and reducing the dangers of default by requiring all borrowers to repay their debt based on a percentage of their earnings. Encouraging colleges to hold down their costs by eliminating both the Parent PLUS and Grad PLUS programs that currently allow for unlimited borrowing.
• Eliminating poorly targeted higher education tax benefits, such as the American Opportunity Tax Credit, in favor of direct aid for students.
The report also calls for strengthening accountability by “creating a federal student unit record system to provide a clearer picture of how students fare as they proceed through the educational system and into the workforce.”
Eligibility for federal student loans should be limited to 150 percent of program length to discourage prolonged enrollments, the report proposes.
Borrowers who turn to private student loans should be able to declare bankruptcy, if necessary, to clear their debts.
While the report is “wonderful and thought-provoking,” Community College Dean questions whether students can finish a two-year degree in 2 1/2 years. Very few do. Setting a tight time limit would make it hard to offer “stackable” certificates or integrate developmental instruction in mainstream courses, he adds.
Then there’s the political challenge. Capping student loans and eliminating tuition tax deductions to pay for Pell could alienate middle-class voters, he warns. “Once the middle class decides that a program is really just for the poor, that program tends to wither on the vine.”
Australia’s student loan system is a good model for the U.S., writes Diane Auer Jones on Brainstorm. In the U.S., students making minimal progress can keep collecting Pell Grants (for nine semesters) and postpone repaying loans.
In Australia, students each know in advance how much money is in their student-loan “account” so to speak. They know that when the money runs out, government support is over (unless the student is moving on to professional school, for example, in which case supplemental funds are made available). This means that the student has the incentive to make good decisions, stick with the program, and complete their studies in a timely manner.
Australians don’t pay interest on student loans. Instead, they pay an up-front fee and a payment based on the national Consumer Price Index and the borrower’s income. Loan repayment starts when the borrower reaches a minimum income, now set at around $45,000 per year. Those making the minimum pay 4 percent of their earnings; higher earners pay no more than 8 percent.
Nobody defaults, because student loan payments are collected by the Australian Tax Authority, not the Department of Education.
University of Tennessee Law Professor Glenn Reynolds (aka Instapundit) has another idea: Let borrowers discharge student loan debt in bankruptcy and charge universities if their graduates default.
I think we should return to the days when student loans were dischargeable in bankruptcy, starting five years after graduation. This will allow graduates who are unable to pay to get out from under what is otherwise a potential lifetime of debt-slavery. . . .
But the real incentive-alignment part is this: Put the institutions who issued the degrees on the hook for the money they received. Making them eat the entire loan balance would probably bankrupt a lot of colleges (though that should tell us something about the problem right there), but sticking them with even a small fraction — say, 10% or 15% — would be enough to inspire a much greater degree of concern for how much debt students take on while in school, and for how likely they are to find gainful employment after graduation.