rethinking student aid fulfilling commitment recommendations

8/20/2019 Rethinking Student Aid Fulfilling Commitment Recommendations

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WWW.COLLEGEBOARD.COM

Lumina Foundation for Education

The Report from the Rethinking

Student Aid Study Group

The Spencer Foundation

Recommendationsfor Reforming Federal

Student Aid

Fulf illing the

Commitment:

September 2008


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Acknowledgments

Te College Board and the Rethinking Student Aid study group extend their thanks

to Lumina Foundation or Education and the Spencer Foundation or their support

o this project. We also express our gratitude to the Andrew Mellon Foundation or

assisting with the costs o the study group’s convening during the course o the effort.

Rethinking Student Aid Study Group

Sandy Baum, co-chair

Professor of Economics, Skidmore College

Senior Policy Analyst, The College Board

Michael McPherson, co-chair

President, The Spencer Foundation

Tom Bailey

George & Abby O’Neill Professor of Economics and Education

Director, Institute on Education and the Economy and Community

College Research Center

Teachers College, Columbia University

Steven Brooks

Executive Director

North Carolina State Education Assistance Authority

Charles ClotfelterProfessor of Public Policy Studies, Economics, and Law

Duke University

Susan Dynarski

Associate Professor of Public Policy, Gerald R. Ford School of Public

Policy and Associate Professor of Education, School of Education,

University of Michigan

Ronald Ehrenberg

Irving M. Ives Professor of Industrial and Labor Relations and Economics

Director, Cornell Higher Education Research Institute (CHERI)

Carl Kaestle

Professor of Education

Brown University

Tom Kane

Professor of Education and Economics

Harvard Graduate School of Education

Bridget Terry Long

Associate Professor

Harvard Graduate School of Education

Marshall (Mike) Smith

Education Program Director

The William and Flora Hewlett Foundation

William Troutt

President

Rhodes College

Jane Wellman

Executive DirectorDelta Cost Project

College Board Representatives:

Youlonda Copeland-Morgan

Associate Vice President, Enrollment Management

Syracuse University

Georgette DeVeres

Associate Vice President/Admission and Financial Aid

Claremont McKenna College

Shirley Ort

Associate Provost and

Director of Scholarships and Student Aid

University of North Carolina at Chapel Hill

College Board Staff and Consultants:

Janet Hansen

Vice President and Director of Education Studies

Committee for Economic Development

Don HosslerProfessor of Educational Leadership and Policy Studies

Indiana University

Kathleen Little

Senior Adviser, Student Aid Policy

The College Board

Tom Rudin

Vice President for Government Relations and Development

The College Board

Patricia Steele

Research AssociateThe College Board


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Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Why Does Federal Student Aid Need Reform? . . . . . . . . . . . . . . . . . . . 3

How Does the United States Compare? . . . . . . . . . . . . . . . . . . . . . . . 4

Are the Problems Really Financial? . . . . . . . . . . . . . . . . . . . . . . . . . 4

The Rethinking Student Aid Project . . . . . . . . . . . . . . . . . . . . . . . . . 6

A Framework for Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Improving the Federal Student Aid System: Recommended Actions . . . . 9

Simplification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Applying for Federal Student Aid . . . . . . . . . . . . . . . . . . . . . . . . . 9

A Simpler FAFSA Is Not Enough . . . . . . . . . . . . . . . . . . . . . . . . 10

Making Pell Grants More Predictable . . . . . . . . . . . . . . . . . . . . . . 11

Estimated Costs and Distribution of ProposedPell Grant Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Tax Credits and Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Budgetary Impact of Proposed Changes in Education Tax Benefits . . . . . 17

Protecting Students Against Unmanageable Loan Burdens . . . . . . . 17

Income-Based Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Loan Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Loan Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Budgetary Impact of Proposed Student Loan Reforms . . . . . . . . . . . . . 20Savings Plans for Low- and Moderate-Income Parents . . . . . . . . . . 20

Estimates of the Cost of a Savings Program for Low-Income Families . . . . 22

Incentives for States and Institutions . . . . . . . . . . . . . . . . . . . . . 23

Encouraging Simple Programs of State Support

for Low- and Moderate-Income Students . . . . . . . . . . . . . . . . . . . 23

Generating Institutional Support for Student Success . . . . . . . . . . . . 24

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Appendix: Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Estimated Cost and Distribution of ProposedPell Grant Modification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Validity of AGI as a Basis for Ability to Pay . . . . . . . . . . . . . . . . . . . . 29

Estimated Budgetary Impact of Revision of Education Tax Benefits . . . . . . 30

The Cost of Improving the Student Loan Program . . . . . . . . . . . . . . . . 32

The Cost of Federal Savings Accounts forLow- and Moderate-Income Families . . . . . . . . . . . . . . . . . . . . . . . 33

Estimated Cost of Campus-Based Incentive Grants toSupport Student Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Fulfilling the Commitment:Recommendations for Reforming Federal Student Aid


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2 Fulfilling the Commitment: Recommendations for Reforming Federal Student Aid

Introduction

In this report, the Rethinking Student Aid study group, brought together by the College Boardwith the support o Lumina Foundation or Education, the Spencer Foundation, and the AndrewW. Mellon Foundation to develop ideas or improving the ederal student aid system, presents itsrecommendations. We hope these proposals will generate a new and open conversation about ederalapproaches to increasing postsecondary education opportunities.1 In the report that ollows, we

discuss the motivation or our efforts, the goals and principles on which we believe student aid policyshould rest, and the details o our proposals or making ederal student aid more effective. Our long-term interest is in modiying ederal policies in ways that are consistent with the vision articulatedin this report. Our immediate goal is to engage the higher education policy community in a rankand creative dialogue about how best to help students whoace financial barriers to access and success in postsecondaryeducation. Our report represents the best judgment o thestudy group members, whose names and affiliations are listedon the inside cover; neither the College Board nor any o thesupporting organizations is responsible or the content o thereport.

Te policy experts, academic researchers, and highereducation proessionals in the group spent two years studyingand discussing the current system and ways to make it more effective or students. We believe thepolicies described in this report would expand educational opportunities and increase both the equityand the efficiency o the ederal investment in higher education.

Te ederal government distributed over $86 billion in grants, loans, work aid, and tax benefitsto students during the 2006-07 academic year.2 Tese subsidies helped many students participate andsucceed in educational experiences that would otherwise have been inaccessible to them. We applaudthese successes, but are convinced that more can and must be done.

In the pages that ollow, we propose a set o reorms that, taken together, offer a coherent,

purposeul, and easible agenda or improving in substantial ways the effectiveness o our aid system,enriching the lives o our citizens, and ensuring more productive use o taxpayer unds. We lay outstrategies or simpliying dramatically the provision o all orms o undergraduate student aid; orimproving the targeting, visibility, and clarity o ederal grants, and or ensuring that those whoborrow to pay or their college education will not be burdened with unmanageable debt. We alsopropose a new program designed to make the dream o accumulating savings or their children’scollege education a reality or millions o our nation’s disadvantaged citizens. Another ederal programwould challenge state governments as well as individual colleges and universities to improve theirperormance through incentive grants that reward strong achievements in supporting low-incomestudents through successul college experiences. Te policy details described here are the result ocareul thought and discussion among the members o the study group. However, there is considerableroom or policymakers and others to urther develop the blueprint o a ederal financial aid system

that would realize the vision o effective public policy we advocate.

Student aid is only one part o the system o financing higher education in the United States,and ederal student aid—the ocus o this report—is only one part o the student aid system. TeRethinking Student Aid project did not address the larger question o state financing o public higher

1. Distinctions are sometimes drawn among terms like “higher education,” “postsecondary education,” and“college.” In this report, we use these terms interchangeably unless otherwise noted.

2. Te College Board, rends in Student Aid 2007 (New York: Te College Board, 2007).


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education. Despite the clear importance o this issue, and its interaction with financial aid, proposalsor reorm o state finance are beyond the scope o our inquiry. We concentrated on the role o theederal government in subsidizing students because ederal policy sets the national agenda, touchesall students, and has the potential to influence the student aid unding practices o states, institutions,

and others. We ocused only on undergraduate students because the issues acing graduate studentsare quite different and deserve separate consideration.

Why Does Federal Student Aid Need Reform?

Te significant increases in the proportion o Americans attending college that have occurred over thepast 40 years would almost certainly have been impossible without the ederal student aid programsdesigned and implemented in the 1960s and 1970s. However, the programs’ results have allen shorto what their ounders had hoped and short o what the American people can rightly expect romtheir investment. Increases in enrollment rates have occurred among all racial and ethnic groups andat all levels o the income distribution, but the participation gaps between affluent students and thoserom less privileged backgrounds have persisted.

High school graduates rom middle- and upper-income amilies have consistently been muchmore likely than those rom the lower 40 percent o the income distribution to enroll in collegeimmediately afer high school. In 2005, 77 percent o graduates rom the top 40 percent o theincome distribution and just 54 percent o those rom the bottom 40 percent enrolled in college. 3 While the gaps across income groups are generally somewhat smaller in recent years than they weretwo decades ago, there has not been a consistent narrowing o these gaps, and the progress towardclosing them has been quite minimal. Moreover, gaps in educational attainment are even larger thanthe enrollment figures reveal because lower-income students who are able to overcome the barriers togoing to college are significantly less likely to complete degrees than are their more affluent peers. Teailure o student aid policies to sufficiently improve persistence and completion must be addressed.

It is difficult to reconcile our common democratic belie that a person’s social ate should notbe determined by parental circumstances with the reality that individuals rom disadvantagedbackgrounds are so much less likely to enroll in and complete college than are their more privilegedpeers. Te problem appears more acute afer recognizing that significant gaps persist even aferaccounting or differences in high school academic achievement.4

Te situation today is deeply at odds with Americans’ understanding o themselves as citizenso a nation committed to equal opportunity. More than three decades ago, Senator Claiborne Pell,speaking in support o the legislation that became the Education Amendments o 1972, said, “Itestablishes by law the right to a postsecondary education or all o our Nation’s citizens…no longerwill higher education be the province o some o us—it will be a birthright o all.” 5 Tis vision haslong been shared by Republicans and Democrats alike, with Richard Nixon asserting, in signing the

Education Amendments o 1972, that that legislation, which created the Pell Grant program, didnot go ar enough: “We look orward in the near uture to having a set o Federal student assistance

3. Sandy Baum and Jennier Ma, Education Pays 2007. (New York: Te College Board, 2007).

4. See able 1.

5. Congressional Record, Vol. 117 Part 22, U.S. Government Printing Office. Washington, DC, 29339–43.


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programs devoted to the goal o equalizing opportunities or all.” 6

Te problem o financial barriers to access and success in higher education is not only an equityconcern. Our nation’s continuing ailure to provide access to higher education or all who are ableand interested will retard the dynamism and growth o the American economy. In their careulresearch, economists Claudia Goldin and Lawrence F. Katz confirm the economic imperative oincreasing the proportion o college graduates in the U.S. labor orce. Tey summarize the evidencein their exhaustive new study o American education,

Te Race between Education and echnology .

“Standard measures o rates o return to education…are exceptionally high today. Tey have increasedsubstantially since 1980 and are currently at historically high levels. … More education is beneficialnot only or the current generation. Increased educational attainment o parents is also o enormous value or the health and educational outcomes o their children.”7 A better-educated labor orceincreases the standard o living or all workers and reduces the cost to the public o income supportprograms. We also know that more educated people enjoy better physical health and are more likelyto be well-inormed participants in public lie. Increasingly, educational success through and beyondhigh school is a necessary grounding or people’s capacity to lead an economically secure lie, toprovide or their children, and to assume ull membership in an ever more complex multiculturalsociety.8

How Does the United States Compare?

Comparison o U.S. educational outcomes with those o other industrialized countries and even osome emerging nations raises deep concerns about international competitiveness. With an early leadin universal primary education, and having opened widespread access to secondary education earlierthan most countries, the United States was or many years essentially unrivaled in the educationalattainment o its people. oday’s situation is quite different, with countries as different rom oneanother as Russia, Japan, and Ireland exceeding the United States in the share o young peoplecompleting a postsecondary credential. Even more sobering is the reality that the U.S. completionrate among those who begin postsecondary programs o three years or longer is 54 percent, lowerthan any other Organisation or Economic Co-operation and Development (OECD) country exceptMexico, and in contrast to 91 percent in Japan and 70 percent in the OECD as a whole.9

Are the Problems Really Financial?

Finances are not the only differences among students rom different economic backgrounds.Differences in academic preparation as well as expectations and aspirations also clearly have animpact on postsecondary education patterns. Tere are differences o opinion about the extent towhich significant financial barriers to enrollment exist. According to a 2002 report rom the AdvisoryCommittee on Student Financial Assistance, financial barriers prevent nearly hal o all college-qualified low- and moderate-income high school graduates rom enrolling in our-year colleges.10 In

6. The American Presidency Project, Nixon 69. Special Message to the Congress on Higher Education,

February 22, 1971. 7. Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology: The Evolution of U.S.

Educational Wage Differentials, 1890 to 2005 (Cambridge, MA: Belknap Press of Harvard University Press,2008), 336–37.

8. See Sandy Baum and Jennifer Ma, Education Pays 2007 (New York: The College Board, 2007) for detailson the individual and social benets of higher education.

9. Organisation for Economic Co-operation and Development, Education at a Glance: OECD Indicators 2006 (OECD Publishing, Paris, 2006), Table A3.2, p. 59.

10. Empty Promises: The Myth of College Access, Advisory Committee on Student Financial Assistance,2002.


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contrast, some analysts argue that measurable financial barriers interere with college attainment oronly a small minority o students.11

I the barriers are not financial, improvements in the financial aid system are not likely to solve theproblem. A ocus on improvements in academic preparation is required to narrow the gaps. Tese twoissues are not, however, entirely separable. Students who do notexpect to be able to afford higher education are unlikely to havethe motivation to prepare academically. One important ocus oour recommendations is to assure young students rom low- andmoderate-income amilies that financing will be available.

Whatever the weight o nonfinancial actors, it is clear that asignificant number o academically talented low-income studentsail to enroll and succeed in college. able 1 shows how ar well-prepared eighth-graders rom 1988,those with math test scores in the top quarter o all students, progressed in school. Virtually the entireaffluent group o high-ranked math students had at least begun college, while only three-quarters othe high-ranked but economically disadvantaged group had enrolled. For those who came rom themost affluent and educated amilies, in the top quarter in socioeconomic status (SES), three quartershad completed a bachelor’s degree by the year 2000, while less than a third o those talented students

rom the bottom SES quartile had earned our-year degrees.Table 1: Highest Level of Educational Attainment in 2000:

Highest Quartile of Eighth-Grade Math Test Scores, High School Class 1992

SocioeconomicStatus

< HS Grad HS GradSome

CollegeCertificateor License

AssociateBachelor’sor Higher

%enteringcollege

% of collegeentrants

earning BA

Lowest 25% 11% 15% 35% 3% 8% 29% 75% 39%

Middle 50% 0% 9% 31% 6% 7% 47% 91% 51%

Highest 25% NA 1% 19% 3% 3% 74% 99% 75%

Source: Fox, M.A., Connolly, B.A., and Snyder, T.D. (2005).Youth Indicators 2005: Trends in the Well-Being of American Youth , (NCES 2005–050).

U.S. Department of Education, National Center for Education Statistics. Washington, DC: U.S. Government Printing Office.

Te acts that many talented students rom low-income amilies do not enroll in college and thatdegree completion rates among this group are so low suggest that there is substantial potential orthe financial aid system to promote increased access and attainment. Fewer than 40 percent o theacademically high scoring/low-SES students who do enroll in college earn bachelor’s degrees. Almosthal o the students rom this group leave college with no credential at all, so the gaps in degreeattainment rates by socioeconomic status or high-achieving students who begin college are largerthan the gaps in enrollment rates. It is critical that a better-designed financial aid system improvecollege success and completion rates. Moreover, there is powerul statistical evidence that large andsimple programs to subsidize college costs have a measurable impact on both initial attendance andcollege completion.12As the economists Claudia Goldin and Lawrence Katz put it, “More generousfinancial aid or low-income youth and a more transparent financial aid system have the potential to

expand college-going and completion.”13

11. Stephen V. Cameron and James J. Heckman, “The Dynamics of Educational Attainment for Black, Hispanic,and White Males,” The Journal of Political Economy 109(3) (June 2001): 455–99.

12. See the evidence cited in Sandy Baum, Michael McPherson, and Patricia Steele, eds., The Effectiveness ofStudent Aid: What the Research Tells Us. (New York: The College Board, 2008).

13. Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology: Te Evolution o U.S.Educational Wage Differentials, 1890 to 2005 (Cambridge, MA: Belknap Press of Harvard University Press,2008), 350.


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Te challenge o expanding America’s college-educated population is made all the greater bythe rapid demographic shif the nation is undergoing. According to projections rom the WesternInterstate Commission or Higher Education (WICHE), students o color, who in 2004-05 constituted just over a third o all students graduating rom high school, will by 2020-21 add up to just underhal o new high school graduates in the United States. Because students rom ethnic minorities aregenerally more likely to need financial help in getting through college and have historically been lesslikely to attend and complete college than white, non-Hispanic students, a air and efficient student

aid system will become even more critical in the years ahead.

Improvements in the system o postsecondary finance alone cannot surmount all the challenges.Nonetheless, in a society with an educational system beset as ours is by severe and persistent economicinequalities, the system o student financial aid is a significant point o leverage, and one that, webelieve, can influence preparation in the precollege years as well as success in college.

The Rethinking Student Aid Project

In 2006, Sandy Baum, senior policy analyst at the College Board and proessor o economics atSkidmore College, and Michael McPherson, president o the Spencer Foundation, initiated theRethinking Student Aid project under the auspices o the College Board. Tey convened a group o

outstanding public policy experts, academic researchers with deep and diverse knowledge o highereducation and its financing system, and experienced higher education proessionals. Te group waspurposely selected to avoid representation o particular interests and constituencies. Te goal wasclearly stated as the design o effective public policy, rather than the protection o any particularaspects o the status quo. In addition to generous financial, logistical, and structural support romthe College Board, the group obtained support rom the Andrew W. Mellon Foundation, LuminaFoundation or Education, and the Spencer Foundation.

Te members o the Rethinking Student Aid study group, listed on the inside cover o thisreport, met over a period o two years. Tey agreed to narrow their ocus to analysis o the ederalstudent aid system and articulated goals and principles on which to base their work. Te study groupcommissioned research rom other experts in order to compile an accessible summary o existing

knowledge on what determines the effectiveness o student aid policies. Tis research is available inthe College Board/Lumina Foundation or Education publication, Te Effectiveness o Student Aid:What the Research ells Us. Te group also met with individuals with experience in related areas opublic policy reorm and with individuals with varying perspectives on student financial aid. Testudy group chairs, along with project coordinator Kathleen Little, met with many individuals andgroups around the country to discuss their ideas about the strengths and weaknesses o existingstudent aid policies and programs. Te proposals outlined in this report were heavily influenced byideas expressed by participants in those conversations.

Another important element o the process o developing the recommendations put orth in thisreport was obtaining reliable estimates o the budgetary impact o our proposals. With support romthe Spencer Foundation, the Rethinking Student Aid project contracted with the Urban-Brookings

ax Policy Center to model the policy changes and estimate any increases or decreases in costsassociated with these changes. Brie summaries o some o these findings are included in the text, andthe detailed analyses can be ound in the Appendix to this report.

We believe that the policies outlined in this report have the potential to transorm the U.S.government’s role in supporting access and success in higher education or its citizens. Whilesignificant progress in this endeavor also requires major improvements in the elementary andsecondary education opportunities available to young people rom lower socioeconomic backgrounds,it is urgent that we diminish the bureaucratic hurdles, the inormation barriers, and the financial


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restrictions acing young people and adults aspiring to improvetheir prospects through postsecondary education.

Te Rethinking Student Aid study group would be delightedto see its proposals turned into legislation in the near uture. Butour immediate goal is to lay the oundation or an innovativeand constructive national conversation about improvements inthe ederal financial aid system. We intend to spend the comingmonths acilitating and participating in conversations with otherknowledgeable and interested individuals and groups who canurther develop our ideas and promote them on the national agenda.

A Framework for Reform

Our goal is to design a ederal financial aid system that increases enrollment and success ratesor low- and moderate-income students. Te existing ederal financial aid system is complex. Teapplication process is difficult and the grant, loan, work, and taxbenefit policies are poorly integrated and have inconsistent rulesand regulations. oo many o the dollars spent ail to increaseeducational opportunity measurably, and not enough dollarsare directed at meaningul increases in educational attainment.Policy reorm must address these issues.

A central problem o the existing ederal aid system is thatit has developed piecemeal, with new programs being devisednot with an eye to the effectiveness and coherence o the systemas a whole, but to meet immediate political demands. Although many aspects o the system work very well and are certainly worthy o being perpetuated, it is critical that we step back, articulatethe undamental principles underlying an effective student aid system, and measure both existingprograms and any proposals or change against those principles.

We believe that the ollowing principles should undergird the ederal financial aid system:

1. Te system should have as its main purpose helping those who are unlikely to meet theireducational goals without financial help.

2. Federal grant aid, in combination with a reasonable amount o work and loans, should beadequate to make completion o a our-year degree financially possible or all qualifiedstudents.

3. Federal aid should be provided as clearly, transparently, and simply as possible.Communication with amilies and students about college opportunity should be early,

proactive, encouraging, sustained, and accurate.

4. Federal aid eligibility should be predictable. Individuals and amilies in given economiccircumstances should be able to anticipate confidently the resources that will be availableto meet their needs.

5. Programs should be oriented first and oremost to helping students. Concerns about theimpact o policy changes on particular institutions such as colleges, banks, or governmentagencies should take second place.


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6. Aid policies should be designed to help students not only to begin postsecondaryeducation but also to succeed afer they arrive.

7. axpayer unds should be used as efficiently as possible in advancing the principles setout above.

Te Rethinking Student Aid study group sought to develop proposals or reorm that would beconsistent with the best available research on program effectiveness.14 We designed these proposals

to be comprehensive in their attention to the various components o the ederal student aid systemand alert to the interactions among those components. Although our ocus is on ederal studentaid, we believe we have been sensitive to the ederal government’s role as one element in a complexsystem that includes other major actors, including state governments and individual colleges anduniversities. In addition, we considered the estimated costs o alternative approaches in the design oour final proposals.

We believe that the financial aid system can and should domore than it now does to make college success available to allwho can benefit rom it, and to assure that society’s investmentin higher education goes as ar as possible toward improvingeducational opportunities. While student aid cannot be expected

to completely eliminate the gaps in college enrollment andcompletion across socioeconomic groups, it should significantlynarrow those gaps. Under the best circumstances, student aidwould support college participation patterns that differ onlyaccording to precollege achievement levels, not according tofinancial circumstances. Te reorms we advocate aim to increasethe proportion o low- and moderate-income students who earnpostsecondary credentials.

Te proposals are not designed to be short-term fixes, but rather to provide a vision o howa reormed ederal student aid system might move the nation’s educational agenda orward, incooperation with states and institutions. In our thinking, we chose not to be bound by short-termpolitical constraints, but we were nonetheless interested in striking a balance between equitable,effective public policy and the potential or broad public support. Tus, while our proposals aredesigned with the primary goal o reducing income-related gaps in attendance and persistence, theyalso reflect other realities, including the college financing burden on all but the wealthiest amiliesand rising student indebtedness at all income levels. Implementing the policy changes we recommendrequires that these challenges be addressed as well.

Not surprisingly, some o the specific ideas we put orth emerged rom difficult conversationsand represent significant compromise among members o the group. We grappled constantly withthe trade-off between simplicity and transparency on the one hand and precision in allocation o aidon the other hand. Individuals in the group placed different weights on the relative contributions thatcould be made by reorms in different elements o the aid system. However, we are all convinced thati our proposal or a new approach to ederal student aid is implemented, students who ace financialbarriers to postsecondary education will be winners, and as a result, our economy and Americansociety will be strengthened.

14. The papers commissioned as part of the Rethinking Student Aid project, with the support of LuminaFoundation for Education, are available online at www.collegeboard.com/rethinkingstudentaid. The

Effectiveness of Student Aid: What the Research Tells Us is also available in print from the College Board.


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Improving the Federal Student Aid System:Recommended Actions

Simplification

Calls or simpliying the student aid system have become widespread. Te importance o makingederal programs more easily understood and more accessible to students is basic to the design othe Rethinking Student Aid recommendations. An easier, more straightorward application system isone aspect o the required simplification, but consolidating and streamlining individual programs isalso critical. Te number o separate programs providing subsidies to students through grants, loanso various types, tax credits and deductions, and other approaches—each with different eligibilitycriteria, different coverage o expenses, and different orms o support—has increased dramatically inrecent years. A simpler system will remove barriers to receiving ederal aid and make the system moretransparent, acilitating the provision o early eligibility inormation to students and amilies.

Te papers in the Rethinking Student Aid research volume conclude that simpliying the ederalstudent aid system is a prerequisite to increasing its effectiveness. Tis theme appears repeatedly,

whether the evidence examined relates to particular orms o student aid, such as grants or loans, orto specific goals, such as promoting persistence or providing opportunities or older students.15

Applying for Federal Student Aid

Most discussions o student aid simplification ocus on the Free Application or Federal Student Aid(FAFSA). Te American Council on Education estimates that 1.8 million U.S. college students whowere likely eligible or ederal Pell Grants did not apply or aid in 2003-04. Te Council’s reportattributes this phenomenon largely to a combination o complexity and lack o inormation.16 TeSpellings Commission, in its 2006 report, A est o Leadership: Charting the Future o U.S. HigherEducation, recommended “replacing the FAFSA with a much shorter and simpler application.” Tereport went on to suggest that the simplest IRS tax orm collects most o the key pieces o data

necessary to determine ederal aid eligibility.17 Te Institute or College Access and Success in its 2007report, Going to the Source: A Practical Way to Simpliy the FAFSA, provided a detailed discussion othe potential or using data rom the IRS to pre-fill the FAFSA.18 An ongoing project involving H&RBlock and financial aid researchers has already provided evidence o the effectiveness o using taxdata to complete the FAFSA.19

Economists Susan Dynarski and Judith Scott-Clayton have analyzed the impact o reducing thenumber o questions on the FAFSA and find that relying on less detailed inormation to calculate

15. Sandy Baum, Michael McPherson, and Patricia Steele, eds., The Effectiveness of Student Aid: What the Research Tells Us (New York: The College Board, 2008).

16 . American Council on Education, “Missed Opportunities Revisited: New Information on Students Who Do Not Apply for Financial Aid,” Issue Brief, February 2006, http://www.acenet.edu/AM/Template.cfm?Section=InfoCenter&CONTENTID=14244&TEMPLATE=/CM/ContentDisplay.cfm.

17. Commission on the Future of Higher Education, A Test of Leadership: Charting the Future of U.S. Higher Education, 2006.

18. Lauren Asher, Going to the Source: A Practical Way to Simplify the FAFSA, The Institute for CollegeAccess and Success, 2007, http://www.ticas.org/pub_view.php?idx=232.

19. Eric Bettinger, Bridget Long, and Philip Oreopoulos, “Increasing College Enrollment Among Low- andModerate-Income Families: An Intervention to Improve Information and Access to Financial Aid” (The H&RBlock FAFSA Project, Interim Report, July 2008).


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eligibility or Pell Grants would have minimal impact on the distribution o ederal grants. Tey ocuson problems related to the timing o the ederal aid application and the complexity o the system andmake the case that the students most negatively affected are rom low-income backgrounds. Teyrecommend an eligibility system that would rely on much more limited data and would be moretransparent than the current Federal Methodology.20

Congress has begun to respond to calls or simplification. Te reauthorization o the HigherEducation Act in 2008 calls or a simple version o the FAFSA or students and amilies with ewfinancial resources. Additional provisions speciy an earlier application processing calendar and thepre-population o the FAFSA using IRS data. While these simplification provisions are well intended,more undamental changes are required to permit amilies to predict accurately their eligibility orederal student aid in advance o colleges’ award notifications.

A Simpler FAFSA Is Not Enough

Te Rethinking Student Aid study group recommends a more significant change in the applicationprocess than most o these proposals suggest. Congress should eliminate the FAFSA and retrieve the financial data required for Pell Grant allocation from the Internal Revenue Service (IRS). Parents

and students who wish to apply or ederal financial aid would

provide simple demographic inormation on a new orm thatincludes an authorization or the IRS to release tax inormationto the Department o Education. Te study group urtherrecommends that only Adjusted Gross Income and amilysize (number o exemptions) be used to determine a student’seligibility or Pell Grants, as described later in this report.

Families receiving means-tested public benefits, such as emporary Assistance or Needy Families(ANF), would be eligible or maximum Pell Grants without use o IRS data. Non-tax filers would fillout simple tax orms (or an alternative simple orm) to apply or student aid, rather than the longer,more complicated application orm that is currently required. As detailed in the ollowing sections othis report, Pell Grants would be the only ederal student aid or which eligibility would be based onthis financial inormation.

We recognize that some states and institutions may require more detailed income inormationto determine eligibility or their own unds. Many currently rely on the ederal computation o anexpected amily contribution (EFC) as the basis or allocating their student aid. o address this need,the release statement would authorize the IRS to provide more detailed financial inormation to theDepartment o Education, which the Department would make available to the states and institutionsdesignated by the student on the new orm. In addition to providing data from the tax form, theRethinking Student Aid study group proposes that the Department of Education calculate an indexof financial capacity for use by states and institutions designated by the student to allow states andinstitutions to allocate need-based aid as they deem appropriate. Tis approach would relieve aidapplicants o the burden o supplying more detailed financial inormation rom their own records,but would provide the inormation needed by states and institutions in a simple, transparent way. It

would also relieve financial aid offices o the burden o veriying the data provided on the FAFSA.21

20. Susan Dynarski and Judith Scott-Clayton, “College Grants on a Postcard: A Proposal for Simple andPredictable Federal Student Aid” (Hamilton Project Discussion Paper 2007-01; KSG Faculty ResearchWorking Paper Series RWP07-014, March 2007).

21. Aid applicants whose nancial circumstances make them exempt from ling federal income taxes could beautomatically considered eligible for maximum nancial aid, or could be asked to report their annual incomeon a very simple form.


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Te government must ensure that limited Pell Grant dollars are awarded as equitably as possibleto students with the greatest need. Using IRS data would help the government achieve that goal.Te Rethinking Student Aid study group proposes to use an average of the most recent three yearsof income information, adjusted for inflation, to provide a more reliable picture of the student’s or parents’ financial circumstances. Tis approach will diminish changes in eligibility resulting romunstable income levels and minimize the possibility o shifing income to “game the system.” Usingthree years o income is not practical when students and parents supply financial inormation on the

FAFSA, but the IRS can easily supply the data.

Congress recognizes in the 2008 reauthorization legislation that amilies should be able toestimate their eligibility or ederal student aid at an early point in time, and the Department oEducation has implemented the FAFSA 4caster tool on its Web site to help potential students estimatetheir aid eligibility. However, the tool requires detailed financial inormation, and assumes thatparents who need the inormation the most will go to the Web to find it. A more proactive solutionwould use the ederal tax system to acilitate early notification to amilies o the ederal aid or whichthey are likely to be eligible. Te Rethinking Student Aid study group recommends that tax filers with dependent childrenbetween the ages of 5 and 19 be informed every year of thePell Grant for which their children would be eligible under the

applicable program eligibility rules. Tis inormation should beaccompanied by acts about the prices o two- and our-yearpublic institutions within the tax filer’s state o residence, aswell as available state grant programs. Additional inormationshould encourage academic preparation and college savings,and provide inormation on borrowing opportunities, as wellas tax credits or which the filer would qualiy. Tese early communications could be accomplishedby adding a simple check-off box to the IRS orms, giving the IRS permission to release incomeinormation to the Department o Education, which would communicate directly with the amily.Similar communications could be disseminated through each state’s office o public benefits torecipients.

Sending all parents inormation on college affordability long beore their children are oldenough or college will provide encouragement to low- and moderate-income amilies that collegeis affordable and provide more affluent parents with realistic inormation to encourage precollegeplanning. Our proposed annual communication will also raise college awareness and encourageacademic preparation or children rom amilies where neither parent has attended college.

Making Pell Grants More Predictable

Te Pell Grant program is the oundation o the ederal student aid system. In 2006-07, the ederalgovernment distributed about $13 billion in Pell unds to 5.2 million low- and moderate-incomestudents. Almost 60 percent o these recipients were independent students, whose parents are notrequired to support their college education. Among the dependent students, almost all came rom

amilies with annual incomes below $50,000 per year. Pell Grants account or about two-thirds oederal grant aid to students. Aid to veterans and military grants make up another 27 percent o thesesubsidies.22

While researchers have not been able to document the expected benefit o the Pell Grant program,there is strong evidence that simple, well-understood grant aid can have a significant impact on thecollege enrollment rates o low-income students. As David Mundel concluded in his paper on the

22. The College Board, Trends in Student Aid 2007 (New York: The College Board, 2007).


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effectiveness o grant aid written or the Rethinking Student Aid project, “large, predictable, andeasy to understand grant programs (like the Social Security, GI Bill, Georgia Hope, and DC uitionAssistance Grant programs) have had observable and substantial effects on college enrollment ratesand patterns. Te Pell program and many other grant programs have ew o these efficacy-increasingoperational characteristics…With respect to complexity—the Pell program was complex when firstimplemented and i anything, became increasingly complex over time.”23

Te Rethinking Student Aid study group recommends that the eligibility criteria for Pell Grantsbe dramatically simplified to rely only on Adjusted Gross Income (AGI) and family size. Tis simplecalculation will allow the creation o a look-up table to which students and amilies can reer ar inadvance o their application or student aid. Tis system will inevitably award Pell Grants to some tax

filers with complicated financial situations whose low AdjustedGross Income masks other financial resources. However, asdetailed in Appendix able A3, this phenomenon is extremelyrare on returns reporting low positive AGI. It is more commonamong those with negative AGI, but only about 1 percent o

filers all into this category. Te complexity or all applicants resulting rom provisions designed todeny Pell Grants to such a small number o people would violate the undamental nature o theproposed reorm.

Instead o being inormed o their expected amily contribution (EFC) as is currently the practice,the ormula will yield a Pell award amount. For a maximum Pell Grant o $5,000, the look-up tableor a amily o our might be as ollows:

Table 2: Possible Pell Grant Look-Up Table for Dependent Students,

$5,000 Maximum Grant

% of poverty Income Pell Award

$0 $5,000

150% $31,800 $5,000

160% $33,920 $4,500

170% $36,040 $4,000

180% $38,160 $3,500

190% $40,280 $3,000

200% $42,400 $2,500

210% $44,520 $2,000

220% $46,640 $1,500

230% $48,760 $1,000

240% $50,880 $500

250% $53,000 $0

Te ormula underlying this table provides the maximum Pell Grant to any dependent studentwhose amily income is at or below 150 percent o the poverty level or the relevant amily size. Tegrant amount declines by 24 cents or each dollar increase in income, reaching $0 at 250 percent o

23. David Mundel, “What Do We Know About the Impact of Grants to College Students?” in The Effectivenessof Student Aid: What the Research Tells Us, edited by Sandy Baum, Michael McPherson, and Patricia Steele (New York: The College Board, 2008).


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the poverty line. Because the poverty line is indexed or inflation, the Pell Grant amounts accruing tostudents at different income levels will automatically rise as prices in the economy rise.

In comparison to the current Pell Grant program, which reached 5.2 million students in 2006-07 and is anticipated to cover an estimated 5.5 million students in 2008-09 with a maximum granto $4,731, this ormula would make about 5.2 million students eligible or Pell Grants in 2008-09.Te aid now going to students with incomes higher than 250 percent o the poverty level would beredirected to lower-income students. otal ederal expenditures would be $16.2 billion, comparedto $16.0 billion under current law (and $12.9 billion in 2006-07 when the maximum grant was$4,050).24

In order to cover the same proportion o the average cost o attendance at a public our-yearcollege as it did 30 years ago, the maximum Pell Grant would have to be about $10,000. A moregenerous Pell program would extend over a broader range o incomes. able 3 illustrates a ormulathat would cover an additional one million students per year at a total cost o approximately $34.5billion. Te program’s cost would, o course, be higher i the more generous Pell Grants were successulin inducing more low-income students to attend college.

Table 3: Possible Pell Grant Look-Up Table for Dependent Students,



$0 $10,000

150% $31,800 $10,000

160% $33,920 $9,333

170% $36,040 $8,667

180% $38,160 $8,000

190% $40,280 $7,333

200% $42,400 $6,667

210% $44,520 $6,000

220% $46,640 $5,333

230% $48,760 $4,667

240% $50,880 $4,000

250% $53,000 $3,333

260% $55,120 $2,667

270% $57,240 $2,000

280% $59,360 $1,333

290% $61,480 $667

300% $63,600 $0

A similar ormula would apply to independent students, as illustrated in able 4, which applies to

single independent students. Grants would be higher or independent students with dependents.

24. These data are based on estimates from the Urban-Brookings Tax Policy Center conducted for the RethinkingStudent Aid project. Lowering the income level at which the amount of the Pell Grant award begins to declinewould allow the lowest-income students to receive larger grants. Maintaining the schedule in Table 2 butincreasing awards to $7,500 for those with incomes at or below 100 percent of the poverty line would have noeffect on the number of recipients, but would increase the estimated 2008-09 cost of the program from $16.2to $21.1 billion.


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Table 4: Possible Pell Grant Look-Up Table for Single Independent Students,



$0 $5,000

150% $15,600 $5,000

160% $16,640 $4,500

170% $17,680 $4,000

180% $18,720 $3,500

190% $19,760 $3,000

200% $20,800 $2,500

210% $21,840 $2,000

220% $22,880 $1,500

230% $23,920 $1,000

240% $24,960 $500

250% $26,000 $0

As noted in the discussion o simplification o the application process above, reliance on IRS

data will permit use o multiple years o data without increasing the burden on students and amilies.Te Rethinking Student Aid study group recommends that PellGrant eligibility be based on an (inflation-adjusted) averageof three years of income. Te use o three years o income isparticularly important or independent students. Te currentFederal Methodology embodies a severe penalty on studentswho work. For each extra dollar o income earned while inschool, students stand to lose 50 cents o Pell Grant unding.

Although the table proposed here appears to incorporate a similar marginal assessment rate, relianceon three years o data will significantly diminish this problem. A student who earns an extra dollarduring the school year or over the summer will find his three-year average income increasing by only33 cents, leading to a much smaller reduction in Pell eligibility. He could earn the extra amount or

three consecutive years beore the ull impact on his Pell eligibility took effect. Reducing the impact ohigher student earnings on Pell Grant eligibility is an important component o the proposed reorm.

Tis simple ormula or Pell eligibility will make these basic grants easy to understand andpredictable or students. As Saul Schwartz argues in his paper on early commitment o financial aid inTe Effectiveness o Student Aid: What the Research ells Us, the simplest early commitment programis likely to be the advance knowledge o Pell Grant eligibility.25

Te maximum value o the Pell Grant has increasedsporadically over time. In order to provide both adequate andpredictable unding, the maximum Pell Grant must increaseautomatically. Te Rethinking Student Aid study group recommends indexing the maximum Pell

Grant to the Consumer Price Index (CPI). Since the poverty level is also indexed to the CPI, thispractice will allow the Pell eligibility amounts described in the above tables to maintain their real,inflation-adjusted levels over time.

25. Saul Schwartz, “Early Commitment of Student Financial Aid: Perhaps a Modest Improvement,” in The Effectiveness of Student Aid: What the Research Tells Us, edited by Sandy Baum, Michael McPherson, andPatricia Steele (New York: The College Board, 2008).


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Over time, the ederal student grant system has also been complicated by the addition o newprograms related to Pell, but with somewhat different eligibilityrequirements. In 2006-07, about 7 percent o Pell Grantrecipients began to receive Academic Competitiveness andSMAR grants, which are based on academic criteria in additionto financial criteria.26 We propose eliminating supplementary grant programs with complex eligibility requirements and using

the funds to increase the generosity of Pell Grants. Tis programconsolidation will reduce conusion among students, paperworkor colleges, and the ederal bureaucracy. Moreover, this change will return the ocus o the core ederalgrant program to increasing educational opportunities or low- and moderate-income students.

Estimated Costs and Distribution of Proposed Pell Grant Modifications

Detailed cost estimates are provided in the Appendix. Tey indicate that using the simplified Pellormula described above and depicted in able 2, with a maximum grant o $5,000, would reducethe total number o recipients by about 5 percent compared to the current policy with a maximumgrant o $4,731, because the maximum income or eligibility would be capped at 150 percent othe poverty line. Tis approach would increase expenditures compared to the current system with

a maximum o $4,731 by only about $0.2 billion, or roughly 1 percent o current spending. Teproposed changes would have little effect on the distribution o Pell Grants either across amilyincome groups or higher education sectors. Raising the maximum Pell to $10,000 would o courseincrease expenditures dramatically relative to the cost o the program with a $5,000 maximum, morethan doubling estimated expenditures to $34.5 billion.27

Tax Credits and Deductions

Te ax Reorm Act o 1997 created two new tax credits or higher education expenditures. Since2000, there has also been a ederal tax deduction allowed or tuition and ee expenses. 28 axpayersmust choose among the Hope ax Credit, the Lietime Learning ax Credit, and the uition axDeduction. Te president’s budget or fiscal year 2008 includes $6.7 billion in oregone tax revenues

or these three education tax benefits.29

As Andrew Reschovsky reports in his paper on education tax benefits in the Rethinking StudentAid research volume, Te Effectiveness o Student Aid: What the Research ells Us, the limited availableresearch casts doubt on the effectiveness o these benefits.30 Bridget Long’s analysis ound that the

26. National Association of State Student Grant and Aid Programs, 2006-07 Academic Competitive Grants andSMART Grants by State, Excel table.

27. Based on estimates from the Urban-Brookings Tax Policy Center conducted for the Rethinking StudentAid project. Lowering the income level at which the amount of the Pell Grant award begins to decline wouldallow the lowest-income students to receive larger grants. Maintaining the schedule in Table 2 but increasing

awards to $7,500 for those with incomes at or below 100 percent of the poverty line would have no effect onthe number of recipients, but would increase the estimated 2008-09 cost of the program from $16.2 to $21.1 billion.

28. At the time this report is going to press, the tuition tax deduction has expired, and it is unclear whether ornot Congress will reinstate it.

29. Ofce of Management and Budget, Budget of the United States Government, Analytical Perspectives, FederalReceipts and Collections (288), http://www.whitehouse.gov/omb/budget/fy2008/pdf/apers/receipts.pdf.

30. Andrew Reschovsky, “Higher Education Tax Policies,” in The Effectiveness of Student Aid: What the Research Tells Us, edited by Sandy Baum, Michael McPherson, and Patricia Steele (New York: The CollegeBoard, 2008).


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introduction o the tax credits did not increase the probability that eligible individuals would attendcollege.31 Explanations or this problem include the reality that the tax credits and deductions providesubsidies afer taxes are filed, long afer most payment or college expenses has occurred. In addition,these subsidies are directed toward middle- and upper-income taxpayers who generally do not acesignificant financial barriers to enrolling in postsecondary education. Almost hal o the benefit o thetax deduction goes to taxpayers with incomes above $100,000. Almost 60 percent o the tax creditsgo to taxpayers with incomes above $50,000, with the remaining 40 percent going to those with lower

incomes.32

According to the Government Accountability Office (GAO), about 20 percent o thosewho would be eligible or the tax benefits ail to claim them.33

Despite the apparent ineffectiveness o these tax benefits in increasing college participation, thetax credits do provide subsidies to middle-income amilies or whom paying or college is a challenge.As noted above, the tax credits are much better targeted on this group than is the tax deduction.Te Rethinking Student Aid study group recommends combining the existing tuition tax credits and

deductions into one tax credit. In addition to improved targeting,having only one such benefit will significantly simpliy thesystem, making it easier or potential beneficiaries to understandand predict their benefits. It is likely that, as GAO has suggested,participation34 rates would increase under this scenario without

compromising benefits to middle-income amilies.

One reason current tax provisions do not provide muchbenefit to lower-income taxpayers is that they are nonreundable. Benefits are available only to theextent that the student or amily has a ederal income tax liability rom which the credit can besubtracted. Another problem is that the credits and deduction apply only to tuition and ee payments,not to room and board, books, or other costs o attending college. Because a significant percentage olow-income students receive grant aid to help deray their costs, and the law requires this grant aidto be applied to tuition first or purposes o the tax benefits, these students are generally ineligible orthe credits and deductions even i they do have tax liabilities. Tis is particularly true i they attendlow-price public colleges. For this reason, even a reundable tax credit applicable only to tuition andees would not be likely to bring many new students into eligibility.35 We do not propose making these

credits reundable because we believe that grant aid is the most effective way to subsidize low-incomestudents and that the substantial dollars required to make the credits reundable would be betterspent on Pell Grants or the other programs proposed in this report.36

Te Rethinking Student Aid study group recommends that the tuition tax credit be applicablenot only to tuition and fees, but to the total cost of attendance for postsecondary students. Measuringthe room and board charges paid to institutions by students residing on campus is not difficult. Itis more difficult to assess the relevant costs or non-residential students. Te simplest approach tothis problem is to determine a fixed annual cost or non-tuition expenditures and allow all ull-time

31. Bridget Long, “The Impact of Federal Tax Credits for Higher Education Expenses,” in College Choices:The Economics of Which College, When College, and How to Pay For It, edited by Caroline M. Hoxby (Chicago: University of Chicago Press and the National Bureau of Economic Research, 2004).


33. U.S. Government Accountability Ofce, “Multiple Higher Education Tax Incentives Create Opportunitiesfor Taxpayers to Make Costly Mistakes” (May 2008), http://www.gao.gov/highlights/d08717thigh.pdf.

34. Ibid.

35. Andrew Reschovsky, “Higher Education Tax Policies,” in The Effectiveness of Student Aid: What the Research Tells Us, edited by Sandy Baum, Michael McPherson, and Patricia Steele (New York: The CollegeBoard, 2008).

36. Estimates of the budgetary impact of refundable tax credits can be found in Appendix, Table A4.


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students to consider this charge in calculating their tax credits. Costs would be prorated or part-timestudents.

Budgetary Impact of Proposed Changes in Education Tax Benefits

Te implications or the ederal budget o consolidating the tax credits will, o course, depend on thesize o the credit that is implemented. According to the cost estimates detailed in the Appendix to

this report, repealing the tuition tax deduction and the Lietime Learning Credit while extending theHope ax Credit to all degree or credential-seeking students would add just under $1 billion to theprogram’s cost. Covering non-tuition expenses would increase the budget impact rom $8.6 to $13.9in 2008-09. Making the credit ully reundable would more than double the cost to the government.Relying only on a credit and not a deduction will shif the subsidy down the income distribution,and allowing non-tuition expenses to be covered will strengthen this effect. Te study group doesnot recommend increasing the overall subsidy provided to taxpayers through this policy by morethan the amount required to extend the current Hope credit to students who would become eligiblethrough coverage o non-tuition expenses.

Protecting Students Against Unmanageable Loan Burdens

An improved ederal student aid system will provide more generous grant aid to students who lackthe financial resources necessary or successul participation in and completion o postsecondaryeducation. Reliance on loans among students rom low- and moderate-income amilies cannotcontinue to increase without negative consequences. However, most students will continue to dependon loans to supplement the combination o their own and their amily’s resources and available grantaid. It is important that the ederal government provide ample access to loan unds or all studentsand that the terms o these loans be avorable enough to minimize both resistance to debt amongpromising potential students and oppressive debt burdens or ormer students, including those whodo not successully complete degrees or whose career paths donot meet their expectations.

Another important component o the ederal student loanprogram is easily accessible inormation or potential borrowers.Students must understand the impact o interest on the amountthey will repay and the implications o alternative repaymentschedules or both monthly payments and total payments overthe lie o the loan. With a better-designed loan program, morestudents will benefit rom the opportunity o borrowing to und their investments, while successullycarrying out their repayment responsibilities.

We believe an effective student loan system should be based on the ollowing principles:

1. Te distribution o subsidies to students should be based primarily on financial

circumstances afer college rather than on student and/or amily resources beore college.

2. Students should be assured that their loan repayment obligations will not exceed aspecified percentage o their incomes.

3. Loan limits should be high enough to prevent excessive reliance on alternative loanswith less avorable terms and without the borrower protections provided by the ederalgovernment. Higher loan limits can also obviate the need or multiple ederal studentloan programs.


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As o July 1, 2009, an improved Income-Based Repayment (IBR) plan or ederal student loanswill be available. Te IBR plan embodies many o the basic components the Rethinking Student Aidstudy group considers important. Under the new IBR plan, no payments will be due i the borrower’sincome (combined with the borrower’s spouse’s income i applicable) does not exceed 150 percento the poverty line or the relevant amily size. Te payment due will be no more than 15 percent othe amount by which income exceeds this threshold.37 Tese are sound parameters that should bemaintained. Te detailed provisions o the IBR program must also be designed careully to acilitate

responsible and successul repayment.

Income-based repayment is critical to being able to assure students that their education debt willnot be overly burdensome. However, because most borrowers do not find themselves with excessivedebt/income ratios and because o the complications involved with continual verification o income,we do not recommend that all loans automatically enter IBR. Te Rethinking Student Aid study grouprecommends that a graduated repayment plan be the standard loan repayment pattern, unless aborrower chooses another option. Borrowers will repay amounts that increase gradually until thedebt is repaid. For the typical borrower, earnings will increase as he or she gains more experiencein the labor market, so graduated repayment will lead to more consistent proportions o incomebeing devoted to debt retirement. Tis structure will reduce the number o borrowers who experiencefinancial hardship or deault on their student loans.

Income-Based Repayment

A well-developed income-based repayment (IBR) programis critical to protecting ormer students rom undue debtburden. Te Rethinking Student Aid study group recommendsstrengthening the new Income-Based Repayment (IBR) programand making it clearer and more easily accessible to all borrowerswho would benefit from it. Inormation about the availability andprovisions o this program must be straightorward and widely

distributed. ranserring into IBR has to be simple and quick in order to meet the needs o studentswhose circumstances change unexpectedly. A satisactory IBR program must also be designed to ease

the process through which borrowers who have deaulted can regain good standing and to minimizethe difficulties aced by permanently disabled borrowers.

Under the current IBR program, a borrower’s payments are first applied to interest due, thento any loan ees due, and finally toward the principal. Te government will pay any remaininginterest on subsidized loans or up to three years. Tis provision should be retained, covering allStafford Loans, but a provision should be added limiting the size o the total debt that can resultrom accrued interest and ees to 150 percent o the original loan principal. A limit o this sort willprevent borrowers already under financial strain rom seeing the amount o their debt skyrocket evenas they conscientiously make the required payments. Te remaining debt o borrowers in the IBRprogram would be orgiven afer 20 years (not the current 25 years). Te burden on borrowers whoare unlikely to make reductions in their loan balances afer an extended repayment period, as well

as the burden on the government o continuing to seek these payments, makes pursuing borrowersbeyond 20 years simply not worth it. Te amount orgiven should not be taxable.

37. At the time of this writing, proposed federal regulations for the new Income-Based Repayment programcombine the income of the borrower and the borrower’s spouse, but allow each partner to repay up to 15 percent of this combined income each year. This approach violates the intent of the system and would not bemaintained under our proposal.


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Loan Limits

Existing ederal loan limits or undergraduates are not high enough to meet the borrowing needs omany students. About 5 percent o undergraduates relied on private student loans in 2003-0438 andthis number has certainly increased since then as the proportion o undergraduate loans comingrom private lenders increased rom 19 percent to 29 percent between 2003-04 and 2006-07. 39 Inaddition, many students also rely on credit cards to supplement their education loans.40 Nonederal

loans generally come with higher interest rates and less generous borrower protections than ederalloans. Students without strong credit ratings or cosigners are particularly vulnerable. As a result,inadequate availability o ederal loans has a significant adverse impact on low- and moderate-incomestudents.

Te Rethinking Student Aid study group recommends that full-time students be eligible to borrow up to the amount of the federal poverty guideline for a single individual for each year ofstudy. Tis amount was $10,210 in 2007.41 Linking the loan limitto an independent basic living standard recognizes that studentsincur the costs o housing, ood, and other day-to-day expensesduring periods o enrollment. Tis approach also eliminates any

potential link between ederal loan limits and tuition prices. Eligibility should be in the orm o a lineo credit so that a student who does not borrow the ull amount allowed in the first year can carrythe available credit over into uture years. Tis is important so that students will not be motivated toborrow more than necessary in the early years or ear o running out o available credit. A maximumo five ull years o credit would be available or undergraduate study, with available credit proratedor part-time students, including those enrolled less than hal time.

Te Rethinking Student Aid study group recommends that Parent Loans for UndergraduateStudents (PLUS) should continue to be widely available, and the terms should be accommodatingenough to prevent parents from relying more heavily on student borrowing. Student loans should beavailable on avorable terms and with ample borrower protections in order to meet the needs o allstudents. However, policies should be designed to encourage parents who are in a position to provide

support or their children to do so.

Loan Subsidies

Te Rethinking Student Aid study group recommends eliminatingthe distinction between subsidized and unsubsidized StaffordLoans. Consistent with the principle that the ocus o thesubsidy on student loans should be on diminishing the burdeno repayment, generous repayment protection will replace thein-school subsidy. Tere is no evidence that eliminating in-school interest is critical to enrollment decisions. Te mostimportant consideration is how much the student will owe at

the completion o studies. Estimates o this amount, includinginterest that may accrue, should be explicit.

38. National Postsecondary Student Aid Study (NPSAS) (2003-04). Calculations by authors.


40. Nellie Mae, Undergraduate Students and Credit Cards in 2004: An Analysis of Usage Rates and Trends (2005).

41. U.S. Department of Health and Human Services, The 2007 HHS Poverty Guidelines, http://aspe.hhs.gov/ poverty/07poverty.shtml. Accessed August 7, 2008.


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Eliminating the distinction between the two Stafford Loan programs means that a ederal need-analysis system will not be necessary or the allocation o student loans. As discussed above in thesection on Pell Grants, although it will be possible to calculate an index o financial capacity or useby states and institutions, Pell Grant awards will be based on a simple ormula embodied in a look-up table. Requiring a more complicated need-analysis system in order to allocate in-school interestsubsidies on student loans undermines simplification efforts.

Te Rethinking Student Aid study group recommends that the interest rate on Stafford Loansbe flexible but lower than market rates for all students. It is appropriate or the ederal governmentto subsidize student borrowers to some extent, since the lack o collateral makes them vulnerableto high rates in the market. However, there is no reason why taxpayers should bear a particularlyhigh share o the cost o student loans during periods o time when interest rates on mortgages andconsumer debt are higher. Similarly, students should not pay higher fixed interest rates when marketinterest rates are low.

Budgetary Impact of Proposed Student Loan Reforms

Estimates rom the Department o Education indicate that eliminating the in-school interest subsidyon Stafford Loans or undergraduates and graduate students would save about $8 billion in 2008-09,

assuming loan limits increase as proposed by the Study Group. Because unsubsidized Stafford Loanscarry no cost in the ederal budget at this time, increasing the loan limits under this scenario wouldnot require additional ederal resources. Further details o the estimated budgetary impact o theproposals described here can be ound in Appendix able A7

Savings Plans for Low- and Moderate-Income Parents

In 1996, the ederal government introduced a new vehicle to encourage amilies to save or college.Tis legislation allows amilies to set aside unds in special 529 plans on which interest accumulatestax ree. Since 2002 these unds can be spent on a amily member’s college expenses tax ree. Tese529 accounts have proved popular and have grown rapidly. In 2007, 10 million 529 accounts held

average assets o over $12,000 that could be used to pay college expenses.42 An appealing eature othese plans is that they help make planning or college a reality or amilies when their children areyoung, building their confidence that their children can and will go to college, and promoting theidea that academic preparation should be in step with financial preparation.

Unortunately, very ew low- and moderate-income amilies participate in these plans. Tis ispartly because tax deductions are o less value to lower-income amilies who ace lower tax rates orhave no income tax liability. But the main reason ew o these amilies ail to participate is simplythat they do not have the discretionary unds required to save. o the degree that they do save, it isthrough building equity in their homes.43 Moreover, the terms o 529 plans, which include penaltiesor withdrawal or non-education expenses, make them risky or many low-income amilies. Teseamilies are both more likely to be orced to withdraw any savings or emergency use and less confident

that their children will actually go to college. Tis reality is unortunate not only because it impliesthat these amilies are deprived o a subsidy available to their more affluent ellow citizens, but alsobecause they miss out on the encouragement o early academic and financial planning or college thatresults rom knowing that money is being put aside or their children’s education.


43. Susan Dynarski, “Who Benets from the Education Saving Incentives? Income, Educational Expectations,and the Value of the 529 and Coverdell,” NBER Working Paper No. 10470, May 2004, and National Tax

Journal 57(2), (2004).


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Te Rethinking Student Aid study group proposes to address the limitations in the existing 529 plans by developing a parallel federal college savings program designed to assure the participation

of families who don’t have the wherewithal to undertake savingon their own. Te proposed program would create a undholding a savings account established by the ederal governmentor every young person who, i they were enrolled in college,would qualiy to receive a Pell Grant according to their parents’

most recent tax return or based on their eligibility or means-tested ederal income support programs. Tese accounts wouldaccumulate interest tax-ree and could be drawn on tax-reeby the beneficiary to meet college expenses. Tey could not beused, even with penalties, or any other purpose.

Te Rethinking Student Aid study group further proposes that every year the federal governmentdeposit funds equal to a proportion of the Pell Grant for which the dependent child would be eligiblethat year. Under the new, simplified Pell allocation ormula, this amount would be easily determinedrom income tax orms. For example, a amily that would qualiy or a $5,000 Pell Grant in a givenyear might receive a contribution to college savings o 10 percent o that amount, or $500 or eachchild o qualiying age. A amily with more income that qualified or a $3,000 Pell Grant would

receive a $300 contribution. Te account will earn interest, andthe amily will receive annual written notification o the amounto college savings in the student’s name.

We believe that these accounts, explicitly targeted by theederal government to provide money or college or low-incomechildren, have the potential to change significantly the wayparents view their children’s prospects or education. Imagine theimpact on the single mother o a seven-year-old who receives aletter inorming her that the ederal government has just put aside $250 toward the college educationo that child and that this money will earn interest until the child is ready to enroll. oday, mostaffluent amilies see a college education or their children as a natural part o the growing-up process,

something like a birthright. Te program we propose here can help weave the expectation o collegeinto the abric o growing up in America, not just or affluent amilies, but or all amilies.

Programs based on similar ideas have been implemented both in other countries and in somestates. Trough the Canada Learning Bond program, the Canadian government deposits unds intoaccounts or children rom low-income amilies and makes additional deposits as long as the amilycontinues to qualiy.44 Te Kentucky Educational Excellence Scholarship, in existence since 1998,makes annual awards to high school students based on their grade point averages. Te unds availableat the time o college enrollment depend on how much students have accumulated over their highschool years. Te states o Michigan and Oklahoma are among those that provide matching unds orsome o the 529 college savings o low- and middle-income amilies.

Depending on the amount o money going into these accounts, this savings program, once ullyimplemented, would establish a financial base or people to use in paying or college. Tat o courseis exactly the role that Pell Grants are intended to play. Afer this savings program had operated ora sufficient number o years, almost everybody who had grown up in the United States and wouldqualiy or a Pell Grant at the time o applying to colleges would bring a savings account with them.Tus, while in the short run the savings program we advocate constitutes a complement to the Pell

44. Human Resources and Social Development Canada, Canada Learning Bond, http://www.hrsdc.gc.ca/en/learning/education_savings/public/clb.shtml. Accessed August 7, 2008.


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program, in the long run, i unded generously enough, it could unction as a replacement or it.In other words, the Pell Grant program and a ederally unded savings account program representtwo alternative ways o providing unds or people whose amily resources will not support collegeexpenses. O course changing rom one system to the other requires managing a long transitionperiod. We are not advocating such a transition as a specific policy goal; we only want to note that itprovides a resh perspective on the challenge o helping low-income people pay or college.

Over the long run, the savings account approach has two substantial advantages over a financialaid grant program. First, the Pell Grant program bases its assessment o amily ability to pay on asnapshot o recent income experience. Under the savings approach, the nest egg or paying or collegeaccumulates over time, in proportion to amily ability to pay over the entire period that children areapproaching college age. Tis longer temporal perspective is likely to be both airer and more efficientthan the snapshot approach. Te accumulation o experience with a modest savings program likethe one we propose would provide a useul basis or deciding whether a larger movement in thisdirection is desirable.

Te second advantage is that the accumulated unds in asavings account automatically provide resources or adult andindependent students. People who grow up in low-income amilies

but don’t go to college right away will still have their accountsintact and continuing to accrue interest. In other words, as thisprogram matures, it provides a means o subsidizing adults whocome rom disadvantaged amilies more generously than otheradults who have postponed their undergraduate education.

Te accounts in question would be, like Social Security accounts, commitments by the ederalgovernment to pay the specified amounts when the requirements or payment are met. Notice thatthese accounts actually pay off (and thereore cost the government money) only or people who goto college. At current rates o attendance by low-income students, and prorating the cost o part-timeenrollment, only about 55 percent o these notional accounts would be claimed within a year aferhigh school graduation, and not all o these accounts would be ully depleted.45 Additional accounts

would be claimed by older returning students. While we intend that this rate o attendance willrise in response to the program, it is likely (albeit unortunate) that only a portion o the promisesrepresented by these accounts would ever be cashed.

A final set o issues concerns the disbursement o the proceeds. We recommend that the undsshould be available to pay or both tuition and other college expenses. Students should not be allowedto spend out their savings accounts too rapidly. Students could be limited to spending a maximum oone-quarter o the total accumulation on ull-time first year attendance, one-third o the remainingunds on second-year attendance, and so on. Te unds could only be used or expenditures onundergraduate education, not or any urther education afer obtaining a bachelor’s degree.

Estimates of the Cost of a Savings Program for Low-Income Families

We estimated the cost o our savings program or several different starting ages and or two differentlevels o contribution or individual amilies. We began by studying the estimated annual cost o aprogram that would provide annual contributions equal to 10 percent o the Pell Grant or whichthe amily would qualiy, beginning when the child was age 12. We ound that at current collegeparticipation rates or eligible amilies, this program would reach 12.6 million amilies and wouldcost about $2.8 billion per year. I the program raised the college participation rate o children rom

45. Sandy Baum and Jennifer Ma, Education Pays 2007 (New York: The College Board, 2007).


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these amilies rom the current 54 percent to 60 percent, the cost would rise to about $3.1 billionannually. A program that provided 25 percent o Pell would change these numbers to $7 billion atcurrent participation rates and $7.8 billion with the higher participation rate. O course starting at anearlier age boosts these costs substantially. For example, the version o the estimates that has a costo $2.8 billion per year when it starts with 12-year-olds would, when ully in place, cost $7.3 billion iunding began at the child’s birth. Details o the estimates are provided in the Appendix.

Incentives for States and Institutions

While our ocus is on the ederal role in student aid, that role includes undertaking intelligent policiesthat will influence other actors in the higher education system. States and institutions clearly have aresponsibility or being active and constructive partners in the assurance o affordable educationalopportunity. We believe that the ederal government has an important role in encouraging states touse their available aid unds or students who need help as well as in encouraging institutions to ocustheir unds and their energies not just on enrolling disadvantaged students, but in helping them tosucceed.

Encouraging Simple Programs of State Support for Low- and Moderate-

Income Students

Te ederal government currently provides a small amount o unding to states ($74 million in2006-07) through the Leveraging Educational Assistance Partnership (LEAP) Program in the ormo matching grants or state need-based grants and community service work-study assistance. Teprinciple o providing incentives or states to direct unds toward students with financial need is bothimportant and consistent with the goals and principles o the Rethinking Student Aid proposals.When this program was initiated (as the State Student Incentive Grant or SSIG Program) in 1974,ew states had need-based aid programs. In the intervening years, most states have established theseprograms. However, afer growing or a period o years, LEAP unding has declined and is now nohigher in real dollars than it was when the program was first implemented. It no longer providesadequate incentives to states.

While states continue to devote increasing amounts o money to student aid, the proportiono those dollars dedicated to meeting financial need has declined markedly since the early 1990s.In order to achieve the goal o targeting student aid unds atthose whose educational opportunities will be most improvedby the assistance, the ederal government should strengthen theincentives it provides to states or aid to students with limitedfinancial resources. It is also vital that states not undermine thesimplified application process or ederal student aid by requiringadditional financial inormation rom students.

Te Rethinking Student Aid study group recommends that a reformed Leveraging Educational

Assistance Partnership (LEAP) Program provide matching funds for state grant aid, with the matchdeclining as the recipient’s family income increases. Te study group further proposes that statesbe rewarded for relying solely on the financial information available through the IRS, rather thanrequiring students to complete additional forms.

An important element o this program is that states need not limit their grant aid to studentswith financial need to qualiy. However, the only dollars eligible or a match would be those awardedt

rethinking student aid fulfilling commitment recommendations

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