the case for federal higher education affordability standards

8/17/2019 The Case for Federal Higher Education Affordability Standards

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The Case for Federal HigherEducation Affordability StandardsLessons from Other Sectors

By Ben Miller and Antoinette Flores May 2016

WWW.AMERICANPROGRESS.O


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The Case for FederalHigher EducationAffordability StandardsLessons from Other Sectors

By Ben Miller and Antoinette Flores May 2016


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1 Introduction and summary

5 The goal and structure of federal financial aid

7 Affordability lessons from other sectors

27 Potential downsides of affordability

33 Recommendations

36 Conclusion

38 Endnotes

Contents


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1 Center for American Progress | The Case for Federal Higher Education Affordability Standards

Introduction and summary

In 2010, Congress enaced wo major expansions o he social saey ne. Firs, i

passed he Paien Proecion and Affordable Care Ac, more commonly known

as he ACA.1 Tis bill brough sweeping changes o he American sysem o healh

care. In paricular, i provided new money or saes o expand healh care cover-

age o exremely low-income people and ax credis o help individuals purchase

insurance plans. A week laer, Presiden Barack Obama signed he Healh Care

and Educaion Reconciliaion Ac o 2010.2 Ta legislaion included more han

$36 billion in new money or he ederal Pell Gran program, which helps low-income sudens afford college.3 I also indexed he maximum Pell Gran award o

inflaion, guaraneeing benefis would increase each year.

Te ulimae goals o boh he healh care and educaion expansions were simi-

lar: make an imporan se o benefishealh insurance in one case, college in

he oheraffordable or vulnerable populaions. More han five years laer, he

effecs o boh changes are clear.

Tanks o he ACA, he share o Americans who lack healh insurance has

dropped by abou one-hird and is now a a hisoric low.4 Tis includes decreases

in he uninsured rae in every sae in he counry and he Disric o Columbia.5

Millions more sill need coverage, bu he numbers appear o be headed in he

righ direcion.

Te legislaion accomplished his by seting clear expecaions ha Americans

should have healh insurance and ha i should be affordable. I se a goal or

saes o expand Medicaidhe program ha provides coverage or low-income

amilieso everyone a or below a se hreshold ied o he povery level. I also

creaed a new se o ax credis ha esablished clear benchmarks or boh howmuch people should have o pay ou o pocke or healh care coverage and wha

ype o insurance hey should be able o afford. Tese benefi srucures provided

a degree o cerainy or amilies in wha had previously been a chaoic marke.


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Meanwhile, he invesmens made in Pell Grans significanly raised he maximum

award and number o recipiens. Tis year, sudens can receive up o $5,775

hrough he program, an increase rom $4,731 in 2008.6 Similarly, he number o

recipiens grew rom slighly more han 6 million o more han 8 million.7

While he Pell Gran increases have mean a lo or sudens, hey have only heldhe line on college affordabiliy or low-income individuals, no made i beter.

oday, he Pell Gran covers 30 percen o he oal cos o atending a our-year

public college.8 In 2008, i covered 32 percen.9 Similarly, he borrowing rae o

Pell Gran recipiens sayed unchanged a 70 percen rom 2008 o 2012.10

Te differing ederal approaches o affordabiliy parially explain why he

expansion o Pell Grans was less successul in helping low-income sudens

han he ACA was in raising he share o Americans wih healh care. Unlike

wih he ACA, he increase in Pell Grans did no come wih guaranees ha

recipiens would no pay more han a se percenage o heir income or borrowno more han a se amoun o money. Te increased Pell Gran benefis boosed

he maximum possible award by abou $1,000, giving sudens more money o

spend on college expenses.

Te resul o an expecaion-ligh approach o college affordabiliy is ha he

abiliy o ederal possecondary benefis o achieve heir desired aims is com-

pleely dependen upon he choices made by schools, governors, and legisla-

ures across he counry. In Caliornia communiy colleges, or example, where

prices are low or nonexisen or mos atendees, he ederal benefis are more

han enough o cover uiion and can also pu a den in living expenses. Bu

in a more expensive sae such as New Hampshire, ederal grans and loans

combined may no be enough o even pay or direc academic coss. And here

is no guaranee he places where ederal aid currenly is sufficien will say ha

waya ew lean years could easily resul in Caliornia communiy colleges

becoming much less affordable.

Such a siuaion is simply unsusainable. Te ederal governmen is making oo

large an invesmen in possecondary educaion o see is dollars no guaranee

affordabiliy, simpliciy, and cerainy or sudens. o comba his, we need oflip he concep o ederal possecondary assisance o ocus on wha i buys, no

how much i pays.

We need to flip

the concept

of federal

postsecondary

assistance to

focus on what

it buys, not how

much it pays.


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As his repor shows, changing ederal financial aid benefis o guaranee recipi-

ens can purchase a specific se o goods, no jus receive a se amoun o money,

will beter conorm hese programs o he res o he U.S. social saey ne.

Drawing on examples rom he healh care and housing secors, his repor ana-

lyzes how he ederal governmen addresses he quesion o affordabiliy hrough

he benefis provided o consumers. In paricular, i ocuses on wo programs wihin each area: Medicaid and he ACA in healh care and renal housing assis-

ance and ederally insured morgages in housing. Imporanly, his emphasis on

he benefis o consumers inenionally excludes oher quesions abou how he

ederal governmen could conain coss, such as hrough innovaion. Ta is an

imporan area or uure research.

Examining how he ederal governmen addresses affordabiliy in oher key policy

areas shows five lessons or how he governmen could rehink is higher educa-

ion benefis o beter mee is goals. Te mos imporan o hese findings is ha

benefis should be ied o specific purchasing goals or consumers. By benchmark-ing benefis o a saed end goalsuch as affording a possecondary educaion

ederal assisance would provide greaer assurance ha hose who are geting help

will be able o afford a leas a basic level o educaion.

Oher lessons rom healh care and housing provide imporan inormaion or

resrucuring ederal aid or possecondary educaion. Tese include:

• Minimizing expenses or he lowes-income individuals

• Seting limis or wha level o goods he ederal governmen will make

affordable

• Creaing separae affordabiliy sandards or deb

• Sharing he cos o achieving affordabiliy beyond he ederal governmen

While here is much o be learned abou college affordabiliy rom oher secors,

hese healh care and housing programs are no perec. Tey may no serve enough

eligible individuals; hey may use a benchmark ha does no eel sufficienly afford-

able o consumers; or hey may have oher challenges. o ha end, hese programs

highligh our oher lessons abou he challenges in addressing affordabiliy:

• Unavailabiliy undermines affordabiliy

• Affordabiliy mus ackle all cos elemens

• Benchmarks mus have ace validiy

• Providers ha mee affordabiliy sandards may change


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Based on hese lessons, his repor suggess a new ramework or possecondary

affordabiliy. I sars wih guaraneeing a low- o no-cos educaion or he mos vul-

nerable individuals. As sudens move higher up he income specrum, he guaranee

shifs o ensure hey can afford a leas an in-sae public opion wihou paying more

han a reasonable share o heir income. o make he mah work, saes and insiu-

ions would have o provide enough assisance o fill in any gaps ha exis beweenamily conribuions and ederal unds. Recognizing ha such clear-cu affordabiliy

aims may no be easible a privae insiuions, hese schools would insead have o

keep sudens’ debs below cerain levels ha are ied o posgraduae earnings.

Seting explici goals and guaranees or ederal suden aid recipiens highlighs ha

hese invesmens are he mos credible ools or addressing affordabiliy. As he larg-

es single under o college educaion in he counry, he ederal governmen could

and should use is aid o demand ha he beneficiaries o is assisance are guaraneed

access o affordable educaions. Tis vision o a suden aid program acively engaged

in requiring affordabiliy is also an explici rejecion o he heory firs ariculaed by ormer U.S. Secreary o Educaion William J. Bennet ha hese programs are o

blame or never-ending price increases.11 Raher han enabling colleges o raise prices

o capure more money, as he Bennet Hypohesis ariculaes, his vision allows he

ederal governmen o exer is leverage o keep prices affordable and in check.

While his paper represens is own vision or achieving possecondary affordabil-

iy hrough ederal acion, i builds upon oher hinking abou he need or greaer

clariy abou wha amilies should pay or college. In paricular, i draws on conceps

firs discussed by he Lumina Foundaiona under o he Cener or American

Progress Possecondary Educaion eamin is 2015 benchmark or higher educa-

ion affordabiliy.12 Tough nonbinding, he benchmark argues ha amilies should

be able o afford college hrough conribuions rom savings, income, and suden

work. Tis paper akes such a concep even urher by proposing how he ederal

governmen could creae a binding affordabiliy requiremen.

Te need or a new approach o higher educaion benefis is clear. oday, more han

41 million Americans currenly hold a combined $1.2 rillion in ederal suden

deb, including 7.5 million borrowers in deaul.13 Saes coninue o reduce spend-

ing on heir public insiuions o higher educaion, driving up uiion and deb. Addiionally, amily incomes simply canno keep up wih prices ha grow aser

han inflaion year afer year. And his does no even begin o address he persisen

access and compleion gaps by race and income. Only by aking a new approach o

hese benefisone ha builds on lessons learned rom oher policy areascan

he ederal governmen hope o guaranee ha all sudens, regardless o back-

ground, can access and afford possecondary educaion.

The federal

government cou

and should use

aid to demand t

the beneficiaries

of its assistance

are guaranteed

access to afforda

educations.


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The goal and structure

of federal financial aid

Federal financial aid is a long-erm invesmen ha, i effecive, should help

sudens move up he socioeconomic ladder over ime. Tis ime rame or suc-

cess is slighly differen rom oher ederal benefis, such as housing assisance or

healh insurance, which are designed o immediaely improve or sabilize he lives

o amilies. Tis difference also explains why ederal financial aid benefis differ

somewha rom hose provided or healh insurance and housing. Wih he excep-

ion o morgage assisance, he oher major benefi programs provide jus-in-ime

cash ransers or oher ypes o assisance ha do no have o be repaid. Federalcollege aid includes grans bu also relies heavily on suden loans. Te idea

behind hese debs is ha sudens borrow agains he uure increases in income

hey will receive rom earning a degree.

Bu even i he invesmen horizons and srucures are differen, he ederal gov-

ernmen’s college aid programs sill have he same ulimae goals as unds spen in

oher secors such as healh care and housing. Te governmen wans is suppor

or possecondary educaion o allow recipiens o afford a college educaion.

Tese unds should supplemen gaps in he financing landscape ha would oher-

wise preven sudens rom going o college. And or he lowes-income sudens,

ederal gran aid should minimize or obviae he need o borrow.

o accomplish hese goals, Congress ses a maximum level o grans and loans ha

a suden can receive each year. Tese amouns are no smallhis year, he larges

Pell Gran or low-income sudens is $5,775, and Safford Loans or firs-year su-

dens range rom $5,500 o $9,500. Te exac unds sudens are eligible o receive

vary depending on a number o acors, including sudens’ economic siuaion, he

number o credis hey atemp, heir year in college, and he cos o heir insiuion.

Noably, he major ederal financial aid programs operae as vouchers or sudens.

Dollars are disbursed o colleges on behal o sudens, meaning ha he amoun o

ederal suppor an insiuion receives is direcly relaed o he number o enrolled

sudens who are receiving his aid. Pell Grans and Safford Loans conain no

maching requiremens and no addiional unds or enrolling large numbers o


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sudens who receive hese orms o aid. Te oher effec o he voucher disribuion

model is ha sae governmens never receive any money rom he aid programs.

Sae governmens are no expeced o play any ormal operaional role in he sysem

beyond approving insiuions o operae wihin heir borders.

Despie heir size, he ederal financial aid programs’ purchasing power is decreas-ing over ime. oday, he maximum Pell Gran covers jus 30 percen o he oal

cos o atending a public our-year college versus 77 percen in 1980. 14 While

some o his drop is due o years when he maximum Pell Gran did no increase,

even indexing he award o inflaion rom is incepion in he 1970s would no be

enough o overcome he relenless increase in college prices.15 As a resul o his

decline in purchasing power in he 2011-12 academic year, 70 percen o Pell Gran

sudens a public our-year colleges also had o borrow o pay or heir educaion.16

Te reason behind he decline in ederal purchasing power also maters or under-

sanding wha can be done o address i. Federal benefis’ values all no becauseinsiuions are raising prices jus o capure more ederal money. Insead, saes are

inenionally reducing heir suppor or possecondary educaion. According o a

Cener or American Progress analysis, 38 saes cu heir unding per suden by a

leas 5 percen rom 2008 o 2012.17 When aced wih budgeary holes rom sae

cus, insiuions are orced o raise prices or sudens. Te resul is ha educaional

coss ha used o be borne by saes are now being passed on o sudens who hen

urn o ederal suden aid o pay hem. Absen he presence o ederal benefis, su-

dens and amilies would find hemselves wih compleely unatainable uiion bills.

Saes supplaning heir own unding or suden and ederal suppor is no a

good oucome. Tis is paricularly rue because a lo o he ederal benefis come

as loans ha mus be repaid by he sudensraising heir long-erm coss and

resuling in bad financial condiions i hey canno make heir loan paymens.

Reversing he decline in he purchasing power o ederal possecondary benefis

and improving affordabiliy canno be done wih simple weaks o he programs.

Nor will increasing benefis alone be enoughhe rae a which uiion rises is

simply oo grea. Insead, i he ederal governmen wans o ensure ha is higher

educaion programs ruly improve affordabiliy, i needs o look o he lessonslearned rom oher secors abou how o address hese problems. Invesigaing

how major ederal programs in areas such as healh care and housing ackle he

challenges o affordabiliy can highligh oher pracices ha would be good o

adop in higher educaion. I can also show he challenges o differen approaches

and give a sense o poenial pialls.


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Affordability lessons

from other sectors

Reviewing how he ederal governmen approaches affordabiliy in oher secors

reveals five posiive lessons ha could be applied o higher educaion financing:

• Many oher programs ie benefi amouns o defined benchmarks so recipiens

know hey will receive enough aid o purchase he goods hey need.

• Areas such as healh care se disinc affordabiliy policies or he mos vulnerable

individuals ha resul in minimal o no expecaions or ou-o-pocke spending.

• Te ederal governmen also limis which producs wihin a marke i will makeaffordable, reusing o subsidize he pricies opions.

• Relaed o his sense o limis, he ederal governmen also creaes affordabiliy

sandardsspecifically, when i deals wih deb in areas relaed o housingo

proec consumers rom unaffordable paymens.

• Finally, he ederal governmen does no always pursue affordabiliy on is

own. For crucial iems such as healh insurance, i enliss he help o saes and

employers o achieve is aims.

No all he lessons learned abou approaching affordabiliy are posiive. Many

o he programs profiled here have heir own challenges ha make hem less

effecive a promoing affordabiliy. In acknowledging hese limiaions, his

repor idenifies our problems in oher secors ha any effors o change ederal

suden aid benefis mus recognize:

• Available resources mus be sufficien o avoid raioning suppor or ying goals o

oudaed sandards ha do no reflec he amoun o help needed in oday’s world.

• Affordabiliy ofen maters on muliple dimensions in a given secor ha mus be

addressed. For example, making monhly premiums affordable in healh insurance

may no be enough i he copays are oo expensive or people o visi he docor.• Expecaions or ou-o-pocke spending mus eel reasonable o recipiens.

• One challenge in ataching benefis o specific levels o qualiy is he opions

ha mee his sandard migh change over ime. For insance, he ACA provides

ax credis or healh insurance plans ha mee cerain cos condiions. Bu he

plans ha qualiy or his benefi may change over ime.


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Te nex secions describe each o hese nine lessonsfive posiive and our nega-

ivein greaer deail, wih specific examples rom healh care and housing and

an explanaion o how hey migh relae o higher educaion benefis.

Lesson #1: Tying federal benefits to specific affordabilitybenchmarks helps guarantee purchasing power

In higher educaion, ederal benefis are calculaed in erms o dollars wih no con-

sideraion or wha hose unds can buy. By conras, ederal programs or healh

care and housing ocus on providing enough assisance o bridge he gap amilies

ace beween he price o he produc and wha he amilies can afford o pay. Tis

approach ensures ha ederal suppor heoreically gives amilies enough purchas-

ing power o buy wha hey need.

How federal financial aid calculates benefits

Here is how he aid awarding process works in higher educaion: When su-

dens complee he Free Applicaion or Federal Suden Aid, or FAFSA, hey

are presened wih a figure, known as an Expeced Family Conribuion, or EFC.

Teoreically, he EFC is a ballpark esimaion o wha a amily can be reasonably

expeced o pay or college. Tis number can range anywhere rom $0 o ens o

housands o dollars, depending on a amily’s income and asses.

Te EFC also drives how much ederal aid sudens receive. For insance, he

maximum Pell Gran sudens can receive in a given year is equal o he difference

beween he maximum award and heir EFC. In oher words, i he maximum award

is $5,915, hen a suden wih an EFC o $0 can receive up o $5,915, while someone

wih an EFC o $1,250 would qualiy or up o $4,665. Te EFC also maters or

receiving Subsidized Safford Loans. I is no, however, relevan or Unsubsidized

Safford Loans, which are available o anyone regardless o EFC or income.

Te use o he EFC in he aid awarding process suggess ha affordabiliy can

be accomplished by combining amily conribuions and any necessar y gran orloan aid. In ac, he Higher Educaion Ac isel esablishes his idea, noing in

Secion 401 ha he combinaion o a reasonable amily conribuion, he Pell

Gran, and oher small ederal assisance programs should cover 75 percen o

he cos o a higher educaion.18


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In pracice, he sum o EFC and oher aid rarely adds up o affordabiliy or

lower-income sudens. Te problem is ha he EFC is a nonbinding number.

Insiuions o higher educaion are under no obligaion o honor ha figure and

charge sudens anyhing close o i. A suden wih a $0 expeced conribuion

could end up sill paying ens o housands o dollars per year or college. In ac,

27 percen o hese individuals who atend ull ime pay $5,000 or more jus orheir uiion and ees, including 13 percen a public our-year colleges.19 Including

living expenses, 86 percen o ull-ime sudens wih a $0 EFC are paying a leas

$5,000 or collegeincluding 89 percen a public our-year insiuions.20

Wihou a binding EFC figure, ederal educaion benefis only ensure recipiens

will ge a specific dollar level o suppor. For insance, maximum Pell Gran

recipiens in heir firs year o college know ha hey will receive up o $5,915, and

hey can ge a loan o up o $5,500 i hey are sill suppored by heir amily.21 Bu

wha recipiens lack is any guaranee ha hose dollars will be sufficien o acually

purchase he possecondary educaion hey are supposed o afford.

Tus, how ar sudens’ ederal dollars srech depends on where hey live and

wha ype o school hey atend. For sudens who live in saes such as Florida or

Caliornia, which radiionally have reasonably priced higher educaion, ederal

suppor may cover all or mos o heir coss. By conras, someone wih he exac

same financial siuaion in New Hampshire or oher saes ha ypically have very

high college prices may have a much harder ime affording college.22 And in boh

cases, he ederal governmen allows saes and insiuions o choose wheher o

offer affordable possecondary opions.

Tis approach o benefis, solely in dollar erms and wihou considering wha he

unds should acually buy, is disinc rom how oher ederal programs consider

affordabiliy. In oher programs, such as he healh care ax credis auhorized

under he ACA or ederal renal assisance, benefis are atached o specific prices

consumers ace, ensuring ha dollars will be sufficien o mee heir inended

aims. Doing so provides cerainy or he recipienswho know hey will be able

o acually buy healh insurance or ren an aparmen wih he aid. I also helps he

ederal governmenwhich knows is aid can acually achieve is desired goals.


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10 Center for American Progress | The Case for Federal Higher Education Afford abil ity Standards

How the ACA calculates benefits

Te healh insurance ax credis creaed by he ACA illusrae a way o hinking

abou benefis in erms o being enough o specifically afford a produc insead

o jus being a se dollar amoun. Te goal o hese credis is o provide subsidies

or low- and moderae-income individuals who receive eiher no or insufficienemployer coverage o purchase healh insurance on he individual marke.23 Bu o

work, subsidies have o be large enough o bring he level o plans on he marke

down o a price people can acually afford. o accomplish his goal, he ederal

governmen ses he credi amoun a he difference beween he cos o a specific

ype o insurance plan and a se percenage o an individual’s income.24 I varies

his percenage based upon where a amily’s income alls beween 100 and 400

percen o he povery line. As amilies make more money, heir expeced conri-

buion o healh insurance increases. Te resul is ha he lowes-income individu-

als do no pay more han 2 percen o heir income, while hose a 400 percen o

he povery line do no pay more han 9.5 percen o heir income.

Te able below shows he premium ax credi’s expecaions or amily income

based upon heir earnings relaive o he ederal povery level.

TABLE 1

Share of family income for ACA tax credits

By percentage of the federal poverty level

Family income as a percentage

of the federal poverty level

Percentage of family income

paid for health care premiums(For the second-cheapest silver-level plan)

Starting income Ending income Starting premium Ending premium

0% 133% 2.01% 2.01%

133% 150% 3.02% 4.02%

150% 200% 4.02% 6.34%

200% 250% 6.34% 8.10%

250% 300% 8.10% 9.56%

300% 400% 9.56% 9.56%

Note: Tax credit calculations use a family’s modified adjusted gross income, a measure of annual earnings minus some deductions.Source: Bernadette Fernandez, “Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA) in 2015”(Washington: Congressional Research Service, 2015), p. 10, available at https://www.fas.org/sgp/crs/misc/R43945.pdf.


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Te use o income in he premium ax credis is similar o he idea behind he

EFC in ederal aid calculaions, only i is binding. Te amoun o he subsidy

sill declines as income increases, jus as Pell Grans phase ou. Bu he differ-

ence is people who qualiy or he credi know ha as long as hey can afford

he ou-o-pocke percenage o heir income, hey will be able o buy a plan. By

conras, even individuals who can afford heir EFC have no guaranee ha heycan afford o pay or college.

Te premium ax credis also se goals or wha a amily’s conribuion is sup-

posed o buy. Te ACA creaed a classificaion sysem ha grades healh insurance

plans as bronze, silver, gold, or plainum.25 A plan’s level is based upon is acuarial

valuea measure o he share o healh insurance expenses ha are paid by he

plan versus he paricipan on average.26 For example, a bronze plan is one wih

an acuarial value o 60 percen, meaning ha paricipans are expeced o cover

abou 40 percen o coss; he plan covers he res. Te oher classificaions rep-

resen increasingly generous opions in which he paricipan pays a smaller shareo coss. Silver, on average, covers 70 percen o a paien’s coss; gold covers 80

percen; and plainum covers 90 percen.27

While amilies receiving premium ax credis choose heir plan level, he ederal

governmen guaranees affordabiliy only o a cerain level o coverage. Te pre-

mium ax credi is atached o he cos o he second-cheapes silver plan available

o he recipien. Tis means ha a amily ha chooses ha plan receives a ax

credi equal o he difference beween heir amily conribuion and he cos o he

premium. So i he monhly premium is $100 and heir conribuion is $30, hen

he premium credi will be $70.

Tis connecion o he ax credi o a good o a specific ype is anoher key les-

son or higher educaion. By saing exacly wha he credi mus be able o buy,

i guaranees everyone can buy a silver plan, while leting he amoun a person

acually ges rom he ederal governmen vary. In conras, higher educaion

benefis fix he amoun a suden can obainso people who are in idenical

circumsances receive he same amoun o moneybu floa he value o wha

hose unds can buy. In oher words, wo ull-ime maximum Pell Gran recipiens

would likely receive he same amoun o money, bu hose dollars buy hem verydifferen percenages o heir oal educaion coss i one goes o a communiy col-

lege in Caliornia and he oher goes o a public our-year insiuion in Vermon.

Higher educatio

benefits fix the

amount a stude

can obtain—

so people who

are in identical

circumstances

receive the

same amount

of money—but

float the value

of what those

funds can buy.


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Tinking abou he ax credis in erms o he value o he good also allows plans o

develop benefi srucures in differen ways. For example, one plan could ge o a 70

percen acuarial value hrough low coinsurance bu high deducibles, while anoher

could ake he opposie approach. Nor are hese values deermined on an individual

basishey represen he general esimae o wha a ypical person would pay.28 Tis

provides insurers wih flexibiliy or how o manage oward a specific end value.

In some ways, he acuarial value concep mirrors wha saes and insiuions

already do on college pricing. Some saes aim or affordabiliy hrough a so-called

high cos, high aid model. In hese cases, colleges charge a high sicker price bu

hen provide generous gran aid o subsidize he price or lower-income sudens.

In oher places, he sae may provide a lo o operaing suppor o a college, allow-

ing i o charge a low upron price. Te end price paid by sudens could very well

be he same; i is he pah o ha number ha differs.

How federal housing assistance calculates benefits

Te concep o a srong connecion beween he benefi amouns and specific

purchasing goals is also a key elemen o he ederal renal assisance programs.

Tese programs use a se o benchmarks ha are based upon a amily’s income

and he price o housing in a given area. Te local renal marke ses he maxi-

mum subsidy a amily can receive, ensuring ha benefis are sufficien o afford

housing bu are no oo high. Families’ incomes dicaes heir chances o quali-

ying or suppor and wha hey are expeced o pay ou o pocke. Te number

o people in he household eniles hem o srucures o a cerain size. Tese

sraighorward rules help amilies clearly undersand he level o suppor hey

are eniled o receive i hey are able o ge ino he program while sill allowing

choice up o a reasonable poin o affordabiliy.

Te ederal governmen adminisers several renal assisance programs ha pro-

vide affordable housing o more han 5 million households in he Unied Saes.29

Te wo larges o hese programs are Secion 8 Projec-Based Renal Assisance

and Secion 8 Housing Choice Vouchers, or HCVs, which were creaed in 1974.30

Combined, hese wo programs serve approximaely 70 percen o all ederalrenal assisance recipiens.31


16/44


Boh Secion 8 programs operae as voucher models in which he governmen

provides financial suppor or individuals o ren privaely owned and operaed

aparmens. Te big difference beween he wo is ha projec-based renal

assisance programs subsidize specific renal aparmens and buildings, while

HCVs cover properies o he recipiens’ choosing. Over ime, enan-based

vouchers have become he preerred mehod o providing renal assisance andcurrenly serve 2.1 million amiliesalmos double he 1.2 million served by

projec-based renal assisance.32

A he mos basic level, HCVs provide suppor or amilies so hey will be able o

pay no more han 30 percen o heir income oward ren. Tis benchmark is sup-

posed o guaranee ha paying or a place o live does no overwhelm a amily’s

budge so hey also can afford ood, clohing, and oher necessiies. Tis serves he

same purpose as he income percenage or he healh care ax credis. I is also he

same concep absen in he ederal aid programs.

Te amoun o a recipien’s HCV is based upon he acual coss o housing in a

given area. Secion 8 HCVs are capped a he air marke ren, or FMRhe ypi-

cal average ren in he local housing marke.33 In oher words, he ederal govern-

men will no provide a voucher or an amoun above he ypical ren in an area.

ying benefis o ren in an area conrols coss while providing a clear definiion

o wha amilies pay. Te vouchers also have sandards or how large a srucure a

amily can ren based upon is size and he ages o is members.34

Tough healh care and housing are wo very differen markes, hey boh show

he benefis o aking a more inenional approach o he benchmarks and levels

se or ederal assisance. By seting sandards or he income percenage a amily

should pay or a produc or service and guaraneeing ha level o paymen o be

enough o afford a minimum produc, hese programs ensure ha paricipans

receive suppor ha acually helps hem buy wha hey need. Tis is disinc rom

he ederal suden aid programs, which appear o se affordabiliy goals based

upon income bu simply disribue se amouns o dollars wih no consideraion

or wha hose dollars can buy.


17/44


Lesson #2: The most vulnerable individuals

have minimal to no out-of-pocket costs

Improving affordabiliy or everyone is a laudable goal. Bu keeping expenses

reasonable is even more imporan or he mos a-risk individuals. Lower-income

people have ewer resources o cope wih high prices. Shocks such as sudden cosincreases may be more likely o cause hem o sop using a service. For example,

hey may drop ou o college or go wihou healh insurance. I is or hese reasons

ha any affordabiliy sysem mus pay paricular atenion o how i serves he

mos vulnerable o is beneficiaries.

Federal health benefits

One noable eaure o he healh insurance ax credis is ha individuals mus make

a leas 100 percen o he ederal povery level o receive assisance. Tis is no someconspiracy o exclude he poores individuals. Raher, i reflecs a heory o afford-

abiliy ha recognizes ha some people are so low income ha demanding any kind

o ou-o-pocke conribuion is ineasible. Insead, he expecaion o he ACA is

ha he poores people who all below he povery level will ge a differen orm o

coverage ha is less expensive or hem hrough he Medicaid program.

Te Medicaid program provides a differen way o hink abou how o serve he

lowes-income individuals. In higher educaion, he ederal governmen suppors

he poores sudens by giving hem he larges amoun o gran aid. I hen hopes

ha saes and insiuions will suppor hese individuals bu does no acually

require hem o do so. Medicaid ses much more explici assisance goals or who

mus be covered and wha ypes o services hey mus receive. I hen splis he

coss o meeing hese aims wih he saes. Tis creaes a sense o shared responsi-

biliy or helping he mos a-risk individuals.

Medicaid provides healh care coverage o more han 71 million Americans.35 I was

signed ino law in July 1965, predaing he Higher Educaion Ac’s November sign-

ing by a ew monhs.36 Medicaid operaes as a ederal-sae parnership, in which he

ederal governmen reimburses saes or a porion o unds spen. All saes and heDisric o Columbia paricipae in Medicaid. In exchange or his ederal assisance,

saes mus provide a leas a defined se o healh care benefis o some specific

populaions. Beyond hese parameers, saes have significan flexibiliy boh in

erms o oher benefis offered, groups covered, and even how o finance heir share

o expenses. As a resul, Medicaid varies a grea deal rom sae o sae.

Any affordability

system must pay

particular attent

to how it serves

most vulnerable

its beneficiaries.


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Te guaraneed benefis ha come wih Medicaid eligibiliy provide consumers

wih much more cerainy han he ederal suden aid programs. Sudens who

are eligible or a Pell Gran are no acually eniled o unding beyond he se

dollar sum hey receive. Tey are no guaraneed ha hey will be able o access or

afford a college o a cerain ype or level o qualiy.

Federal housing benefits

Federal renal assisance programs also build in conceps o greaer generosiy or he

lowes-income individuals hrough heir eligibiliy erms. For sarers, a amily mus

no earn more han 80 percen o he median income in heir ciy or couny o qual-

iy or aid. Income limis are deermined or meropolian areas and counies and

are adjused or amily size.45 Bu because hese programs are no enilemensa

low-income amily is no guaraneed o receive supporhey also arge benefis

urher. For insance, projec-based renal assisance requires ha a leas 40 perceno unis in each developmen go o amilies who are exremely low-incomemean-

ing hey make no more han 30 percen o he local median income.46 enan-based

HCVs are even more argeedexremely low-income amilies mus receive 75 per-

cen o all new vouchers each year.47 While his need or greaer argeing is mosly

a reflecion o he disappoining ac ha no enough suppor is available or renal

assisance, i does also show a similar commimen o providing as much generosiy

as possible o he lowes-income individuals.

Overall, boh he healh care and housing approaches o he mos vulnerable pop-

ulaions send a message ha here are some levels o income so low ha recipiens

canno be expeced o pay much, i anyhing.

Lesson #3: There are limits to what the federal

government will support for affordability

While he ederal governmen has a vesed ineres in making cerain goods and

benefis affordable, i does no need o mee his goal or every ype o a given

produc or service. Ensuring affordabiliy or every ype o insurance plan, hous-ing srucure, or insiuion o higher educaion would discourage effors a cos

conainmen and likely resul in he ederal governmen spending more money on

expensive opions wih idenical oucomes o cheaper alernaives.


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Currenly, he ederal governmen does no really consider he quesion o wha

should be affordable or where i should limi assisance in is higher educaion

assisance programs. On he firs issue, he governmen uses he same ormulas

o deermine sudens’ benefis regardless o wheher hey atend a higher- or

lower-priced insiuion. I is, hus, equally willing o subsidize he counry’s mos

expensive school as i is he cheapes. In ac, he aid awarding ormulas are se sosudens canno receive benefis above heir level o expenses. Tis means someone

who goes o an expensive college will receive more ederal assisance, even hough

he dollar amouns may be able o purchase a smaller share o a college educaion.48

By conras, oher secors have very differen approaches o affordabiliy limis.

In he case o healh insurance ax credis, his means ataching benefis only o

coverage o a cerain level and no increasing suppor beyond ha poin. In he

housing space, he ederal governmen addresses his issue by seting limis on

how much o is income a amily can spend and sill receive a subsidy.

In he healh care secor, he ederal governmen ses is affordabiliy limis in erms

o how generous a plan i will guaranee someone can afford. o do his, i ataches

he amoun o he ax credi o he difference beween he second-leas expensive

silver plan and a se percenage o a amily’s income. Only or plans o his ype and

below does he ederal governmen ensure ha a se percenage o income will pur-

chase a defined level o benefis. A amily can, however, choose a more expensive

gold or plainum plan, paying a larger share o heir income or premiums because

heir subsidy does no increase o reflec he higher plan’s cos. Te credi by no

means prevens such a choice, bu i does provide a clear undersanding ha he

governmen is no expeced o guaranee affordabiliy or hose opions.

Similar o healh insurance ax credis, ederal renal assisance programs atach

heir benefis o he median ren in an area o ensure housing opions will be

affordable. Tis oo allows amilies o choose more expensive housing. Bu regula-

ions allow hem o do his only o a poinamilies canno pay more han a

cerain percenage o heir income and sill receive assisance.

Federal renal assisance benefis provide amilies he difference beween he

air marke ren in heir area or he size o house or which hey qualiy minus30 percen o heir income. Families have he opion o choose housing ha

coss more han he FMR, bu hen hey pay he difference beween he amoun

over he benchmark plus 30 percen o heir income.49 For example, he FMR in

Washingon, D.C., or a amily o our in a hree-bedroom home is $1,951. Ta


21/44


is he maximum subsidy a amily in he region could receive oward he cos o

housing. I he amily chooses housing ha coss more han $1,951, he amily

would pay more oward ren.

Families canno, however, use vouchers or any housing above he FMR where

hey would pay more han 40 percen o heir income in heir firs year o ren-ing.50 Tis ensures amilies choose a home ha is affordable or heir income and

ha subsidies do no cover overly expensive homes.

Te conceps described above could apply o higher educaion in several ways.

For insance, Congress could require ha benefis be sufficien o afford a se

percenage o he price o a public our-year college in each sae. Tis would allow

sudens who atend a communiy college o cover a larger percenage o heir

coss, while hose who choose privae colleges would no have any guaranees or

expecaions ha heir educaion would be affordable. Alernaively, affordabiliy

limiaions could be applied o he deb levels so ha insiuions canno loadsudens wih loans beyond a cerain poin o indebedness relaive o heir uure

income. As he nex lesson shows, his is jus one way o ackle he quesion o

affordabiliy in a deb-based financing mechanism.

Lesson #4: There are affordability standards for debt

Te ederal governmen ofen helps individuals afford producs and services

wih deb financing. In he case o higher educaion, i provides sudens wih

low-cos loans ha are repaid o he governmen. For housing, he governmen

provides insurance o encourage companies o issue morgages and ses san-

dards o proec borrowers rom some o he unscrupulous behavior observed

during he Grea Recession.

Te ederal governmen mus be very careul when i provides access o deb.

While leverage can help individuals access a home or an educaion ha hey migh

no oherwise be able o afford, i also adds risks. Tis is no a problem i hese

individuals easily repay heir loans, bu i maters a lo i hey all behind or deaul,

which can have disasrous financial consequences.


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Federal higher education debt

In higher educaion, he governmen limis access o loans sricly in dollar erms.

For undergraduae borrowers, i ses annual and lieime loan limis based on

a suden’s year in school. Tese cumulaive limis are $31,000 or dependen

sudens and $57,500 or independen sudens.51

Meanwhile, boh graduae andparen borrowers have largely unlimied access o deb. As long as hey can pass

a minimal consideraion o pas credi hisory, hey are allowed o borrow any

amoun up o an insiuion’s cos o atendance.

How federally guaranteed mortgages approach indebtedness

Te housing secor akes a much differen approach o deb. While i oo has

dollar-based limis, he housing secor also ses affordabiliy sandards in erms

o deb relaive o income in order o proec borrowers rom ending up wihmorgages hey are unlikely o repay. Neiher o hese seps prevens someone

rom finding a loan ha appears unaffordable, bu i limis how much he ederal

governmen will become involved in morgages ha appear o be overly risky.

Te Federal Housing Adminisraion, or FHA, is he bes example o how he

ederal governmen approaches affordabiliy in oher deb programs. Congress

creaed he FHA in 1934 afer he Grea Depression. Is goal is o improve housing

sandards, provide an adequae home financing sysem hrough insured home

morgage loans, and sabilize he housing marke.52 When FHA was creaed,

only 40 percen o households could afford o own heir home.53 Te majoriy o

amilies could no mee he sric morgage loan erms: down paymens equal o

50 percen o he propery’s marke value and repaymen schedules o only hree

o five years ending wih a balloon paymen.54

Te FHA atemps o increase homeownership by providing insurance or

privae lenders o issue morgages. Te insurance provides privae lenders

wih ull proecion agains losses i a buyer deauls on a loan. In mos cases,

i a borrower deauls, he FHA pays he lender he remaining principal owed.

Because he governmen provides insurance and lessens he risk o privae lend-ers, lenders can offer loans wih more accessible erms o buyers who would no

oherwise qualiy. Since is sar, he program has insured more han 34 million

homes, allowing he Unied Saes o achieve a homeownership rae o 68 per-

cenone o he highes raes in he world.55 oday, approximaely 4.8 million

single-amily morgages are FHA insured.56


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Wha makes FHA morgages ineresing rom an affordabiliy sandpoin is hey

are capped in absolue erms and relaive o a buyer’s income. Te exac amoun

ha can be len varies by localiy bu has a naional ceiling ha canno be sur-

passed. For high-cos areas such as Washingon, D.C., he cap is a he naional

maximum o $625,500; or he lowes-cos areas, he cap is $271,050.57 In addi-

ion o hese maximum limis, he FHA also limis morgage sizes based upon heamily’s deb-o-income raio. Tis es looks a all debno only he morgage

amoun. In general, FHA will no allow a morgage in which paymens exceed 31

percen o a amily’s income or where he combinaion o he morgage and oher

deb exceeds 43 percen o income.58

Te higher educaion marke recenly incorporaed a similar concep o deb-o-

earnings raes or loan eligibiliy hrough a regulaion known as gainul employmen.

Issued by he U.S. Deparmen o Educaion in 2014, i requires career-oriened

programs o ensure ha graduaes who received ederal aid have deb paymens

ha are equal o or less han 8 percen o heir annual income. Programs ha can-no mainain his hreshold risk losing access o ederal suden aid. Te difference

beween gainul employmen and he FHA’s morgage process, however, is ha gain-

ul employmen looks a he resuls afer he ac o ensure debs were no oo high,

while he FHA simply would no have insured he loan a he ouse.

Even ouside o he gainul employmen conex, he upron affordabiliy require-

mens considered by he FHA could be implemened in wo oher ways in he

suden loan programs. Firs, affordabiliy benchmarks could be used o esablish

risk-sharing requiremens, in which colleges would be on he hook or a larger

share o unaffordable deb burdens ha become delinquen, deaul, or are no

repaid. Second, or parens who ake ou ederal loans, affordabiliy requiremens

could be similar o hose used or housingparens would be unable o borrow

amouns or which heir monhly paymens would be greaer han a cerain share

o heir income. Regardless o srucure, adding hese requiremens would allow

sudens and parens o acquire some deb, while prevening colleges rom bur-

dening hem wih oo much deb wihou sharing he risk.

Imporanly, limiaions on deb based upon he suden would no work in higher

educaion. Te undergraduae loan limis already serve as a good check on preven-ing egregious deb levels in absolue erms. In addiion, mos sudens lack he credi

or income hisory o gauge proper limis. Unlike a morgage, where he purchaser’s

income is likely o say consan or grow a a relaively sable rae, someone who ges

a good college educaion should expec o see airly seep income increases in he

years afer graduaion. Te resul is ha he maximum amoun o reasonable deb

upron may end up being easily repaid afer a ew years in he workplace.


24/44


Mortgage affordability after the financial crisis

Addiional new rules relaing o morgages provide anoher way o add affordabil-

iy proecions o suden loans. Tese rules esablish a qualified morgage, which

encourages lenders o offer loans wih cerain proecions and reasonable erms.

Te idea arose rom he morgage crisis, when i became clear lenders did no bearenough responsibiliy or offering unaffordable loans o homebuyers. o address

his issue, Congress passed he Dodd-Frank Wall Sree Reorm and Consumer

Proecion Ac in 2008. Te bill required all crediors o make a reasonable, good-

aih deerminaion o a consumer’s abiliy o repay a homeowners’ morgage.

In 2013, he Consumer Financial Proecion Bureau issued a rule urher imple-

mening abiliy-o-repay requiremens and esablished he concep o a qualified

morgage.59 Te basic idea is o creae greaer legal proecions or lenders ha

offer affordable producs wihou undesirable eaures, while raising he risk or

companies whose loans do no mee hese erms.

Te mos imporan requiremen or a loan o be a qualified morgage is ha i

akes ino consideraion a buyer’s abiliy o repay he loan.60 Tis analysis mus

consider no only he cos o he morgage bu also oher debs a buyer holds. o

be a qualified morgage, he paymens on he loan plus oher debs canno exceed

43 percen o he buyer’s preax income.61 Tis provision discourages lenders rom

offering excessive amouns o deb o people who likely canno afford hem. In

addiion, he loan isel canno have risky eaures associaed wih decepive prac-

ices, such as emporarily low ineres raes ha will rise over ime, hidden ees, or

mandaory arbiraion clauses.62

Wheher a lender offers a qualiying morgage maters or how a cour assesses

a company’s compliance wih abiliy-o-pay sandards. Offering a qualified

morgage gives a lender some proecion agains consumer lawsuis ha allege

he lender violaed abiliy-o-repay requiremens. Lenders ha offer low-cos

qualified morgages have a sae harbor. Tis means ha in he case o a lawsui,

he cour presumes he lender has complied wih abiliy-o-repay-requiremens,

providing he lender wih greaer leverage in he case.63 Tis does no mean ha

lenders canno issue nonqualified morgages, bu i does provide an encourage-men or offering hese debs.


25/44


Applying he concep o qualified morgages o suden loans has ineresing

implicaions or higher educaion affordabiliy. In 2013, he Cener or American

Progress discussed his issue in he conex o privae suden loans.64 Bu he

idea could work or colleges, as well. For example, he ederal governmen could

esablish rules ha affec how much risk an insiuion has o bear based upon he

amoun o deb i offers cerain sudens or he raio o suden deb o poscollegeincome. Schools ha say below a se hreshold would have o share in litle o no

risk, while hose above he benchmark would bear more risk. Te basic idea would

be he sameinsiuions ha do well by sudens on specific clear merics would

have greaer proecions han hose or whom excessive deb is he norm.

Lesson #5: Make affordability a shared goal

Te ederal suden aid programs are unilaeral invesmens. Te ederal govern-

men covers he enire cos o he benefis i provides o sudens via insiuions.Operaionally, his makes he programs easier o adminiser because hey do no

require relaionships in every single sae. I also ensures ha sudens receive

equiable benefis regardless o where hey live.

A unilaeral approach o higher educaion affordabiliy also has significan draw-

backs or he ederal governmen. In paricular, i means he ederal governmen

canno leverage parnerships wih saes and insiuions o make hem do heir

par in keeping coss down. Insead, when saes and insiuions cu heir own

unding, he ederal governmen seps in as a saey ne or sudens. Te addi-

ional grans and loans he governmen provided when saes aggressively slashed

unding during he Grea Recession helped millions o sudens afford educaion

ha would oherwise likely have been oo cosly. Unorunaely, by placing no

requiremens on he saes and insiuions ha also benefi rom ederal aid, he

governmen pus isel in a posiion in which is programs can be aken advanage

o, allowing saes and schools o supplan heir own unding. When his occurs,

he coss o subsidizing higher educaion direcly ranser rom he sae and insi-

uion o he suden and he ederal governmen.

o be clear, he issue a sake here is disinc rom he argumen ha some makeabou how ederal suden aid direcly leads o uiion increases. Ta heory,

known as he Bennet Hypohesis, alleges ha insiuions inenionally raise prices

as a way o capuring increases in financial aid revenue. 65 Tis ormulaion is a mis-

undersanding o he dynamics behind higher educaion unding. For one, ederal


26/44


suden aid has no risen nearly as much as uiion. Undergraduae ederal suden

loan limis have no increased since 2008. And beore ha, hey had no changed

since 1994 or anyone oher han firs-year sudens.66 Te Pell Gran does increase

each year by a ew dozen dollars, bu his is ar below he annual rise in uiion and

is no available or all sudens. While higher educaion ax benefis also increased

by abou $700 since 2008, his is sill well below he rise in uiions.67

Raher, he issue a play is a quesion o who should be responsible or subsidiz-

ing public higher educaion. For decades, he answer o his quesion was he

saes, wih he ederal governmen providing some suppor or he lowes-income

sudens, and everyone else paid ou o pocke. While sae subsidies sill exis

oday, hey are significanly diminished. In many ways, his is he same patern

ha repeas isel elsewhere in he social saey ne, where saes have decimaed

unding or goods and services such as suppor or low-income amilies.68 In he

case o higher educaion, however, he ederal governmen has done more o assis

sudens and fill he gap creaed by declines in sae unding. Te end resul o hisis a cos shif away rom saes and oward sudens and he ederal governmen.

Tus, raher han being he engine o sae cus, ederal suden aid has become he

saey ne ha so many oher pars o he social benefi srucure lack.

While having he ederal governmen fill in he unding gaps lef by sae cus is

no ideal, i is paricularly problemaic in higher educaion because much o he

backfilling is done wih deb. Paying or college wih loans raises he long-erm

price o college or sudens since hey mus repay wha hey borrow plus ineres.

Deb also increases he risk o atemp college. I sudens do no complee college

or atend a poor-qualiy program, hey may no receive he income gains necessary

o make he loan proposiion work. For hese people, deb can become unmanage-

able, leading o deaul and dire financial consequences such as wage garnishmen.

Forunaely, he significan size o he ederal invesmens in possecondary educa-

ion presens an opporuniy o change hese dynamics. Moving away rom ederal

financial aid as a unilaeral invesmen and oward a sysem ha creaes shared

requiremens beween saes, insiuions, and he ederal governmen presens

he bes opporuniy or guaraneeing possecondary affordabiliy. Raher han

reaing financial aid as a price driver, policymakers need o recognize is place ashe naion’s single bes ool or keeping coss reasonable.

Tere are several ways he ederal governmen could use is financial aid programs

o play a more acive role in affordabiliy. In paricular, wo examples rom he

healh care coverage and insurance space sand ou: Medicaid and he employer

mandae rom he ACA.

Rather than

treating financia

aid as a price dr

policymakers

need to recogn

its place as the

nation’s single b

tool for keeping

costs reasonable


27/44


Shared affordability through Medicaid

As noed earlier, saes ha paricipae in Medicaid are required o cover cerain

populaions and share in he expense o coverage. Te way his cos sharing acu-

ally works is as an open-ended reimbursemen program. Te sae spends money

on allowable Medicaid expenses, and hen he ederal governmen reimburses paro he cos. Imporanly, here is no hard cap on spending. Saes ha are willing

o expand heir eligibiliy and hus provide beter benefis o more people receive

addiional ederal suppor o make i workable.

A sae’s reimbursemen rae under Medicaid is dicaed primarily by he Federal

Medical Assisance Percenage, or FMAP, rae, hough addiional ormulas may

apply under cerain excepions.69 Te FMAP ormula akes ino accoun he

relaionship beween a given sae’s per-capia income and naional per-capia

income.70 By law, he FMAP canno be lower han 50 percenmeaning ha

he ederal governmen evenly shares he cos o every expense wih a saeorhigher han 83 percenmeaning ha or every $1 he sae spends, i ges all

bu 17 cens back.71 Mississippi had he highes FMAP rae in 2015 a 73.58

percen, while 13 saes had a rae o 50 percen. 72

Te FMAP srucure shows a way o share he coss o affordabiliy across saes

ha have radically differen levels o affluence. Raher han holding every sae

o idenical sandards, he varying reimbursemen rae allows he ederal govern-

men o pick up a larger share o he coss or saes ha canno afford o pay, while

providing less assisance o hose wih more wealh. Tis is essenially he same

way he ederal governmen approaches benefis or individuals, wih he amoun

o help declining as wealh rises.

Te paymen srucures or Medicaid and ederal higher educaion benefis cre-

ae very differen incenives. By reimbursing saes or coss incurred, Medicaid

encourages saes o be more generous, bu i also makes hem share he burden

o addiional coss as a way o discouraging overly profligae spending. Tis ype

o unding model could be one way o ge saes o reinves in higher educaion. I

bears some similariy o an idea suggesed by he American Associaion o Sae

Colleges and Universiies, which would creae a new ederal unding sream harewards saes wih addiional dollars, depending on how much hey spend on a

per-suden basis.73 As saes spend more, hey would receive addiional dollars,

creaing a similar incenive or greaer generosiy.


28/44


I is possible o incorporae similar principles rom he Medicaid program ino

ederal suden aid even wihou a new unding sream. Congress could change he

programs o inroduce a more ormal role and se o expecaions or saes. Under

his srucure, saes would have o commi o making higher educaion affordable

or Pell Gran recipiens and share in he cos o doing so. Similar o Medicaid, his

srucure would require saes o ocus effors on supporing he lowes-incomerecipiens hrough a shared unding model.

While he Medicaid model represens a collaboraive approach o ackling afford-

abiliy hrough increased unding, oher healh care examples sugges ways o

address he same challenge wih accounabiliy. Tis would be paricularly effecive

or hinking o ways o make insiuions play a greaer role in offering affordable

producs. Recognizing ha no all schools have heir own aid o use or se heir own

uiion, saring accounabiliy wih colleges could also be a way o spur sae acion.

ACA’s employer mandate

Te ACA’s employer requiremens or healh insurance coverage provide an

example o how accounabiliy can creae shared affordabiliy. Basically, he ACA

requires employers bigger han a cerain size o offer employees coverage o a

minimum benefi and cos level. Tese condiions apply only o companies ha

employ he equivalen o 50 or more ull-ime employees.74

Te shared responsibiliy provisions serve as a way o hold larger employers mon-

earily accounable or no offering accepable healh care coverage. o avoid hese

penalies, an employer’s plan mus provide minimum essenial coverage, a leas 60

percen o benefi coss.75 Employers mus also offer coverage o a leas 95 percen

o heir ull-ime employees and ensure he premiums do no exceed 9.5 percen o

an employee’s annual income.76 Meeing hese condiions is imporanhe penal-

ies are riggered i even one ull-ime employee receives a premium ax credi.77

Tis ramework esablishes a srong message ha employers have a responsibiliy

o keep heir coverage affordable and heir employees off he individual marke.

Failure o do so can have significan financial consequences. Employers ha dono offer coverage o enough employees are assessed a penaly equal o $2,000

muliplied by heir number o ull-ime employees. Addiionally, i an employer

offers unaffordable coverage ha resuls in an employee receiving a premium ax

credi, he fine increases o $3,000 per person. Tese fines are no based on he

number o employees geting a credi or no geting coverage; raher, a single unac-

cepable insance resuls in a cos based upon all ull-ime employees.78


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Te requiremens or employers o provide insurance coverage can be applied o

accounabiliy or colleges. Insiuions ha lead sudens ino unaffordable levels

o deb are ailing in heir responsibiliies he same way employers wih unac-

cepable insurance coverage do. Bu insead o fining colleges, insiuions wih

unaffordable deb levels could be prohibied rom paricipaing in he ederal aid

programs or required o share in more o he risk when borrowers wih excessiveloan balances sruggle. Te ormer case would be similar o expanding he exising

gainul employmen regulaion ha holds career raining programs accounable

or he debs o graduaes versus heir earnings. In he later, i would mean ha

he more unaffordable he deb levels become, he more an insiuion would pay

o he ederal governmen each ime a borrower sruggles.

Te benefi o he risk-sharing approach is ha insiuions would have o conrib-

ue unds only i elevaed deb levels became problemaic. Tis proecs insiu-

ions wih good oucomes rom acing sancions while sending a srong signal

abou he connecion beween deb and perormance. An iniial ocus on peror-mance also means penalies could be inensified over ime.

In esablishing a risk-sharing sysem, he ederal governmen should consider

he choices abou differeniaed accounabiliy ha are presen in he ACA. For

insance, a risk-sharing sysem should draw disincions in requiremens based

upon he size o he insiuion, including he number o borrowers and amoun o

deb received. Tis proecs he smalles insiuions because i may no be easible

o expec rom hem he same resuls as large universiies.

Regardless o wheher hrough a reimbursemen-syle reward or risk-sharing

accounabiliy, he lessons rom healh care demonsrae one srong lesson:

Affordabiliy is oo complex a problem o rely solely on soluions rom he

ederal governmen. I will be impossible o lower prices, increase value, and

keep deb levels in check wihou creaing incenives or everyone involved in

affecing hose resuls.

Affordability is

too complex a

problem to rely

solely on solutio

from the federal

government.


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Potential downsides of affordability

Te lessons illusrae five useul sraegies or ackling higher educaion affordabil-

iy. Tis includes relying on clear benchmarks or deermining how much assis-

ance o provide and creaing shared responsibiliy or keeping benefis in reach.

Tis does no, however, mean every social suppor program rom oher secors has

a perec srucure ha should be adoped in ederal aid programs. In ac, looking

closely a oher programs raises several concerns ha mus be hough hrough

beore making changes in he suden programs: ensuring benefi levels and und-

ing are sufficien o avoid raioning, addressing all coss ha migh be barriers oaffordabiliy, requiring amily conribuions ha recipiens believe are manage-

able, and acknowledging ha supporing only producs and services ha mee

cerain requiremens can be difficul i hey change over ime.

Concern #1: Unavailability undermines affordability

Achieving affordabiliy is no jus abou providing sufficien benefis or an

individuali requires providing sufficien suppor or everyone who needs i.

No assising enough qualified individuals can undermine he goals o a program

because i means recipiens will no be cerain o geting he help hey need.

Te Pell Gran ares exremely well in erms o availabiliy. Any suden who

applies or aid and mees he eligibiliy erms is guaraneed o receive suppor.

Tis is rue wheher he suden is he firs or he 8,000,000h person o apply.

Tis dependabiliy is crucial or building rus in he program and convincing

young amilies hey will receive help paying or college.

Tis concern o availabiliy wihin affordabiliy also relaes o where recipiens canacually use heir benefis. For insance, a program ha covers all eligible individuals

bu les hem paricipae only a sies ha are geographically disan is no really an

affordable program. Afer all, lower-income individuals may no be able o afford he

ime and money needed o ge o he places where heir benefis are acceped.

Achieving

affordability

requires providin

sufficient suppo

for everyone wh

needs it.


31/44


Te issue o local availabiliy is a paricular concern in he Medicaid program.

While Medicaid requires saes o provide recipiens some reedom o choose

among differen healh care providers, beneficiaries can have rouble finding a

docor or denis willing o serve hem.79 Being unable o acually use Medicaid

benefis can weaken is goal o keeping individuals and amilies healhy.

Te ederal aid programs, however, excel a having opions or sudens.

Financial aid can be used a any o he more han 7,000 paricipaing colleges,

as long as he insiuion acceps he suden.80 Recipiens can use heir benefis

o atend colleges in oher saes, whereas Medicaid covers coss in oher saes

only under cerain circumsances.81

Ta said, he acual abiliy o sudens o choose among many insiuions may

be oversaed. In general, poorer sudens are much more likely o choose higher

educaion insiuions close o heir home, especially i hey atend a commu-

niy college.82 Similarly, adul or working sudens who already have esablishedproessional or amily lives are unlikely o pursue possecondary opions ha

are ar away. And even seting aside geographic concerns, insiuions ha cos

more han he available benefis may be so ou o reach ha hey are no acually

a viable college choice.

In oher cases, ederal benefi programs may no be unded well enough ha

hey are guaraneed o be available or everyone who needs hem. Tis is par-

icularly an issue in he ederal renal assisance programs. I is no uncommon

or a amily o spend monhs and even years on a wailis beore receiving help

hrough hese programs. While ederal renal assisance subsidies currenly help

more han 5 million households, i is esimaed ha figure represens only 25

percen o hose who could be eligible or such help.83 Once amilies ge off he

wailis, he housing where hey can use heir benefis may no be in neighbor-

hoods ha are bes or children.84

Problems wih renal assisance availabiliy will likely coninue o ge worse as

demand or low-income housing has grown while unding or hese programs

has salled in recen years.85 Budge cus semming rom sequesraion in 2013

resuled in millions o ewer dollars available or low-income housing pro-grams and a reducion in he number o amilies assised by he program. While

Congress resored some o he unding in 2014, he program sill does no have

enough money o provide or all amilies ha need affordable housing.86


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All o his suggess ha any rehinking o affordabiliy benefis needs o srike

a balance beween robus choice or he beneficiary and sufficiency o achieve

is inended aims. Te renal assisance programs have clear goals o make sure

benefis are sufficien bu do no pay enough atenion o choice and widespread

availabiliy. Medicaid alls in he middle, wih some hough paid o choice bu

gaps ha need o be filled. In he case o ederal suden aid, here is, arguably, oolarge a ocus enirely on choice wih no consideraion o sufficiency. While here

is no necessarily a perec answer o hese challenges, hey need greaer consider-

aion in he ederal aid programs.

Concern #2: Affordability has multiple elements

Mos discussions abou college affordabiliy are acually ocused on he price

sudens mus pay an insiuion o atend. Bu looking a only hese direc

coss misses a big porion o he affordabiliy challenge. Consider, or example,Caliornia communiy colleges: Tese insiuions are essenially ree or mos

sudens.87 Bu he sudens who go here sill mus find ways o cover heir hous-

ing, ransporaion, ood, and possibly child care o atend. Tese are housands

o dollars in coss and canno be ignored. Afer all, sudens who canno pay o fix

he broken car on which hey rely o ge o school may be a jus as high a risk o

dropping ou as sudens who sruggle academically.

Te ederal suden aid programs parially consider he addiional coss ha mus

be covered o make college affordable. On he posiive side, ederal benefis can

be used o pay or nondirec expenses, such as living coss. Tis allows sudens

who atend a less expensive college o poenially receive more assisance covering

hese necessiies. A he same ime, because ederal college benefis are no con-

neced o any affordabiliy meric, here is no guaranee a suden’s insiuion will

be cheap enough o have money lef over or living. As a resul, sudens’ abiliy o

afford all expenses associaed wih an educaional program varies a grea deal by

where hey happen o live and sudy.

The costs of using health insurance

Te challenge o addressing affordabiliy beyond he direc cos o he iem pur-

chased is paricularly presen in he healh care conex. In his area, he issue is ha

he monhly premiums are jus one healh-relaed cos consumers mus manage.

In the case of

federal student

aid, there is,

arguably, too

large a focus

entirely on

choice with

no consideratio

of sufficiency.


33/44


Ou-o-pocke spending or prescripions or copays or docor visis also need o be

affordable because any plan or which someone can afford he premiums bu no he

per-visi coss proves o be insufficien or care excep caasrophic incidens.

Te ACA ried o address hese addiional affordabiliy challenges hrough wo

provisions. Firs, i capped he ou-o-pocke cos o consumers on he ACAexchange o $6,450 per year or services covered by heir plan; he amily cap is

$12,900.88 Families ha make beween 100 percen and 250 percen o he pov-

ery level have an even lower cap o $2,250 o $5,200.89

Te second provision gave addiional subsidies o increase he acuarial value o

silver plans or low-income people. I does his by increasing he acuarial value so

ha he lowes-income individuals will, on average, pay even less han 30 per-

cen o coss. Someone beween 100 and 150 percen o he povery level canno

be charged an acuarial value or a silver plan below 94 percenmeaning he

individual is responsible or 6 percen o coss. Families wih incomes beween150 percen and 200 percen o he povery level are guaraneed an acuarial value

o 87 percen, while hose beween 200 percen and 250 percen are promised 73

percen.90 Tese requiremens provide a way o urher decrease oher healh care

coss, such as deducibles, coinsurance, or oher paymens.

Tese cos-sharing requiremens also have implicaions or choice. Tey nudge

amilies o pick silver plans because hose who choose less generous opions

such as a bronze planor op-ier opionssuch as a plainum plando no ge

he increase in acuarial value. Tis change does no resric choice, bu i provides

greaer guidance or individuals who may be unsure which plan o choose. Tis

seup also involves danger. A amily ha does no undersand he nudge may end

up making a significan misake, choosing o pay a bi less each monh or a bronze

plan even hough he reduced cos sharing o a silver plan more han offses he

difference in premiums.

In Medicaid, he process o dealing wih addiional coss is more sraighorward.

Under program rules, only higher-income Medicaid paricipans can be charged

monhly premiums.91 And while saes can charge paricipans when hey access

healh care in he orm o copaymens, deducibles, ec., hese amouns mus bekep small, wih poorer individuals charged less. Overall, he paricipans’ share o

coss mus generally say below 5 percen o heir income.92


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Making nonacademic coss affordable in higher educaion is one o he mos

vexing problems acing he secor oday. I is increasingly suggesed ha living

coss canno be ignored when rying o address college affordabiliy and comple-

ion. Bu living coss are also quie high, and expanding benefis o cover all o

hese expenses would be unaffordable. Greaer sandardizaion or consisency in

esimaing he size o hese coss would be a good firs sep. Currenly, collegescan se heir own esimaes o living expenses, resuling in a lo o inconsisency:

Colleges locaed near each oher have come up wih radically differen numbers.93

aking a more raional and consisen approach o hese coss would a leas sar

he process o undersanding wha kind o gaps need o be filled and he possible

sraegies or addressing hem.

Concern #3: Spending requirements

for families must feel affordable

Esablishing affordabiliy benchmarks is imporan or giving amilies a sense o

cerainy abou wha hey will have o pay. I, however, hese hresholds are se oo

high, hey seem so unaffordable ha he cerainy value is los.

A poenial example o his problem already exiss in he ederal suden loan

programs. Righ now, sruggling borrowers are able o reduce heir loan paymens

o no more han 10 percen o heir discreionary income. As a percenage o heir

overall income, his proporion is much lower. Tis is because discreionary earn-

ings represen an individual’s income minus esimaes o necessary expenses such

as housing and ood. Bu i borrowers do no undersand he concep o discre-

ionary income, hen 10 percen may eel ar oo high as a repaymen expecaion.

Similarly, i he amoun o money a amily is expeced o pay ou o pocke is oo

high, hen a guaranee may no eel generous enough o be meaningul. Consider,

or example, a amily ha makes 300 percen o he povery level and receives an

ACA ax credi. Paying a litle more han 9.5 percen o he amily income may

seem affordable in he absrac, bu i ha amily has a lo o addiional deb, hen

i may no be a low enough figure o be workable.

Te challenge o seting hresholds ha seem affordable is urher complicaed by

he ac ha many o he numbers chosen are he resul o poliical calculaions o

wha Congress can afford based on available unds. Tis means a given benchmark

may be less a reflecion o an objecively deermined number and more a realiy o

he lowes ha could be agreed upon.

If the amount of

money a family

expected to pay

out of pocket is

too high, then a

guarantee may

not feel generou

enough to be

meaningful.


35/44


All o his means ha any approach o hreshold seting in higher educaion mus

srive o find clear numbers based upon objecive assessmens o wha amilies can

pay. Missing he mark can weaken he effeciveness o any new benchmarks.

Concern #4: What meets affordability standards can change

Seting affordabiliy goals hrough benchmarks and subsidizing opions ha mee

cerain condiions is one way o ensure ha ederal programs mee heir inended

goals. Bu one challenge wih such an approach is ha opions are no saica

provider ha mees he benchmarks oday migh change and no longer mee he

benchmark omorrow. For insance, a college ha was affordable may raise is

prices, or a high-qualiy program may ge a new owner and no perorm as well.

Making i possible or he opions ha qualiy under cerain affordabiliy san-

dards o change can be good or producs and services ha need o be boughevery year, such as healh insurance. In healh care, because plan premiums gener-

ally change annually, here is no guaranee he previous year’s second-lowes-cos

silver plan will hold he same posiion he ollowing year. Te posiive resul is ha

consumers are encouraged o coninue shopping or affordable coverage, which

encourages greaer compeiion andi is hopedbeter producs or consum-

ers. On he downside, swiching plans could be inconvenien i he plans have

differen neworks o docors and hospials.

Effors a higher educaion affordabiliy would do well o avoid his problem o

changing eligibiliy i a all possible. Sudens atend college only or a ew years,

and ranserring can resul in los academic credis or oher adjusmens ha

make i difficul o graduae on ime. Given hese consideraions, he benefis o

comparison shopping ha come rom changing wha is eligible are more han

ouweighed by he coss o ranserring. Because o his, he bes way o handle

changes in eligibiliy over ime is by applying hem only o new sudens. Doing so

allows sudens o sick wih heir chosen school unil hey finish heir educaion.


36/44


Recommendations

Te ederal invesmen in higher educaion is designed o correc a ailure in

he marke. Wihou governmen suppor, millions o low- and middle-income

amilies across he counry would be unable o access and afford a possecondary

educaion. Te resul would be lower levels o educaional atainmen, a less-

skilled workorce, and depressed economic growh.

A he same ime, he governmen canno ignore he reurn on is invesmens. As

sewards o axpayer dollars, i has a fiduciary responsibiliy o make sure money is well spen and achieves is desired aims. I canno simply spend an infinie amoun

o money o fix he marke ailure in higher educaion.

Unorunaely, he curren consrucion o he ederal aid sysem is insufficienly

concerned wih wha is dollars buy and how saes and insiuions use hem.

As a resul, i becomes ar oo easy or he purchasing power o ederal grans

and loans o be diminished by unabaed uiion increases brough on by reduc-

ions in sae unding.

o fix hese problems, he ederal governmen should build upon he sraegies

already developed o ackle hese same challenges in oher key areas. In paricular,

i should do he ollowing:

Create a guarantee of no- or low-cost

public education for Pell Grant recipients

Pell Gran recipiens are he lowes-income individuals in higher educaion.

Tey simply canno afford o be charged housands o dollars or college andshoulder massive deb burdens. Ye he curren Pell Gran program conains no

proecions o ensure ha even he absolue poores individualshose receiv-

ing he maximum awardhave an expecaion ha he colleges enrolling hem

will charge a reasonable price. Ta needs o change. Much like he ederal healh


37/44


care benefis sysem ses sandards or wha low-income recipiens can pay ou

o pocke, he Pell Gran program should esablish similar requiremens. Tis

should sar wih guaraneeing Pell Gran recipiens can use heir unds o pur-

chase a public in-sae educaion or an amoun ha is equal or close o ree.

Create purchasing guarantees for middle-income students

Jus because someone is no a Pell Gran recipien does no mean hey should

lose any sor o guaranee abou affordabiliy. For hese individuals, heir guaran-

ee should be ramed in erms o knowing ha a reasonable amily conribuion

coupled wih small loans will be sufficien o cover he enire cos o an in-sae

public educaion. Such a sysem mirrors he srucure o he ACA ax credis

middle-income individuals are sill expeced o conribue ou o pocke, bu hey

know ha conribuion will be enough o buy wha hey need.

Require states to meet affordability targets

Te wo recommendaions above will work only i saes do heir par o keep he

gaps ha ederal aid fills a a reasonable size. Doing so means seting expecaions

ha are ied, no o per-pupil spending amouns, bu o he back-end price aced

by sudens afer subracing oher orms o nonederal financial aid and he amily

conribuion. Tis approach gives saes many pahs o meeing he goal. Tey

could increase operaing suppor o keep uiion low; raise financial aid o arge

subsidies o lower-income sudens; pursue innovaive sraegies ha reduce he

expense o providing an educaion; or some combinaion o hese approaches.

Tese requiremens would be concepually similar o he sae relaionship in

Medicaid, in which paricipaing saes would have o mee minimum expeca-

ions or which sudens receive wha kinds o assisance, wih flexibiliy or saes

o be more generous i hey desire.

Hold colleges accountable for excessive loan burdens

Boh he healh care and housing secors recognize he risk o high prices and/or

deb and ake seps o miigae hose challenges. In healh care, his means esablish-

ing penalies or large employers ha provide insufficien coverage. In housing, i

means no providing subsidies or properies ha would be oo expensive relaive o

a recipien’s income or holding lenders accounable or offering unaffordable loans.


38/44


Higher educaion would benefi rom embracing similar conceps. Coll

the case for federal higher education affordability standards

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