Comments on New America’s Financial Aid Reform Plan

In the last few years, there have been a dizzying number of proposals put forth to reform the complex and confusing system of student financial aid in the United States. From a series of 16 proposals released in the 2012-13 academic year through the Gates Foundation’s Reimagining Aid Design and Delivery project to Sara Goldrick-Rab and Nancy Kendall’s proposal for a free two-year public college option to a host of financial aid reforms proposed by the 2016 presidential candidates, there is no shortage of ideas to reform financial aid. (And I’ve got plenty of ideas of my own.)

The newest thoughtful proposal to add to the mix comes from New America’s education team, many of whom have significant experience in state and/or federal higher education policy. In this proposal, “Starting from Scratch: A New Federal and State Partnership in Higher Education,” the New America team proposes completely throwing out the current federal financial aid system and replacing it with a federal/state partnership with maintenance of effort requirements for states and accountability requirements for colleges while requiring colleges and states to cover students’ unmet financial need. Below, I summarize some of the key pieces of the proposal that I like, some that I dislike, and some that require a lot of additional thought.

Things I like

(1) Unlike some of the other financial aid proposals out there, the New America proposal has provisions to go beyond public colleges and universities to cover at least a segment of private nonprofit and for-profit colleges. This is an important recognition, as all colleges that currently receive federal financial aid are public in one sense of the word. A financial aid system that only supports students attending public colleges could result in a stampede to public institutions, which could be a problem in states with historically small public sectors (such as in the Northeast).

(2) Plowing funds currently spent on tax credits and deductions into student financial aid isn’t a new idea (and New America raised it in 2013), but it makes perfect sense. Research has shown that tax credits and deductions have no effect on college enrollment or completion, likely because the money gets to students well after enrollment (assuming they remember to claim the funds on their tax return).

(3) I’m glad to see the New America team questioning the current definitions of both the cost of attendance (COA) and the expected family contribution (EFC). As I’ve shown in research with Sara Goldrick-Rab and Braden Hosch, the non-tuition portions of the COA are determined by colleges and vary drastically within the same geographic area. The EFC has been criticized as being an outdated formula that doesn’t adequately reflect a family’s ability to pay. I’d like to see New America dig in deeper on both of these areas.

Things I don’t like

(1) I’m generally uncomfortable with the idea of ‘maintenance of effort’ proposals that require states to keep a certain level of funding per full-time equivalent (FTE), as the New America plan does. As I’ve written about before, states tend to think about funding in terms of overall funding amounts (not on a per-FTE basis) because they don’t directly control enrollment levels. If this program shifts a larger percentage of enrollment to public colleges, required state funding levels for higher education will rise at the same time states are already legally or constitutionally required to fund other priorities. I also think that maintenance of effort requirements will result in states lobbying Congress to defeat this proposal (and I also think that states would opt out despite the authors’ insistence that it wouldn’t happen).

(2) I don’t like states choosing which colleges could receive financial aid under the partnership model. I would rather see all colleges that meet quality and accountability thresholds receive funding regardless of their state affiliation or tax status. It may very well be the case that fewer for-profits or private nonprofits meet the threshold, but as long as the threshold is justified, I’m fine with that. But excluding all non-public institutions immediately (and at the whim of state policymakers) doesn’t make sense to me.

(3) I’m concerned about getting rid of federal loans to cover the EFC, while simultaneously placing additional regulations on private loans. This could result in students not being able to get access to credit at reasonable interest rates, as private lenders may choose to not offer loans when students can discharge them via bankruptcy. I would much rather see an income share agreement or income-based repayment model encouraged for private loans in this case, as this gives both students and lenders some level of protection.

Unclear

(1) The New America proposal calls for states to have a larger role in holding colleges accountable for their outcomes. This makes sense for colleges that just operate in one state, but is far trickier for colleges that operate in multiple states. If this were to happen, groups like the National Council for State Authorization Reciprocity Agreements (NC-SARA) would become even more important.

(2) I’m concerned that colleges would try to game the funding system on account of the requirement that 25% of students qualify for Pell Grants under the current EFC formula. If a college already has 30% of students receiving Pell Grants and has funding tied to meeting outcomes, it suddenly has an incentive to recruit a few more higher-income students with a higher likelihood of graduation. Research that I’ve done with my Seton Hall colleague Luke Stedrak (look for it soon in the Journal of Education Finance) shows that colleges in states subject to performance-based funding received less Pell funding that colleges not subject to performance funding after controlling for a host of other characteristics. It might be worth tweaking the system to reduce the possibility of gaming.

I’d love to hear your thoughts on New America’s discussion-worthy proposal. Drop me a note or leave a comment below!

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About Robert

I am an assistant professor of higher education at Seton Hall University. All opinions are my own.
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