CAPSEE Researchers Propose Major Reforms to Financial Aid Policy
NEW YORK, NY (October 21, 2013) — In an October forum hosted by Brookings Institute’s Hamilton Project, two CAPSEE researchers presented proposals on changing financial aid and student lending policy to improve college outcomes. The proposals, described in detail in two papers released by Brookings Institute, address the issues of low completion rates for Pell Grant recipients and the rising “debt repayment crisis” facing American college students and families.
The first of these papers, co-authored by CAPSEE’s Judith Scott-Clayton and Sandy Baum of the Institute for Higher Education Policy, recommends three major Pell Grant reforms to strengthen student success and on-time completion. The Pell Grant was originally designed as a one-size-fits-all voucher intended to serve the needs of recent high school graduates from low-income families. Since the program’s inception in 1972, it has grown to serve a much larger and more diverse population—9.4 million students now receive $35 billion in Pell Grant funds—even as graduation rates for recipients remain stubbornly low.
Scott-Clayton and Baum propose three major structural reforms to improve outcomes for Pell recipients. First, they propose that the program’s financial support should be supplemented with guidance and support services that have been shown to improve academic outcomes. These services would be tailored to meet the needs of the populations Pell Grants serve: younger, dependent students would receive personalized, technology-assisted outreach and coaching services from initial application through the first year of college; adult, independent students—who often are returning to college to obtain specific career-related credentials—would receive third-party pre-enrollment counseling to help them choose appropriate institutions and programs, as well as one-on-one guidance provided by their institution at least once per year while enrolled.
The authors also recommend that the Pell Grant program simplify the application process by automatically calculating eligibility using information retrieved electronically from tax returns and by making eligibility fixed for several years. Furthermore they argue that eligibility should be based on a simple formula based on income and family size so that students and families can easily calculate in advance what college costs will be. Finally, Scott-Clayton and Baum suggest strengthening incentives for student effort and completion, including larger grants for students who take more credits than the current Pell maximum of 24 per year, and small monetary bonuses for on-time completion.
CAPSEE’s Susan Dynarski, in a paper co-authored with University of Michigan’s Daniel Kreisman, argues that contrary to the popular narrative, we have a college loan repayment crisis rather than a debt crisis, and proposes a simplified system to replace the array of repayment options currently available. Student-loan debt has mounted to $1 trillion, and 21 percent (7 million) of student loans are in default. Dynarski and Kreisman point out the huge returns to a college education belie the argument that the costs of student borrowing are out of line with the value of attending college: Even for students who do not complete college, lifetime gains are about $100,000, whereas more than two thirds of students borrow less than $10,000 and 98 percent borrow less than $50,000.
The authors argue that the root cause of growing default rates is not the amount of debt, but a repayment period that is restricted to the first ten years of borrowers’ working lives, when income tends to be lowest. Instead, the authors propose a progressive system of loan payments pegged to earnings that—like social security contributions—are automatically deducted from paychecks. Instead of the fixed, ten-year period, borrows would have up to 25 years to pay off their loans.
According to the authors, both proposals require minimal to no additional spending. Dynarski and Kreisman contend that their proposal could save money by reducing defaults, cutting the costs of loan servicing by moving loan servicing from private loan companies to the federal government, and eliminating the student-loan interest deduction and in-school interest subsidy.
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