The writers over at the New America Foundation released a report suggesting reforms of federal financial aid. For those of us who haven’t had a chance to read the full thing yet, they helpfully provided a blog post summarizing their recommendations, which is what I’ll be (mostly) reacting to here. Below are a few of their recommendations, followed by my commentary.
“Restore the ability of borrowers to discharge private student loans in bankruptcy”
I whole-heartedly agree. As I wrote recently, “we [currently] have a situation in which private student loans do not have safeguards for borrowers, but do have the safeguards for lenders, which is a recipe for abuse of borrowers (in this case, lender-encouraged over-borrowing). The remedy is to either subject private student loans to the existing loan limits (add borrower safeguards), or to make private student loans dischargeable in bankruptcy (take away lender safeguards).”
“End the Graduate PLUS loan program, which allows for unlimited borrowing by graduate students and discourages prudent pricing on the part of institutions”
“Eliminate the Parent PLUS loan program, which allows parents to borrow up to the cost of attendance. This program can encourage families to over-borrow and provides colleges with a convenient source of funds if they wish to raise their prices”
GradPLUS is a very badly designed financial aid program, and ParentPLUS is structured very similarly. Getting rid of these would be a huge improvement.
“Eliminate the outdated Supplemental Educational Opportunity Grant program that disproportionately benefits wealthy private institutions and use the savings to shore up the Pell Grant program.”
Legacy aid programs like SEOG and Perkins loans should be a huge scandal, but for some reason aren’t. They divvy up federal money among colleges not based on the need of their students, but rather based on past allocations. In practice, this means that old rich schools that enroll few low income students get more money from the government than open access institutions that specialize in educating low income students. Moreover, “the aristocratic colleges have been remarkably successful in defending their unjust perks, so much so that a student at a very high-cost institution is 15 times more likely to receive a Perkins Loan than a student at a lower-cost institution.” Eliminating SEOG, Perkins, and other legacy aid programs would be a huge improvement.
Eliminate “complicated tuition tax breaks, tax-advantaged savings plans, and the student loan interest deduction.”
My one caveat on this one is that I think tax-advantaged savings plans should be kept. But other than that, the tax credits and deductions are better used for other purposes
The Sensible (neither good or bad, but given tight budgets a reasonable choice)
“Limit eligibility for Pell Grants to 125 percent of program length”
“End the poorly targeted subsidized interest rate benefit”
Both of these are sensible ways to increase the bang for the buck of scarce financial aid dollars.
Make the Pell Grant an entitlement
I’ve testified before the Senate that the Pell grant is the crown jewel of federal financial aid programs. Nevertheless, making it an entitlement is a mistake. As Rich Vedder and I wrote
Recall that efforts to reform Social Security by former President Bush, and the more recent efforts of President Obama to cut wasteful spending from Medicare were misleadingly attacked as craven attempts to starve and kill grandma. The lesson is obvious – once a program is made an entitlement, we are stuck with it… the program would be nearly impossible to reform or discontinue. This would lock us into a potentially inferior program long after it has outlived its usefulness, possibly making Pell grants the 21st century equivalent of the mohair subsidy. We like the Pell, but we’re not ready to commit to it for the rest of our lives.
Turns out the mohair subsidy was killed in 2011. For the third time in twenty years. Perhaps I’m just going through The Walking Dead withdrawal, but the way this thing keeps coming back from the dead is starting to scare me.
“Make a Redesigned IBR Program the Sole Repayment Option for Borrowers”
The Income Based Repayment (IBR) is another poorly designed and ill-thought-out financial aid program. To their credit, Jason Delisle and Alex Holt, two of the co-authors of the report, have done yeoman’s work in trying to make IBR better. But they have not succeeded, even though their work showed how disastrous the new IBR program would be before it even took effect. Moreover, the almost unsuccessful fight to end the FFEL program back in 2010 showed just how difficult it can be to reform or eliminate even a federal financial aid program that is almost universally believed to be poorly designed. The lessons I learned from all of this is that if the basic structure of an aid program is flawed, there is very little chance of salvaging it. Problems that are pointed out before the program is in place are ignored (new IBR), and once the program is in place, it develops inertia (and lobbying power) that will take years to overcome if we’re lucky (FFEL). And if we’re not lucky, we end up stuck with it seemingly forever (Perkins). This history suggests to me that rather than trying to reform flawed student lending programs, it is better to start from scratch.
Photo Credit: New America Foundation