Funding Higher Ed

Funding Higher Ed

The Congressional overhaul of federal student aid is a good first step, but true reform of the system will require an effort on the scale of the GI Bill.


When Congress passed bills overhauling federal student aid in mid-July, the rhetoric flew high. House Speaker Nancy Pelosi called them “the single largest increase in college aid since the GI Bill.” But the GI Bill radically transformed college from an elite bastion to a middle-class aspiration, while these long-delayed reforms merely regain some lost ground. Certain provisions in these bills could fundamentally change the way society shares the burden of college costs, but upholding the vision of a true meritocracy will require broader reorganization of student loans and even changes in the way colleges are run.

The bills contain $17 billion to $18 billion in new aid. The need-based Pell grant will increase 25 percent over five years; interest rate reductions and loan forgiveness will make loans more affordable. These benefits are paid for by $19 billion in subsidy cuts to the student lending industry. (Differences in the Senate and House versions have yet to be reconciled; a Bush veto threat looks shaky considering the Senate’s 78-to-18 margin.)

As generous as they sound, these reforms won’t make college as affordable as it was even fifteen years ago. College costs have more than doubled in constant dollars since 1985. Nine-tenths of all high school students recognize the value of a college degree, yet 400,000 forgo enrollment each year because they can’t afford it. Only a third of young people will earn a postsecondary degree. In 2004 two-thirds of graduates had an average $20,000 in student loan debt. Private, unsubsidized student loans have been growing at the staggering rate of 27 percent annually.

Philosophically, the most important innovation is income-based repayment. Under these new rules, those earning below 150 percent of the poverty line–about $15,000 a year for a single person–are exempt. Anyone can limit payments to 15 percent of his or her marginal income above that line. So a single mom earning $27,000 a year and owing $20,000 would pay back $80 a month, compared with more than $200 on conventional repayment plans. Taxpayers would make up the difference. After twenty-five years, all balances would be forgiven.

Income-based repayment works like systems in Northern Europe, Britain and Australia. Right now, the US system is booby-trapped. Those with large student loans and low incomes–whether because of illness, unemployment or career twists–have little recourse. Because of changes loan industry lobbyists won in 1998 and 2005, a few missed payments can turn into the nightmare of default, where debt balloons to four or five times the original balance. Yet there is no bankruptcy protection for either federal or private loans. College students who finance their education with student loans are making an investment that benefits themselves and society. Income-based repayment provides social backup if the personal investment doesn’t pay off–or for those who become preschool teachers, social workers or enter other crucial low-wage professions.

The fattest reform target is the student lending industry, which faces recent scandals over sweeteners it offered college financial aid officers. About 77 percent of federal student loans are administered by lenders in the Federal Family Education Loan Program (FFELP), with federally guaranteed returns and guarantees against default, while the remaining 23 percent comes from the Treasury through the Direct Loan Program. Direct loans are much cheaper for taxpayers, even after these subsidy cuts.

Presidential candidates John Edwards and Barack Obama have gone on record saying the FFELP middleman should be eliminated, the original intent of Bill Clinton when he introduced direct loans in 1993. But some reformers are worried about the ability of the federal bureaucracy to administer an annual $85 billion in student loans. Others, like me, who applaud a broader federal role, are worried about the continued growth of private loans that fly under the government’s radar. I would love to see the end of FFELP and its subsidy buffet. But even if there is no FFELP, financial institutions will continue to offer private education financing because it’s a proven product. It seems, then, that the most efficient use of federal resources is to regulate these loans, offering subsidies to make them cheaper for students and protections to make them fairer.

The compromise proposal that made it into the bills is to treat federally guaranteed student loans like other government-backed securities: Let the market set subsidies through an auction. If banks had to compete for the right to make student loans, presumably subsidies would fall to the lowest rate the market could bear. But auctions are a tricky fix because they could be set up to favor lenders, especially in the Senate version of the bill. The question is whether the public or Congress has the patience to cut through lobbyist propaganda and tame the FFELP monster with truly competitive financing and servicing of loans.

The hottest potato, barely touched in these reforms, is tuition itself. For the first time in federal law, both bills contain provisions to increase scrutiny of colleges that raise tuition faster than the national average, but they are soft. Retired Education Department insider Jon Oberg proposes a stronger federal tack: He wants to make Pell grants contingent on colleges demonstrating that they allocate their own state and institutional funds to the students who need them most.

Well-endowed private colleges, most recently Amherst, are eliminating debt for middle-class students. But controlling tuition costs at the colleges most students attend requires bold state action. A recent proposal from Massachusetts Governor Deval Patrick for free community colleges–a return to the policies of the 1960s and ’70s–is a great example of what’s possible. In the end, however, it’s all about trade-offs. Would you rather fire the new football coach or hike tuition another 10 percent this year? These choices won’t be fun. But expanding opportunity for all demands the kind of courage exhibited back in the days of the GI Bill.

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Katrina vanden Heuvel
Editorial Director and Publisher, The Nation

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