Federal higher-education policy is in shambles. The strategy of the past 40 years — to increase student aid, watch tuition rise, and increase student aid again — has reached a breaking point. Federal loans flow freely with few questions asked, giving colleges every incentive to raise tuition and enroll more students, but less reason to worry about whether those students learn anything. Tuition at the average public four-year college has nearly quadrupled since the early 1980s, pushing more students into debt. Meanwhile, low completion rates and stagnant wages have left 7 million borrowers in default. Making matters worse, generous loan-forgiveness programs pushed by the Obama administration effectively reward students for borrowing more, not less.
Americans are looking to their leaders for help on this front, and most leaders are providing the same old answers: spend more money, write more federal rules, and hope for the best. Democrats hope to make public college “tuition free” by spending hundreds of billions of dollars in new federal money and placing state institutions under direct federal control, thereby rewarding colleges for years of tuition increases, expanding Washington’s reach, and sticking taxpayers with the bill.
At its heart is an idea proposed by Milton Friedman back in 1955. Rather than issue loans, which require students to pay back a set amount with interest, the federal government would let all eligible students finance their education by agreeing to pay back a small share of their future income. Specifically, the federal government would extend a $50,000 line of credit in a flexible account to high-school graduates who wished to enroll in postsecondary education or training. Students could draw that money down at their own pace (within sensible limits) to pay for their education and would then repay 1 percent of their income for 25 years for every $10,000 they used. Draw down $30,000, pay 3 percent of your income.
That’s a lot better than the deal President Obama enacted in 2010 and touted in his State of the Union Address last week. Under his plan, student-loan payments are capped at 10 percent of income and borrowers see their balances grow with interest. Under Governor Bush’s plan, interest is eliminated altogether. What’s more, student payments would be capped at 1.75 times the original amount they draw down. That makes it fairer than the current system, under which students who borrow the most — those with graduate degrees — reap the biggest subsidies from loan forgiveness.
Bush’s plan demands more of colleges, giving them ’skin in the game’ when it comes to former students’ capacity to pay back into the system after school.
Low-income students would still get Pell Grants on top of the $50,000 in available financing. But instead of learning about their eligibility only after applying to school and receiving a financial-aid award letter, they would under the new plan accumulate grant funding in their accounts over the course of high school, the amounts being based on their parents’ tax returns. Rather than filling out the byzantine Free Application for Federal Student Aid (FAFSA), interested parents of high-school-age kids could elect to have the IRS assess their eligibility when they file their taxes. Using that information, the Department of Education would, after each year of high school, credit an amount of grant money to the account, which could be drawn down only after graduation.
Under the new system, then, a college student would start with a set amount of federal aid in an account that follows him through his career. Students will have incentives to spend wisely and more power to chart their own path.
Why should conservative reformers like the plan? Because it would eliminate the system’s worst-designed programs. First, it would replace the flawed PLUS loan program — which allows parents and graduate students to borrow up to the cost of attendance with no lifetime limit – with a single program that has clear limits. It also does away with generous loan-forgiveness plans that give students incentive to borrow more. Finally, the plan would do away with inefficient higher-education tax benefits that have no effect on college-going behavior, have been shown to inflate tuition, and do little to help low-income families.
The plan also demands more of colleges, giving them “skin in the game” when it comes to former students’ capacity to pay back into the system after school. That means putting colleges on the hook financially for a portion of the credit that alumni fail to repay in a timely fashion. Risk-sharing will encourage colleges to consider their admissions policy, keep tuition low, and maximize the value of their programs. Colleges that charge too much and fail to deliver will have to change or lose their eligibility. Students, too, would have to meet performance benchmarks to maintain access to their aid (as they do today).
Finally, Governor Bush also recognizes that today’s students need a broader array of options to choose from and that the system needs a healthy dose of competition. His plan therefore would enable students to use their federal aid for a broader array of services and providers – short-term job training, prior-learning assessments, apprenticeships, and innovations such as boot camps and online micro-credentials. These new players would not have full access to federal aid but would be reimbursed in amounts based on their performance, keeping taxpayer dollars safe. An abundance of new, lower-cost paths to credit and skills will put pressure on pricier colleges to compete.
Progressives will say this plan isn’t better than “free college.” That’s a good thing. Scarce taxpayer dollars should be targeted to those who need them most, not spread across all students in a universal entitlement. Governor Bush’s plan is a big step in this direction.
— Andrew Kelly and Jason Delisle are higher-education analysts who served as informal advisers to Governor Jeb Bush on education policy.