Overhauling Student Loans

Karein Weise of Bloomberg Businessweek identifies four proposals for revamping student loans:

1. Right now, many colleges and universities target financial aid resources to attract high-performing students, many of whom are affluent, rather than to students from low-income households. The goal, presumably, is to improve yield and selectivity. And the result is that schools are essentially using Pell Grants to substitute for their own resources. Weise draws on ”Rebalancing Resources and Incentives in Federal Student Aid,” a comprehensive proposal from the New America Foundation’s education policy team, which offers the following correctives: 

Enact a Pell Grant matching requirement for four-year public and private non-profit colleges that enroll a relatively small share of low-income students but charge them high net prices. The goal of the proposal is to put an end to colleges’ financial aid arms war by pushing schools to reallocate their existing institutional aid from merit to need-based aid.

New America also calls for Pell Grant bonuses for four-year colleges and universities that enroll a substantial share of low-income students while graduating at least half of them, as well as Pell Grant bonuses for community colleges that have a high graduation and transfer rate. The goal of the bonus payments is to encourage schools to further reduce the net price paid by low-income students. Among other things, New America also calls for limiting eligibility for Pell Grants to 125 percent of program length, to discourage students from prolonged enrollment. 

2. In “Managing Risk, Reaping Reward: Redesigning Federal Student Loan Policy to Improve Performance in Higher Education,” Stephen Crawford and Robert Sheets describe how federal student loan reform can encourage U.S. colleges and universities to better align the net price of higher education with future incomes. Rather than devote federal student loans solely to broadening access and improving completion rates, Crawford and Sheets call for an emphasis on improving labor market earnings for graduates relative to the cost of attending college, including the opportunity cost. To that end, per Weise, they call for new choice architectures to guide students as they make decisions about how much debt to take on in light of their career aspirations:

[Crawford and Sheets] say current IBR [income-based repayment] options focus too much on the “back end” of student debt—helping students after they have taken on heavy debt. They say federal policy could instead take into account the likely future income of a student when determining how much he or she can borrow in the first place. Australia does this by dividing academic programs into four different “bands” that have different loan limits based on the expected income of graduates and the importance of the studies to national priorities.

The reform agenda outlined by Crawford and Sheets depends on the creation of “a national, open-data platform that can support the large-scale data analytics needed to calculate risk and underwrite loans, provide easy access to the relevant consumer information, and enable effective student-institution matching,” a step that has met with strong resistance from U.S. colleges and universities. 

3. Weise also makes reference to income-based repayment more broadly, a concept that Dylan Matthews ably explored last week in discussing Oregon’s new “Pay It Forward” pilot program.

4. And more radically, she also cites a paper by Sara Goldrick-Rab, Lauren Schudde, and Jason Stampen, all of whom are based at the University of Wisconsin-Madison, which calls for shifting away from student loans and towards direct federal financing of higher education institutions, which would vary according to the need of the student population. Traditionally, the objection to blanket financing of this kind has been that taxpayers at large, including the non-college-educated, would be obligated to subsidize higher education for a relatively privileged population, despite the fact that graduates capture the lion’s share of the benefit. Goldrik-Rab et al. argue that as higher education enrollment becomes more common (the authors suggest that 80 percent of children can expect to be users of higher education in the future, though of course a smaller share will complete their degrees), financing it through taxes becomes a more equitable proposition. The goal of the proposal appears to be to strengthen accountability mechanisms (the federal government would have more leverage over how recipients go about pursuing their educational mission) and also to strengthen the relative position of public higher education institutions and to foster more egalitarian campus cultures. 

My impression is that while options 1, 2, and 3 are broadly compatible, option 4 implies a somewhat different direction for higher education policy. The New America concept of a Pell Grant bonus bears a passing resemblance to the Wisconsin proposal, yet it is more of a supplement to a system still built around individual students. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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