TO: Rep.

John Kline (R-MN), Chair, Education and the Workforce Committee, United States House of Representatives Sen. Tom Harkin (D-IA), Chair, Committee on Health, Education, Labor, and Pensions, United States Senate Samson Lim, Founder & Executive Director, Scholarship Junkies, LLC February 25, 2013 Reforming Federal Student Aid Policies to Improve College Affordability and Access

FROM: DATE: RE:

Introduction Despite the ever-growing demand for a college-educated workforce nationwide, the increasing costs of tuition and fees are threatening college access and affordability for low- and middle-income students as well as those who would be first in their family to pursue higher education.1 While many of the countrys public colleges and universities have been forced to raise tuition due to dwindling state support, the students with the greatest financial need and uphill challenges to attaining a college education have not been adequately served by existing federal student financial aid programs.2 In his 2013 State of the Union Address, President Barack Obama stated clearly that taxpayers cannot continue to subsidize the soaring cost of higher education and that, in cooperation with the federal government, colleges must do their part to keep costs down.3 With the reauthorization of the Higher Education Opportunity Act (HEOA) looming around the corner,4 it is critical to reform the HEOA to maximize its support for low- and middle-income students pursuing higher education and imperative to ensure that postsecondary educational opportunities for Americas students become more accessible, affordable, and attainable. This memo first outlines the key factors that shape todays discourse of higher education access and affordability issues in the United States. It then provides research and evidence that support the positive impact of reforming the current system of federal student financial aid distribution and delivery on college access and affordability for low-income and first-generation students.5 Finally, the memo discusses two recommendations for how reauthorizing the HEOA with critically needed reforms can help more students particularly those from low-income and firstgeneration backgrounds pursue and persist in postsecondary education. Specifically, this memo calls for: 1) establishing the Pell Grant program as an entitlement program rather than as a discretionary funding item, 2) combining existing, non-Pell Grant financial aid into a state grant that creates a) a guarantee of full college grant funding for low-income students and b) no-interest loans for middle-income students. These recommendations if followed and implemented with clear buy-in and accountability from states, higher education institutions (both public and private), students, and families can make a college education more affordable and attainable for all students and create a more sustainable system for years to come. Background While the United States system of higher education is unquestionably the most celebrated worldwide, its future success and sustainability hinges largely on its ability to keep college costs for students affordable, to provide quality instruction and economic value, and to ensure that postsecondary education in America is accessible for all students. In 2012, however, outstanding student loan debt reached $1 trillion for the first time in United States history, exceeding the combined amount of consumer and credit card debt nationwide leading some to question the value of pursuing a higher education degree.6 The short-term and long-term economic payoffs, however, could not be clearer. As of January 2013, the unemployment rate for those whose highest educational attainment ended with a high school diploma is more than double that of those with a

 bachelors degree (8.1% to 3.7%)7 and, as studies have shown, those with a bachelors degree will earn $1 million more over the course of their lifetime than those with only a high school diploma.8 Broad access to higher education opportunities, however, faces formidable threats and barriers in the form of skyrocketing college costs, dwindling state support for public higher education, and limited federal student financial aid.9 Indeed, over the past 70 years, tuition and fees have grown annually at a faster rate than inflation.10 Federal student financial aid, however, has not kept pace with the rise of college costs and has, in fact, increased at a much slower rate.11 Furthermore, the last twenty years have brought on an explosion in the percentage of student loans that comprises available financial aid, saddling many graduates (and dropouts) with crippling debt.12 As a result, financial concerns pose a significant roadblock for many, particularly low-income students, seeking to pursue higher education over 100,000 high-achieving, low-income high school graduates who are qualified for college choose not to pursue postsecondary education every year.13 In fact, low-income students today attend college at a lower rate than high-income students did over 40 years ago.14 Tellingly, research suggests that, even after accounting for all available grants and loans, low-income students still face significant unmet financial need.15 Yet, studies have also shown that financial aid indeed helps catalyze both academic and social participation of students in college, which have been found to impact their decision to either persist in college or drop out.16 With the reality that more students and families are struggling to find ways to afford higher education today,17 the need to rethink federal student financial aid has been trumpeted nationally by such actors as the Bill and Melinda Gates Foundation, who launched the Reimagining Aid Design and Delivery project in 2012. The policy proposals produced by grant recipients of the Gates Foundations initiative on redesigning student aid have spanned ideas both new and old.18 Noting the stark disparities in college access and persistence between low-income students and their more affluent peers though, the reports as well as conversations happening in communities around the country push for more targeted financial aid strategies to better serve low-income students and simplify the processes for applying for and receiving financial aid to pursue higher education.19, 20 Recommendations While the conversation to ensure mandatory funding for the Pell Grant program or reform other federal student aid programs is not new, it is now well past time to implement innovative ideas for improving and sustaining financial aid policies. Two critical steps include: 1) establishing the Pell Grant program as a true entitlement program rather than as a discretionary funding item, 2) combining existing, non-Pell Grant financial aid into a state grant that creates a) a guarantee of full college grant funding for low-income students and b) no-interest loans for middle-income students. These recommendations will not only allow for more students to successfully pursue higher education but also ensure that they will receive the financial support needed to persist through college and contribute to the economic workforce and civil society as well-educated citizens. 1. Establish the Pell Grant as a true entitlement program to ensure mandatory funding Since its creation in 1972 by Senator Claiborne Pell, the Pell Grant program has been the cornerstone of federal student financial aid.21 At the time, a single Pell Grant could cover most, if not all, of the costs of attending college; however, over the past few decades, the purchasing power of the Pell Grant has shrunk considerably due to the discretionary budget shortfalls the Pell Grant program faces each year during budget appropriation discussions.22 By establishing the Pell Grant program as an entitlement program requiring mandatory funding and increasing the Pell Grant award back to its original proportional amount of college attendance costs, however, Congress could ensure the financial aid of the most needy students seeking to pursue a postsecondary degree.

 With current funding levels, Congress could achieve this by moving the 60 percent of total Pell Grant funding from the current appropriations process side of the federal budget to the mandatory entitlement side of the budget, which currently already covers the remaining 40 percent of total Pell Grant funding. Then, rather than setting aside the Supplemental Educational Opportunity Grant (SEOG) as a secondary grant to Pell (and which disproportionately aids wealthy private institutions), the money saved from eliminating the SEOG could bolster the Pell Grant along with the elimination of tuition tax credits that invariably benefit mainly upper-income students.23 Furthermore, a sliding scale could allow for more middle-income students to become eligible for grant funding and provide some relief that may have otherwise been found through tax credits. 2. Combine existing, non-Pell Grant financial aid into a state grant that creates a) a guarantee of full college grant funding for low-income students and b) no-interest loans for middle-income students Given that states have the greatest influence over the tuition and costs of their institutions through state appropriations for higher education, the consolidation of existing non-Pell grant programs into a federal-state partnership grant program (on top of the Pell Grant) that primarily targets the bottom 40% of family income nationally would represent a paradigm shift in the landscape of college access and affordability.24 As financial aid guru Mark Kantrowitz has written, financial aid is the difference between graduating and dropping out for many low-income students.25 According to Kantrowitzs analysis of 2009 data, 45% of low-income students graduated within six years when less than a quarter of their college costs are covered by grants, while that percentage jumps to 68% when grants cover more than three-quarters of college costs.26 By ensuring that lowincome students could attend college debt-free, full college grant funding could move the graduation rate of low-income students even higher. In addition to boosting student aid though, accountability measures should be implemented that tie the amount of funding received by states through this federal-state partnership grant program to state and institutional efforts to keep college costs low.27 Beyond the implementation of a federal-state partnership grant program, the consolidation of existing federal student loan programs into interest-free loans for middle-income students (or the next 40% of family income nationally) would alleviate some of the financial relief previously offered through tuition tax credits.28 The complex inefficiency of the current system has made it difficult for many students, particularly those from low-income backgrounds, to pursue higher education. As Milton Friedman wrote, [Those who seek higher education] should not be prevented by market imperfections from making the investment when they are willing to bear the costs.29 Additionally, the multiple systems for federal student loan repayment is confusing for students and leaves many borrowers paying more than they may need to under another repayment option.30 Instead, moving to a system where income-based repayment becomes the default option for paying back loans would create greater benefits for more college students and graduates. By shifting the formulas for federal student financial aid to target students most in need, the promise of full college affordability would go a long way to ensuring that more students can pursue the higher education they seek. Conclusion Given the demand for greater postsecondary education attainment in the United States, the need to ensure that all students can access, afford, and persist in higher education has never been greater. Existing federal student aid policies have become overly complex and inefficient in serving the students requiring the most significant support. Rather than allowing states to balance the costs of higher education on the backs of students and families, Congress must reform federal student aid policies to be more student-centered and ensure that the most impactful student aid programs remain well funded and sustained over the long-term. Then, and only then, can the promise of Americas engines of ingenuity be truly accessible, affordable, and attainable for all students. 3

 Endnotes
Michael Dannenberg and Mamie Voight, Doing Away With Debt: Using Existing Resources to Ensure College Affordability for Low and Middle-Income Families, The Education Trust (Washington, D.C.: 2013), p. 2, http://www.edtrust.org/dc/publication/doing-away-with-debt-using-existing-resources-to-ensure-college-affordabilityfor-low 2 Ibid., p. 8. 3 President Barack Obama, 2013 State of the Union Address, The White House, http://www.whitehouse.gov/the-pressoffice/2013/02/12/president-barack-obamas-state-union-address 4 Though the Higher Education Act of 1965 is due for reauthorization in 2013, it is likely that the actual reauthorization still may not occur this year. If Congress does not pass a reauthorization on time, an automatic one-year extension will kick in. In this case, Congress is required to pass legislation allowing for an extension to reauthorizing the HEA. Given this loophole, it could be years before the HEA is finally reauthorizedthe 2003 reauthorization was delayed thirteen times before finally being passed in 2008. Source: Mark Kantrowitz, Reauthorization of the Higher Education Act of 1965, http://www.finaid.org/educators/reauthorization.phtml. 5 The Organization of Economic Cooperation and Developments annual Education at a Glance: OECD Indicators 2012 publication for the United States identified that the odds that a young person in the U.S. will be in higher education if his or her parents do not have an upper secondary education are just 29% one of the lowest levels among OECD countries. See more at J.D. LaRock, Education at a Glance 2012: OECD Indicators (September 2012): http://www.oecd.org/education/CN%20-%20United%20States.pdf. 6 Rohit Chopra, Too Big to Fail: Student debt hits a trillion (Washington, D.C.: Consumer Financial Protection Bureau, March 21, 2012), http://www.consumerfinance.gov/blog/too-big-to-fail-student-debt-hits-a-trillion/. 7 Economic News Release, U.S. Bureau of Labor Statistics, February 2013, http://www.bls.gov/news.release/empsit.t04.htm 8 Bridget Terry Long and Erin Riley, Financial Aid: A Broken Bridge to College Access? Harvard Educational Review, Vol. 77, No. 1 (Spring 2007), p. 39. 9 As the Center for Postsecondary and Economic Success notes, State and local appropriations for higher education have declined significantly between 2000 and 2010by 24 percent in research universities and in masters institutions and by 20 percent in bachelors colleges and in community colleges. Patrick Reimherr, Tim Harmon, Julie Strawn, and Vickie Choitz, Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Completion, Center for Postsecondary and Economic Success at CLASP (Washington, D.C.: 2013), http://www.clasp.org/admin/site/documents/files/Final-RADD-WhitePaper-Feb-2013.pdf. 10 David H. Feldman, Myths and Realities about Rising College Tuition, Student Aid Perspectives (Washington, D.C.: NASFAA, 2012), http:// www.nasfaa.org/advocacy/perspectives/articles/Myths_and_Realities_ about_Rising_College_Tuition.aspx. 11 Mark Kantrowitz, Should More College Financial Aid Be Based on Need, Not Merit? The Wall Street Journal (June 24, 2012): http://online.wsj.com/article/SB10001424052970203370604577265350407194184.html. 12 Andrew Martin and Andrew W. Lehren, A Generation Hobbled by the Soaring Cost of College, The New York Times (May 12, 2012): http://www.nytimes.com/2012/05/13/business/student- loans-weighing-down-a-generation-withheavy-debt. html?pagewanted=all&_r=0. 13 Michael Dannenberg and Mamie Voight, Doing Away With Debt: Using Existing Resources to Ensure College Affordability for Low and Middle-Income Families, The Education Trust (Washington, D.C.: 2013), p. 5, http://www.edtrust.org/dc/publication/doing-away-with-debt-using-existing-resources-to-ensure-college-affordabilityfor-low 14 Ibid., p. 5. 15 Bridget Terry Long and Erin Riley, Financial Aid: A Broken Bridge to College Access? Harvard Educational Review, Vol. 77, No. 1 (Spring 2007), p. 42. 16 Alberto F. Cabrera, Amaury Nora, and Maria B. Castaeda, The Role of Finances in the Persistence Process, Research in Higher Education, Vol. 33, No. 5 (1992), p. 590. 17 CollegeBoard Policy & Advocacy Center, Trends in College Pricing 2012, p. 9, http://trends.collegeboard.org/sites/default/files/college-pricing-2012-full-report-121203.pdf. 18 Kelly Field, Gates Foundation Offers Ways to Simplify Student Aid, The Chronicle of Higher Education (February 18, 2013): http://chronicle.com.ezproxy.cul.columbia.edu/article/Gates-Foundation-Offers-Ways/137347/. 19 Allie Bidwell, Tax-Based Aid Should Be Redirected to Low-Income Students, Report Says, The Chronicle of Higher Education (February 20, 2013): http://chronicle.com.ezproxy.cul.columbia.edu/article/Tax-Based-Aid-ShouldBe/137405/.
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Beckie Supiano, Condense and Simplify Federa Aid Progarms to Help Students, Group Suggests, The Chronicle of Higher Education (February 22, 2013): http://chronicle.com.ezproxy.cul.columbia.edu/article/CondenseSimplifyFederal/137509/. 21 Stephen Burd, Kevin Carey, Jason Delisle, Rachel Fishman, Alex Holt, Amy Laitinen, and Clare McCann, Rebalancing Resources and Incentives in Federal Student Aid, New America Foundation (Washington, D.C.: 2013), p. 4, http://newamerica.net/sites/newamerica.net/files/policydocs/NAF_Rebalancing%20Resources%20FINAL.pdf. 22 Ibid., p. 4. 23 Ibid., p. 4. 24 Michael Dannenberg and Mamie Voight, Doing Away With Debt: Using Existing Resources to Ensure College Affordability for Low and Middle-Income Families, The Education Trust (Washington, D.C.: 2013), p. 10, http://www.edtrust.org/dc/publication/doing-away-with-debt-using-existing-resources-to-ensure-college-affordabilityfor-low. 25 Mark Kantrowitz, Should More College Financial Aid Be Based on Need, Not Merit? The Wall Street Journal (June 24, 2012): http://online.wsj.com/article/SB10001424052970203370604577265350407194184.html. 26 Ibid. 27 The idea behind tying federal student aid to state and institutional investments in higher education is to curb the disturbing trend of enormous annual tuition increases. While evidence seems to refute a causal relationship between increasing federal student financial aid and tuition increases (see Mark Kantrowitz, Wall Street Journal, June 24, 2012), the goal of implementing accountability measures is to prevent a high-tuition, high-aid model that would cause a race to the bottom for most students by pricing out students. A more common-sense approach might be pegging annual tuition increases to the Consumer Price Index (the governments measure of inflation), which has been proposed in Washington state by Washington State University president Elson Floyd (see Shawn Vestal, The Spokesman-Review, October 10, 2012: http://www.spokesman.com/stories/2012/oct/10/shawn-vestal-floyds-tuition-plan-for-wsu-overdue/). 28 Michael Dannenberg and Mamie Voight, Doing Away With Debt: Using Existing Resources to Ensure College Affordability for Low and Middle-Income Families, The Education Trust (Washington, D.C.: 2013), p. 10, http://www.edtrust.org/dc/publication/doing-away-with-debt-using-existing-resources-to-ensure-college-affordabilityfor-low. 29 Milton Friedman, Capitalism and Freedom (Chicago, IL: The University of Chicago Press, 1955), p. 150. 30 William R. Doyle, A New Partnership: Reshaping the Federal and State Commitment to Need-Based Aid, The Committee for Economic Development (Washington, D.C.: 2013), p. 16, http://www.insidehighered.com/sites/default/server_files/files/A%20New%20Partnership%20Financial%20Aid_Rep ort.pdf.
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