Chapter 22: Reform Financial Aid

In its 2006 report, the Spellings Commission on the Future of Higher Education concluded, “The entire financial aid system—including federal, state, institutional and private programs—is confusing, complex, inefficient, duplicative and frequently does not direct aid to students who truly need it.”

The Spellings Commission had it right. There is a bewildering array of financial assistance programs—loan programs, grants, tax free savings plans, tuition tax credits, etc.—each with their attendant problems. Even a reasonably informed student or parent has difficulty knowing more than a small portion of the nuances of the system, and swamped guidance counselors often do not have the time to advise families about all the options. Additionally, there is a huge timing issue. Students typically submit college applications before having any real indication of the amount of expected financial aid. They are applying without really knowing the cost of the program that they would like to participate in.

Additionally, some of the programs encourage cost increases by the college themselves. Tuition tax credits, for example, provide tax savings only if students attend college, increasing the demand for college and thus college prices, defeating some of the benefit of the tax credit.  Student loan subsidies in effect vary with the tuition of the school attended, so the government rewards both the schools who increase fees as well as the students who attend them. Each year, tuition fees nationally rise by, say, six percent, so student loan grants for the following year rise by that amount or more. It is probably true to say that the vast increase in student loans is as much a cause as a consequence of the tuition price explosion in modern times.

Much of today’s financial assistance is a form of price discrimination –charging customers differing amounts for the same service. Net tuition prices vary substantially from the published “sticker price.” While price discrimination actually serves some useful economic purposes, it also causes problems, particularly when students do not know their likely “scholarship” aid at time of application, forcing them to rely heavily on sticker prices. The differential between the sticker and the actual price, as well as the large variation in that differential between individuals, causes student uncertainty and may lead to inappropriate student choices.

Reform of student aid would involve vast reduction in the multiplicity of federal programs, the simplification of the FAFSA form (discussed above), a reintroduction of private competitive servicing of student loans, and  moving to vouchering student assistance instead of institutional subsidies (see below). States need to consider when all-merit based award systems that include very high income students are appropriate, given limited resources.

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Download a summary of the full report, 25 Ways to Reduce the Cost of College (pdf)

View the full report here