Reimagining what to do with Financial Aid for Today’s College Students

Washington, D.C., Jan. 7, 2013—Days after the U.S. federal government brokered a deal to avoid the worst of the tax increases and spending cuts known collectively as the “fiscal cliff,” the Institute for Higher Education Policy (IHEP) is calling today on federal policymakers along with other actors in the higher education system—including students, institutions, and states—to have “skin in the game” of financial aid reform because all parties can stand to benefit. In its new white paper, Making Sense of the System: Financial Aid for the 21st-Century Student, IHEP outlines 13 federal policy recommendations for improving the financial aid system so that more students can attend and succeed in college, and ultimately earn valuable postsecondary degrees and credentials.

The Making Sense of the System paper presents synthesized information that was gathered from a series of surveys and focus groups—including responses from a mix of thought leaders who represent business, higher education, civil rights, and public policy sectors—to offer a framework of principles that can guide decisions on financial aid design and delivery. Proposed principles focus on the most important goals of financial aid such as increasing student access to postsecondary education, fostering student persistence to a degree or credential, and improving educational equity. In addition, the framework of proposed principles on financial aid reform also helped to provide a set of wide-ranging federal policy recommendations. Those reform ideas include:

Federal Policy Recommendations to Improve Financial Aid Design And Delivery

1. Create a system of early financial aid “accounts” that can leverage family savings and public/private resources.
2. Match family college savings for low-income households through public or employer dollars.
3. Make the American Opportunity Tax Credit fully refundable so it may be utilized by low-income households, and create a pilot program for early delivery of the credit.
4. Communicate potential financial aid awards in a statement, based on Internal Revenue Service information that allows families to plan for the cost of college.
5. Maintain the Pell Grant program as the centerpiece of need-based aid, and make it an entitlement.
6. Provide block grants to states to coordinate institutional student services and public benefits to financial aid.
7. Reform the Supplemental Education Opportunity Grant to provide institutions with money for “emergency” aid to students.
8. Institute a system of loan forgiveness for on-time completion for Pell-eligible students.
9. Tie campus-based aid to student debt repayment levels and degrees awarded, in addition to cohort default rates.
10. Create incentives for performance-based grants.
11. Incentivize that spending be maintained on need-based aid for students.
12. Incentivize pre-tax employer matching for student debt repayment for the first five years after a student has completed college.
13. Make Income-Based Repayment the default option for student loan repayment.

Most importantly, the Making Sense of the System paper assesses trade-offs of the above mentioned recommendations from multiple perspectives to clearly define and determine whether they support success without reducing access, or vice versa. While highlighting the benefits, disadvantages, and unintended consequences of each financial aid proposal, the paper asks: Who is helped or hurt by the proposal? Whose behavior would change? What are the fiscal trade-offs? What is the impact on enrollment or completion goals? What issues arise in implementing the proposal?

“Financial aid has traditionally been designed as a series of isolated policy ideas,” says IHEP President Michelle Asha Cooper, Ph.D. “We feel that rethinking financial aid as a system that helps students at all stages in their educational career, and providing ideas to make that system more equitable for students, could go a long way in ensuring that college is more affordable for students and that more students graduate with manageable levels of debt.”

Making Sense of the System: Financial Aid for the 21st-Century Student is part of the “Reimagining Aid Design and Delivery (RADD)” project—an initiative supported by the Bill & Melinda Gates Foundation that seeks to shift the national conversation on federal financial aid toward ideas that will make college more affordable, while giving students the support and encouragement they need to earn their degree or credential; and seed the field with innovative policies that can make that happen.

To download a free copy of Making Sense of the System: Financial Aid for the 21st-Century Student, visit IHEP’s website at www.ihep.org. For more information about the RADD project, visit the Bill & Melinda Gates Foundation Postsecondary Success website at www.gatesfoundation.org.