Creative solutions to higher education finance, part 1

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Article Highlights

  • Since 1972, despite massive changes to higher ed, fed fin aid programs look virtually the same

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  • It's time for new ideas for higher ed finance, incl human capital savings accounts

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  • Like Health Savings Accounts, human capital savings accounts would help students invest wisely in higher ed

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The world of postsecondary education has changed tremendously since the early 1970s. In 1972, about a quarter of 18-24 year olds enrolled in college; thirty years later, enrollment rates had climbed to 40 percent. The number of non-traditional students—part-time students; adults who are balancing work, family, and school; and so on—has also ballooned, and these students now outnumber the “traditional” undergraduate that lives on campus at a four-year college. College also costs about three times what it used to, even after adjusting for inflation.

In other words, we are now enrolling far more students, of a vastly different make-up, and at a much higher cost than we did 40 years ago—and yet federal financial aid programs look virtually the same as they did in 1972. Sure, policymakers have layered new programs like tax credits and parent loans on top of the basic grants and loans born a half-century ago, and tweaks to eligibility and benefit levels have changed the size and scope of the programs.

But the basic approach to financing college students remains unchanged: students choose a college and apply for financial aid, and the government provides need-based grant and loan money to subsidize the cost of attendance.

The problem is, these programs aren’t working as intended. Student loan debt, delinquencies, and defaults are at all-time highs, but tuition continues to climb much faster than inflation. Federal policymakers invested record amounts in the Pell Grant program over the past five years, yet its purchasing power has never been lower. Most discouraging: after a half-century of investing in federal financial aid, the gap in attainment between low-income and high-income students has actually grown over time.

The system’s troubles have not gone unnoticed. Unfortunately, most of the “solutions” proffered range from the pedestrian to the problematic to the downright perverse. Tinkering with Pell Grant eligibility, student loan interest rates, and repayment plans is all fine and good, but these changes leave existing incentives intact. Grander schemes to change those incentives have also emerged, like the President’s plan to give out financial aid money on the basis of how accessible, affordable, and successful colleges are. But it’s not clear exactly how this performance-based funding system would bend the cost curve back.

More troubling are the truly bad ideas—giveaways cloaked as “reform”—that only exacerbate the problem. Senator Elizabeth Warren proposed letting students borrow at the rate the Federal Reserve charges to banks, a change that would encourage even more students to take on debt. And despite tough rhetoric on college costs, the Obama Administration has expanded a shortsighted income-based repayment policy that bails out students whose choice of college or graduate school doesn’t pan out.

These ideas certainly won’t make college more “affordable,” and will likely do the opposite.

It’s time to think more creatively about higher education finance. That means new answers to basic questions about how aid money is given out, how it’s paid back, and who pays for what. Last June, my colleague Sara Goldrick-Rab of the University of Wisconsin-Madison and I released a series of papers by top researchers designed to encourage this kind of thinking. Sara and I don’t agree on much, but we do agree that the status quo needs to change.

I wanted to toss out three additional ideas that didn’t make it into the papers here. We’ll look at one today and two more tomorrow.

Human Capital Savings Accounts

The first idea is to use some existing federal and/or state funding to create Human Capital Savings Accounts (HCSAs) that would be portable and would follow qualified students throughout their lives.

Currently, student aid is awarded in two ways. Some is disbursed to degree-seeking students on a semester-by-semester basis to subsidize the cost of attendance, and some is credited to students and families when they file their taxes. If you are eligible for need-based grant aid, the feds deliver a chunk of aid directly to the college after you register for classes, thereby reducing your tuition bill. Tax benefits come long after the tuition bill has been paid. Under this model, the more semesters you sign up for, the more benefits you receive.

While there is a limit on how many semesters (12) students can access Pell Grants, it is not as though students have an overall “benefit balance” from which tuition expenses are debited. If you sign up for classes, you get a small dose of the total aid you’re eligible for. Likewise, unused grant money does not roll over and accumulate from one semester to the next. This means there is little incentive for students to enroll in courses that cost less than what the government provides.

There’s also no flexibility in how to allocate those aid dollars. You couldn’t, for instance, spend a fraction of it on inexpensive general education courses before using the bulk of it for specialized courses in your major. Finally, if you wanted to take some classes to improve your skills but did not want to go all-in for a degree, you wouldn’t be eligible for a federal grant at all.

In some ways, this approach is not unlike the way traditional health insurance plans work. Doctors provide patients with a service, the price of which is subsidized by a health insurance company. Because patients only pay a fraction of the costs directly, there is less pressure to shop around for the most affordable care.

High Deductible Health Plans (HDHP) and Health Savings Accounts (HSAs) attempt to change these incentives. Under these plans, consumers pay a larger share of their medical expenses using tax-advantaged and employer-subsidized savings accounts. Health savings are portable across jobs, and funds roll over and accumulate over time. In theory, this system should encourage patients to be more cost-conscious. Savvier shoppers should in turn compel providers to compete on price and quality.

These plans are only about a decade old, but research suggests that consumers with HSAs spent less on healthcare and used fewer services. To be clear, much of this reduction was due to consumers foregoing some medical care rather than shopping around—an immediate concern for any attempt to import this logic to higher education. However, it’s also possible that patients spent less money on the kind of additional visits and tests that inflate bills when the insurance company is paying.

We wouldn’t want to graft this model onto higher education directly, but it’s worth thinking through what it might look like. A human capital savings account might work like this: rather than hand out aid money semester by semester, federal or state governments could set aside some portion of the total amount of aid that students would be eligible for over their college career—let’s say two years to start, with opportunities for more based on performance—and place it in personalized savings accounts. These accounts could only be used for educational expenses, and students would gain and maintain access to their account by meeting academic benchmarks while in high school and college. The amount of public “seed money” would depend on a student’s income, and any private contributions would be tax deductible.

Once a student graduated high school, investments in education would be debited from the account balance, leaving consumers with a choice as to how they want to allocate the money. Some might opt for inexpensive general education and introductory courses in order to spend more on upper division courses later on. Others might choose to spend the majority of their funding on a two-year degree program and revert to loans for expenses beyond that. Any funds left over would follow the student and could be rolled over into a retirement account or into a child’s college fund, providing incentive to spend wisely.

This approach makes a few things possible. First, it would provide an opportunity to notify students early on about the benefits they could be eligible for if they work hard and fulfill requirements. So-called “Promise Programs” work under a similar logic, providing free college tuition to local students who qualify. Early evidence shows that the implementation of the Kalamazoo Promise had positive effects on high school credit accumulation and the GPAs of African-American students.

Second, it provides students and their families with a sense of ownership and control over their aid, which could encourage them to invest more carefully. When unseen aid money reduces the cost of attendance like manna from heaven, there is less reason to think hard about whether those funds are going as far as they could. When that money is coming out of your own savings account that follows you throughout your life, the incentive is there to spend that money on a program or course with value. Meanwhile, these more disciplined consumers could put new pressure on the providers of education to compete on price.

Third, HCSAs would open up opportunities to fund lifelong learning more effectively. Currently, adults that wish to retool by taking a few courses get little help in doing so. But as the crisis of long-term unemployment has lingered, this kind of retraining has become even more important. Bipartisan efforts to set up worker-owned “lifelong learning accounts” under the Workforce Investment Act have not gotten very far. HCSAs could unify higher education and lifetime learning benefits into a more coherent whole, which would be a step in the right direction.

Tune in tomorrow for two other ideas.

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