The trillion dollar question: Reinventing student financial aid for the 21st century

Article Highlights

  • How do you #ReinventFinAid? That's the trillion dollar question. New research on #financialaid reform.

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  • We need to move past "tinkering" policies, and start to fundamentally rethink troubled FinAid system. #ReinventFinAid

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  • It's time for new #FinancialAid tools to serve today's students. #ReinventFinAid

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Back to the Future: Lessons from a half-century of financial aid policy

The Politics of Student Aid
Daniel Madzelan, US Department of Education (retired)

In the first 40 years of Pell Grants, the US Congress appropriated a third of $1 trillion for the program (half of this amount since 2006 alone). To be sure, Pell Grants have always enjoyed broad bipartisan support, yet the program's spectacular growth is a recent phenomenon. Except for student loans, other federal student aid programs have not fared nearly as well. However, there is general agreement that the fiscal health of the grant program, as it is currently configured, is unsustainable. Policymakers, appropriators, and other stakeholders will demand better student-level outcomes from all of the federal aid programs. This paper aims to explore which groups might be best positioned for advancing policies to achieve evolving program goals. Madzelan provides an anecdotal review of the history and development of the Pell Grant, other federal spending programs, the college tuition tax credits, and the circumstances that led to certain policy preferences being realized. How have these programs' goals evolved? What did prior efforts to restructure them look like, and how did those efforts fare? More broadly, what created momentum for change in the past? Are the prospects for change affected by the constellation of interests (both within government and outside it in the interest-group community)?

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Building a Foundation of 'Actionable Knowledge': Research that can Improve the Performance of Federal Student aid Policies
David Mundel, Independent Research Consultant

Funding for federal student aid programs, which were first authorized in the 1960s and 1970s, has increased dramatically. In spite of these increases, the performance of these programs has been disappointing: longstanding inequalities in college attendance, completion rates, and patterns continue. These disappointments have resulted from several market and nonmarket behaviors, some of which federal student aid programs have addressed and many of which remain unaddressed. Despite increases in funding for and the quality of research on federal student aid policies, we know little about the impact of current programs and even less about the possible impact of changes in these programs or new approaches. Given the disappointing results of current student aid policies, the limited understanding of the effects of these and alternative policies, and the increasing likelihood of future funding constraints, an "actionable knowledge base" needs to be developed if future disappointments are to be avoided. This paper focuses on issues that must be addressed in developing such a knowledge base.

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Beyond simplification: New approaches to access

The Promise of 'Promise' Programs
Rodney Andrews, University of Texas at Dallas

In recent years, there has been a proliferation of "promise programs," defined by Andrews as local place-based scholarship programs that offer near-universal access to funding for postsecondary education. Despite the burgeoning popularity of these programs, there is little comprehensive information on their efficacy as a means of encouraging postsecondary education. In this paper, Andrews first describes the structure of the promise programs and then attempts to answer the questions: How are the Promise Programs financed? Who gives the money, and how is it sustained? Using extant research as a guide, are the promise programs in and of themselves a scalable solution for financial aid reform?

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From FAFSA to Facebook: The Role of Technology in Navigating the Financial Aid Process
Regina Deil-Amen, University of Arizona, and Cecilia Rios-Aguilar, Claremont Graduate University

Policy has targeted simplifying the Free Application for Federal Student Aid (FAFSA) with mixed results. However, the FAFSA is just one component of a much larger system of aid eligibility and disbursement that intersects with family structure and college achievement patterns. This paper moves beyond narrow discussions of FAFSA simplification to address larger ongoing processes of aid application and receipt as well as efforts to leverage social media (and similar technologies) to ease information, communication, and timing problems that plague students pursuing aid. Specifically, Deil-Amen and Rios-Aguilar profile the technology resources relevant to financial aid and discuss evolving efforts that use social media to enhance opportunities for community college students to communicate about and navigate the financial aid process. They likewise identify the limits of what social media can accomplish, with particular attention to if and how it can effectively serve the needs of disadvantaged students, emphasizing how the criteria and delivery of financial aid has differential consequences for community college and nontraditional students. Need-based financial aid was designed to improve higher education access, but federal and state aid programs require students and families to navigate a time-dependent, information-driven, and procedurally complex process. How have technological innovations tried to help, and where do they fall short?

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Rethinking Grant Aid

Making College Affordable: Rethinking Voucher-Driven Approaches to Federal Student Aid
Sara Goldrick-Rab, Lauren Schudde, and Jacob Stampen, University of Wisconsin-Madison

Today's higher education policy defines affordability as making college enrollment opportunities available rather than ensuring equitable chances for degree completion across socioeconomic statuses. The decision made at the inception of Title IV of the Higher Education Act of 1965 to target the distribution of financial aid at individual students—rather than to pursue alternatives such as institutional subsidies—contributed to a system with very few incentives to keep college costs low and to encourage college completion rather than access. This paper compares the stated purposes of Title IV financial aid programs to programmatic effects and unintended consequences over time and considers the costs and benefits of the status quo. Goldrick-Rab, Schudde, and Stampen consider alternative organizational models focused on low college costs, institutional cultures of affordability (rather than consumption), and successful college completion. They conclude with a discussion of the need to pilot new approaches through a demonstration program with rigorous evaluation.

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Incentivizing Success: Lessons from Experimenting with Incentive-Based Grants
Lashawn Richburg-Hayes and Reshma Patel, MDRC

Financial aid has been a key component in enabling millions of students to access and complete postsecondary education. Yet little is known about whether financial aid causes academic success and, if so, how innovations in this critical tool can be implemented. This paper provides evidence of the effectiveness of incentive-based financial aid from several randomized controlled trials. The findings suggest that incentive-based grants—grants contingent on meeting certain academic benchmarks—result in a larger proportion of students meeting academic benchmarks, a greater number of credits earned, and modest effects on grade-point averages in the first year. Richburg-Hayes and Patel's findings are mixed on persistence into the second year. Their paper also describes several other promising innovations that creatively link financial aid to student success and provides insights gained from experimenting with financial aid. It concludes with implications from this collective body of research for federal and state policy and private charitable giving.

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Rethinking Institutional Aid: Implications for Affordability, Access, and the Effectiveness of Federal Student Aid
Lesley Turner, University of Maryland

While the dramatic increases in college costs over the past three decades have been widely publicized, less attention has been paid to an increasingly important component of postsecondary affordability—institutional grant aid. As listed tuition and fees rise, institutions have also increased their use of institutional aid to target specific students with individualized discounts. Turner's paper examines trends in institutional aid, its impact on student behavior, and how it interacts with federal and state financial aid programs. Do institutions tend to use aid in ways that complement or contradict federal and state policy objectives? Do institutions use government aid, such as Pell Grants, to supplant or supplement their own aid? Are there policies that might help combat this tendency to supplant? What levers does the federal government have that might be able to affect institutional aid practice?

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Smarter Student Loan Policies: Innovations in Lending, Borrowing, and Repayment

Nicholas Hillman, University of Wisconsin-Madison
Nicholas Hillman

One in ten borrowers defaults on his or her federal student loans within three years of entering repayment. As a result, federal policymakers, college leaders, and students are growing even more wary of repaying mounting levels of student loan debt. This paper discusses the background and emerging policy issues associated with student loan default, highlighting the potential impact income-related loans could play in preventing and reducing default rates. It describes how the contours of student reliance on loans, student debt, and default have changed dramatically as costs have risen. It also discusses alternative structures for loan programs and repayment, drawing insights from international policy experiments. Hillman's paper concludes by discussing the challenges and opportunities of implementing income-related loans as the standard repayment plan for all federal borrowers in the US, which could help borrowers and the federal government manage default risks and improve consumer protections.

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Managing Risk, Reaping Reward: Redesigning Federal Student Loan Policy to Improve Performance in Higher Education
Robert Sheets, University of Illinois at Urbana-Champaign, and Stephen Crawford, George Washington University

The longstanding goal of federal student aid programs has been to expand access to higher education. This paper argues for adding two other goals: increasing the returns on investments in higher education and reducing the financial risks that student loans place on borrowers and lenders (taxpayers). Furthermore, Sheets and Crawford's paper proposes policy changes that would help achieve these new goals by promoting business-model innovation and incentivizing better loan risk management. To ensure continuing efforts to expand access, it recommends moving all student loan subsidies into the Pell Grant program and making the Pell Grant program a true entitlement. Conversely, it calls for consolidating the existing loan programs into one and making that a true loan program—one with the underwriting and incentives needed to promote prudent borrowing and to avoid heavy losses. Finally, the paper explains two prerequisites for operating such a loan system: a national, open-data platform that can support the data analytics needed to calculate risk, provide easy access to relevant consumer information, and enable effective student-institution matching; and accreditation reform that facilitates business model innovation, especially innovation that increases the productivity of higher education. In developing this argument, the paper draws on recent advances in financial risk management and behavioral economics.

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