We have already noted a few of the many flaws in the college financial aid system (See “The Case for Financial Aid Reform”). There are others to be sure but that would require a book-length critique. It is sufficient to conclude that the system does not work and has not worked for several years. Let’s be clear, however. The fault is in the system itself – the good, hard-working people in financial aid offices at every level and the many dedicated people in the financial departments of federal and state governments are not at fault. They are, as are all of us, victims of a system that has failed to respond to historical and economic changes.
Abraham Lincoln said during another time of national trial, “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall ourselves, and then we shall save our country.” Our initial response to the current economic meltdown was been to line the pockets of the perpetrators, a few of whom have used our largesse to provide obscene bonuses for themselves and their co-conspirators. Their fifteen minutes are up! It is time…it is beyond time to heed Lincoln’s advice.
The changes that follow are intended not only to alter the face of college funding but also to provide the kinds of benefits that will serve as a needed stimulus for Main Street, College Street and even Wall Street. Everything contained in this proposal will have benefits that will transcend the limited world of higher education and spill over into our economy at large.
Change One: Eliminate the FAFSA. Instead, have students simply apply to college without the college knowing anything about the student’s or the family’s financial condition, a direct, clear return to need-blind admission. No longer will first-generation college students and families where the parents may have insufficient background and skills to deal with a form like the FAFSA be excluded from college because of the complexity of a financial aid form. College admission across the economic spectrum can then become the true meritocracy it should and must be.
Change One Point Five: And while we are at it, let’s get rid of the CSS Profile, a form required by many expensive colleges. This form is a way for colleges to circumvent the federal standard that determines financial need by adding other variables relating to the wealth of families, things like home equity, retirement assets and even an analysis of cash flow. While many of us generally admire the work of The College Board, it should be acknowledged that it has a pre-college monopoly that OPEC would envy. Not only do we pay The College Board for PSATs, SATs and AP examinations but they are also the sole vendors of the CSS Profile. Families looking to apply to the more selective colleges can look forward to spending anywhere from $600 to $1,000 on The College Board along the way. But even more important, the CSS Profile is a way for colleges to dramatically lower their obligation to provide campus-based aid to needy students by simply decreasing the family’s demonstrated need. For instance, while the FAFSA may suggest that a family’s expected contribution is $15,000, the CSS Profile may raise the number to well over $20,000. In this way, the college can use all the available federal money but much less of their own campus-based money. The CSS Profile allows colleges to tweak the need formula in any mysterious ways they choose. Each college’s approach is opaque and ever-changing. They can do whatever they want because behind the curtain of the basic CSS Profile, is a data bank of hundreds of extra questions that any Profile college can ask The College Board to append to the form. No one can judge the impact of the answers to the extra questions on the calculated family contribution. The Profile is a swamp of uncertainty with no way for a family to prepare in a timely fashion for its financial impact. The “feds” seem to go along with this, no questions asked!
Change Two: Once the college has enrolled the new freshman class, the students or the families (students of independent and parents if dependent) will be required to submit to the college a validation of the previous year’s Adjusted Gross Income (AGI) as reported on their 1040 income tax return. This can probably be done electronically through a link to the IRS. The amount each student or family will be expected to pay will be predicated solely on one thing and one thing only, the adjusted gross income as reported at the bottom of page one of the 1040. That amount can be instantly and automatically calculated electronically once the AGI and the cost of attendance of any college is known. If a wealthy family gets a clever CPA to deliver a very low AGI, then it would make some sense to reevaluate the tax system to correct that legal tax-avoiding strategy. Simply doing that would more than pay for the cost of changing the college financing system and a whole lot more.
Change Three: Each year, the U.S. Department of Education will publish a Family Contribution Index (FCI) beginning at an adjusted gross income of whatever level the Department and the national interest dictates. The index should list the expected percent of the total cost of college for one year (cost of attendance) the family will be expected to pay. College should be free for all families below whatever baseline AGI the Department chooses (ex: $40,000) and then increased by a portion of a percent for each $1,000 above the base number. So, for more expensive colleges, the percentage listed will result in a higher outlay of actual dollars because it is a percentage of a higher cost. For planning purposes, the FCI should be published every year at least six months prior to the beginning of a new academic year (July 1) so that there are no surprises and there is enough lead time to make plans for paying the amount indicated by the FCI. In uncertain economic times, only one number has to be changed, the Index baseline AGI where families will begin to have to pay for college. The rest of the scale simply falls into place. Full Tuition, room and board and fees will be paid only by families with AGIs of well over two hundred thousand dollars a year.
For dependent students, the parents’ AGI will dictate the percentage of college costs and for Independent students, the student’s AGI will be the determinant. Dependency status rules should be clear, transparent and unambiguous.
Here is a hypothetical example for a family with an AGI of $65,000 where the Family Contribution Index starts at $50,000 AGI (an admittedly high starting point) and determines that this family must pay 9% of the cost of attendance:
• At an $18,000 college, the family pays $1,620.
• At a $36,000 college, the family pays $3,150.
• At a $45,000 college, the family pays $4,050.
• At a $52,000 college, the family pays $4,680
In almost every instance, the family, if it elected to pay monthly, could likely cover college costs out of their normal income stream. The idea is to create an FCI that would make it possible for a family to afford college out of cash flow at any income level.
Change Four: Family assets should not be considered when determining the ability to pay for college. If a family’s assets are not a component of the college affordability formula, parents will be encouraged to save for retirement and/or become more aggressive consumers in the nation’s general marketplace. This not only will serve as an economic stimulus but it may also create a population of senior citizens with enough discretionary income and savings to be an active, contributing demographic in our nation’s commercial activity. In 2007, college savings plans nationally had grown to about $122 billion (The College Board, 2007). That is money set aside by families to pay for college, not retirement, not to buy consumer goods but simply college. In doing so, except for the most affluent families, total financial aid eligibility was lowered by about $6.8 billion. If that money were put into retirement assets and not counted as an asset, financial aid eligibility would be increased and the $122 billion retirement nest egg will have grown to about a half trillion dollars by the time these adults wanted to retire. The question of whether it is better for the nation to have families enrich the coffers of private financial houses who peddle 529 plans to deal with a four-year college career or to either put money into the active economy and/or prepare for a 20 or 30 year period of retirement? This choice needs to be addressed on a national scale. This plan will help to drive the conversation.
Change Five: The colleges will then receive AGI validation for all continuing students or families. Using this data combined with that of the entering class, the college can determine a reasonable estimate of the total accounts receivable for the entire student body for the next academic year. The lion’s share of these calculations can be done instantly and automatically through a link with the IRS. The same software can also provide a running cumulative AR total for all students at any college
Change Six: The Department of Education or other appropriate agency with full and active involvement of leaders from the world of higher education will create another index, this one for colleges. The Institutional Contribution Index (ICI) will include transparent benchmarks like endowment, certain data points within the college budget, debt, contributions from state resources such as the California’s Cal Grant Program and fund raising expectations and activities. The ICI will determine the degree (percentage) to which the college must contribute to the total cost of underwriting the need of its students, the difference between the family’s FCI (the percentage of college costs the family is required to pay) and the actual full cost of attendance at that college. Obviously, more highly endowed colleges will be expected to contribute a larger percentage to student aid than less affluent colleges. The ICI is essentially a means test for colleges. The ICI and the form used to determine the index should be created with substantial input from the college community. There will also be a section for special considerations not revealed by the normal college budgeting process to make the Index more reflective of the college’s true ability to contribute campus-based aid. Care should be taken to develop a “formula” that will in no way obstruct or interfere with the college’s ability to deliver educational services or attract competent staff or create innovative and cutting-edge instructional programs. Once developed, the ICI will dictate the total percent of campus-based financial aid the college must provide each year to close the gap between the total accounts receivable from attendees and the collective total cost of college for all students if they had all paid in full. To mitigate the impact of the annual paperwork for colleges and to assure compliance and quality control, the U.S. Department of Education should create a small, highly-trained cadre of professionals along with some user-friendly instructional software to help colleges complete and submit the required data needed to determine the ICI rating for every college.
The ICI formula must also include incentives for colleges who hold the line on the cost of attendance and penalties for colleges that increase prices without substantial cause. The latter should be crafted to dramatically increase the required campus-based contribution in a clear, direct correlation to the size of the increase in the cost of attendance. To the degree the increase exceeds the rate of inflation or the CPI, the upward slope of the campus-based contribution should increase in a way to serve as a strong incentive to hold down college costs and the subsequent the college attendance “sticker price”.
State-funded, public colleges will be eligible to participate in the ICI plan using the same standards to determine the required contribution for each campus to help close the aid funding gap. It is clear that states should always be required to contribute reasonable amounts of money to help pay for needy students at the state’s own public institutions.
The ICI should also include rewards for colleges who do things really well: high four-year graduation rates, post-college placement in grad schools and the job market, student outreach and diversity programs, successful fund-raising efforts, cost-lowering programs and exemplary use of technology, etc. Colleges that are so wealthy that they are expected to provide 100% on the ICI should be rewarded with a substantial federal grant to acknowledge their success. The same software noted above can also run a cumulative total of the actual dollar amount an college will be expected to provide given that college’s FCI driven accounts receivable and its annual cost of attendance or Student Budget.
So now, using the example started above, we may have something that looks like this if the ICI (essentially a “co-pay index”) is determined to be 30% for this specific array of hypothetical colleges:
• At an $18,000 college, the family pays $1,620 + a 30% contribution from the college (according to the ICI) or $4,914. Total so far = $6,574.
• At a $36,000 college, the family pays $3,150 + the college’s required contribution of 30% or $9,855. Total so far = $13,005.
• At a $45,000 college, the family pays $4,050 + the college’s required contribution of 30% or $12,285. Total so far = $16,335.
• At a $52,000 college, the family pays $4,680 + the college’s required contribution of 30% or $14,196. Total so far = $18,876.
Change Seven: Once the college knows how much it will have to provide to help make college affordable for 100% of the admitted and continuing students, the college will complete a rather pro-forma Institutional Financial Aid Verification form (IFAV) requesting aid from the federal government to close the remaining funding gap after the family and the college contributions have been determined. If the college has completed the form correctly and verified that it has contributed the required amounts to the student aid process, the funds from the federal government will be guaranteed.
To assure quality control and full compliance with the system, colleges will be subject to a college contribution system-related audit at any time.
The completed model started above will now look like this:
• At an $18,000 college, the family pays $1,620 + the college’s required contribution of 30% or $4,914 + the federal contribution of $11,466 = $18,000
• At a $36,000 college, the family pays $3,150 + the college’s required contribution of 30% or $9,855 + the federal contribution of $22,995 = $36,000
• At a $45,000 college, the family pays $4,050 + the college’s required contribution of 30% or $12,285 + the federal contribution of $28,665 = $45,000
• At a $52,000 college, the family pays $4,680 + the college’s required contribution of 30% or $14,196 + the federal contribution of $33,124 = $52,000
Two constants will be the hallmark of the system: No family will be required to pay one dime over the amount determined by their AG-driven FCI. Colleges using its own funds and the federal supplement will be required to fill 100% of every student’s need (the total cost of one year at the college minus the percent of the total cost the family will be required to pay equals the calculated need) to receive any federal money. Using this model, financial aid “paperwork” will be reduced from several million (FAFSA and CSS Profile) forms a year to fewer than 20,000 ICI and IFAV forms.
Change Eight: Student Loans should be completely eliminated as a form of need-based aid although direct, unsubsidized government loans to students and parents should continue to be available to help the family pay all or some of the out-of-pocket costs dictated by their 1040 AGI. There is little or no benefit to associating crushing personal debt with higher education. That prospect results in all sorts of false choices from not attending college to choosing a career intended to cope with debt rather than one which is emotionally fulfilling for the individual. But there is more, much more to the student loan issue.
• Under the current system, students are borrowing more than ever, an increase of 58% over the last decade when adjusting for inflation. The total nationally per student using federally funded loans is about $20,000. When the average debt for public and private colleges is combined the total student undergraduate borrowing is about $49 billion. On March 7, 2013 in an article in Money Morning by Ben Gersten, the current student loan debt is almost $1 trillion dollars much of which is becoming a more risky public investment with every passing day as student loan default grows like a cancer. Nationwide student loan debt is larger than the nation’s entire credit card debt and is second in total national balance only to mortgages on homes many of which cost less than a private college education for one student over four years.
Despite the fact that student debt is high and because their ability to borrow under the current rules is limited, total parent debt using government-sponsored college loan programs is also increasing at about the same rate and the same totals not including parents using home equity and other forms of secured debt to pay for college. The percent of parent borrowers is up 92% over the last decade to about $11 billion annually. Remember averages are just that and many students and parents have much higher debt levels than the averages might suggest. Consider too, that those with the greatest unsecured debt are typically Pell Grant recipients, families from the lowest economic demographic in the nation. Worse yet, in 2006, according to The College Board, the national volume of private student and parent loans was a whopping $17.3 billion. Much of the unstable private loan borrowing was a reflection of the failure of the current financial aid system to deliver on its promise. Private loans should not be a part of the new model for non-proprietary, undergraduate colleges and universities.
In designing a coherent and sensible grand plan, there will be many, many related changes and endless, pesky details like the length of eligibility for students, undocumented students, part-time students, independent students, etc., but if we preserve the main tenets, it will forever change the college-accessibility environment of this nation and a lot more.
The litany of benefits:
• Any academically qualified student from any background can attend and graduate from college. The 600,000+ college-qualified students who now opt out of the college arena for financial reasons will now be back in play making our nation exponentially stronger and financially more viable.
• Under this plan, the vast majority of colleges will receive much greater amounts of federal aid because that aid, in the form of a check, will always be related to the college’s need as determined by the ICI (the Institutional Contribution Index) for that academic year. No longer will colleges be left to fend for themselves as student needs increase ahead of the federal government’s willingness to provide financial aid to keep up with that demand. Colleges will be secure in the knowledge that the federal government is on their side as a partner, not as an adversary.
• Colleges will have the opportunity to attract more qualified students because of their enhanced ability to receive massive, college-appropriate amounts of federal dollars. It will make the college recruiting process a more level playing field from the colleges’ point of view. Moreover, by not having to tie up so much of their institutional funds in the form of campus-based aid, the colleges can invest in their own upgrades of faculty and facilities so that over time, the quality of many more financially marginal colleges will be improved. By having a transparent, dependable federal support system in place, colleges across the board will be able to plan their budgets including capital improvements with a greater degree of certainty. Under this system, for the first time in years, colleges will no longer be victims but, rather, beneficiaries of a federal program.
• By not including assets as a factor in the financial aid formula, parents will be free to put money aside for retirement or to purchase more consumer goods or to put a substantial down payment on a home. The likelihood of an aged population financially neutered by runaway college costs and an unreliable college financial aid system would be greatly reduced. A timely and prudent national investment that increases the college attendance rate of each new generation, an investment of four years per student, is a much better use of our tax dollars than a 30-year support system for retired parents economically marginalized by a dysfunctional college financial aid system. The millions of parents of college students will be able to look forward to a retirement where they can also be active consumers by injecting their adequate retirement dollars into the economy at large – an important economic stimulus by any standard.
• Students will no longer have to begin their post-college lives with debt nor will their choice of career have to be based in part on whether the career will enable the student to pay back student loans. The fear of debt will no longer serve to deter qualified students from going to college. Nor will college graduates be forced to direct portions of their take home pay to some holder of their student loan. Instead, the money (in the tens of billions of dollars) will be used for consumer goods to enhance the quality of post-college life and the economy as a whole. Financial institutions, college funding experts, financial aid administrators and sellers of college saving financial products like 529 plans and private student loans will be largely out of the college funding loop thus eliminating a whole layer of costs that have nothing to do with educating anyone. Short term expenditures like college costs will no longer negatively affect more important long-term investment outcomes.
• By making college possible for every qualified student, young people across the economic/social spectrum will be faced with a promising future. That promise is an enormous incentive to do well in school and as any educator can attest, kids who see school as a stepping stone to a better life are likely to be a contributing member of a school community. The halo effect of a fulfilling future life is likely to permeate the halls of any public or private secondary school. The promise of good things to come is sure to improve the educational climate of the school and most certainly will lower costs associated with a student body that attends the school with a sense of purpose and an American dream that values talent and character more than money as the primary currency required to achieve that dream.
• As recently as May 2009, The Chronicle of Higher Education reported that colleges across the board were complaining about the vast amounts of paperwork forced upon them by federal mandates many of which were connected with the need-based financial aid system. The changes outlined here will almost completely eliminate such burdens. With the help of a federally-trained cadre of professionals to assist with the completion of the Institutional Contribution Index (ICI), the remaining outgoing paperwork to the federal government will be minimal and the primary incoming document will be a check and a receipt. The check can be used by the college at the sole discretion of the college. No longer will there be payments from the raft of separate federal programs each of which has to be verified and accounted for….Just one check payable to the college in the amount requested by the Institutional Financial Aid Verification Form will suffice.
• Under the present system, community-minded service clubs and others who offer scholarships find that their generosity is more often than not used to replace college financial aid already offered to a recipient of their scholarship. Thus, their grant essentially makes little or no difference to the recipient. Under this new approach, private, “outside” scholarships can go directly to the recipient to help pay down whatever amount is required by the new AGI-based formula. This will further lower the cost of college for the student and his family rather than merely replace aid already provided in the college’s financial aid award.
• By creating a clear path to college and delivering on that promise, the nation will finally take full advantage of its richest natural resource, the talent, creativity and vision of its citizens.
• The President along with others across the political spectrum have called for a reduction in force of programs that may no longer be needed. The proposed system will eliminate the entire “alphabet soup” of financial aid programs and the bureaucracies spawned by each program both at the governmental level and at universities and colleges. The simplicity of the new model will dramatically reduce the delivery costs associated with college financial aid.
• A simple, transparent, largely form-free approach will eliminate any need or temptation to “game” the system. Americans will no longer spend their dollars on financial aid “experts” and advisors to walk them through the jagged shoals of an overly complex system. No longer will there be a need for “insider” ways to circumvent the intent of a largely counter-intuitive, formula-driven system that seemed to have been created by people who were dwelling in windowless cells like a cloistered religious order rather than in the daylight of the real world of real families, real colleges and a real economy. Nor will Americans fall victim to sellers of financial products that are excluded from the current financial aid formula or be tempted to reposition assets in an often costly effort to qualify for a few more dollars of financial aid. Any system that encourages good people to do bad things is on its face, a bad system.
• The nation will reap enormous profits from an unabashed investment that opens the doors of college to all qualified students. College-educated citizens will more than pay back the nation in the form of an enhanced tax base, greater productivity, buying power and global competitiveness. Moreover, as pointed out earlier, educated citizens typically do not require expensive, publicly funded services like police and prisons, rehab and food stamp programs, unemployment benefits and many health care services. Those benefits will be both in terms of real dollars and societal quality-of-life dimensions. Whatever the plan costs, the nation will be repaid in full with huge interest. Paul Krugman of Princeton and The New York Times was right when he suggested, if you really believe in change, then don’t be afraid of what it costs. Cost becomes irrelevant if long-term profits, economic stability and an enhanced qualify of life are the likely outcomes. Around the globe, countries that make post-secondary education part of a national birthright always reap impressive national dividends. If the proposed plan provided a worst-case average of $30,000 annually for every college student, with a national student population in four-year colleges of about 9 million full-time students, that would cost about $240 billion annually, an investment that is likely to be repaid in full many times over. If you count the money diverted from the economy and money that would no longer be taken out of the economy, we pay much more than that every year to fund our present, utterly dysfunctional system of college financial aid.
Finally, having a national college funding system in place, one that is reliable and transparent, may encourage the construction of new colleges and new post-secondary education models and/or the transition of community colleges into 4-year colleges all of which are very risky and probably impossible ventures under the current system of college funding and financial aid.
The right to self fulfillment is the hallmark of a great nation. It isn’t only a privilege of the rich. It should be a birthright, part of what it means to be an American. So far, most of the recovery stimulus has been directed at companies and executives who created this mess in the first place. It’s as though the rest of us don’t exist. The vast majority of families across American have seen little benefit from the bailouts. They have watched in sadness as our tax money flows as a life preserver for the few selfish captains of industry, many of whom in a more rational time, would and should be headed for jail. The college support plan outlined here will instantly reach Main Street and any other address where hard-working Americans and their smart, deserving children have the right to realize their potential by going to college or any post-secondary training program. At the same time, it will ensure a more viable retirement experience for families across the economic spectrum by avoiding the use of family assets to pay for college. By bypassing the rich to directly serve the needs of the average American, everyone wins, even the wealthy. When Americans are well-educated and well-paid, the opportunity for business growth expands exponentially, making the investment community more stable and profitable for all concerned.
By creating a simpler, more rational, more user-friendly, more reliable and more transparent approach to college funding and by framing it as a very profitable national investment, arguments for its adoption become less a matter of base-driven political debate and more a matter of simply wise use of our tax money. Most Americans can argue the philosophy of one idea or another but something that always seems to resonate across the political spectrum is the “bottom line”. Fair enough. So let’s make that analysis because it is pretty straightforward and the actual bottom line is likely to be stunning to the point of becoming a financial imperative. Unlike other approaches designed to deal with the current financial meltdown that focus solely on the more immediate issues, the plan outlined here addresses not only the current slow recovery but it also has tangible implications and ongoing payoffs for the nation in the decades to come.
A Note about Community Colleges
Because community colleges are so varied, this post-secondary niche is not as easy to paint with one broad stroke. Here are some approaches and they apply only to students in a degree or certificate programs:
Residential, full-time students at public and private community or junior colleges should be treated like any other college described above. They will be eligible for the same aid eligibility as above but only for residential students or, as in the case of more expensive private two-year colleges, the student will have to pay whatever FCI-driven percent of the tuition and other relevant fees depending upon residential choices (on-campus, off-campus, relatives or home) contained in the student budget the formula suggests. The rest will fall into place as above. To become eligible to participate in the plan described earlier, all residential public and private community and junior colleges will have to complete the Institutional Contribution Index (ICI) outlined above.
For public community colleges that are non-residential, in addition to any state-level aid programs, students in a certificate, degree or transfer program will be able to borrow a federal unsubsidized direct loan to cover whatever they need (according to the school’s student budget and verified by the school) to attend the college. Such coverage eligibility will be restricted to tuition, books and fees and will not exceed four years and is only available after all relevant state and/or campus-based aid (if any) has been used each year. If the student receives a degree or certificate of completion to a training program, the loans will be forgiven. If the student successfully transfers to a four-year college, the community college loan will be subsidized and ultimately forgiven provided the student who transfers to a four-year college also receives a four-year degree within a four-year period following transfer.
All loans that have not been forgiven will be eligible for a loan payback process described later in this plan.
A Special Comment:
If there is a demand for more four-year colleges (and there will be if the new paradigm is adopted and implemented), by using the model for non-proprietary colleges noted earlier, it would be less expensive as a public investment if a new college knew that in its formative stages, it could count on federal dollars in the form of campus-based financial aid to cover shortfalls in fees from students and families. This is particularly relevant for community colleges. By using federal aid to supplement the new colleges’ campus-based financial aid responsibilities, the basic aid model would allow a two-year college to expand to a four-year college at a relatively low cost to the state or to any other funding source. This is a much less expensive way to provide more four-year college seats than a plan that starts from scratch.
Moreover, as a consumer cost saving, if selected community colleges expanded to a four year college for those in their institution who wish to go beyond a two-year program by continuing at the same institution there is a greater likelihood that the courses taken in years one and two will better integrate into a four-year major with its particular prerequisites. This will encourage students to continue with less loss of credits and an exponentially greater chance of completing the degree in four years which always results in a cost savings by all parties (including tax payers).
Graduate Schools and Proprietary Institutions
Up to now, we have focused on undergraduate, non-profit colleges and programs but there are other segments of the post-secondary education world that are also in need of change and should be included in any comprehensive retooling of the college funding system. Specifically, an approach is needed to deal with proprietary, for-profit programs and institutions and graduate schools and programs of all kinds.
To many, it would be improper for taxpayers to massively enhance the profit margin of private, for-profit (proprietary) institutions. Nonetheless, they have an important role to play and in order to create a national plan for higher education funding we should include a rational approach to helping them as they help students. Graduate schools of all types need to be served as well. But unlike, undergraduate education, grad schools are far more elective in nature and typically have more clearly-defined paths to employment and higher salaries. Thus, it follows that the educational funding plan for these segments of the higher education system should involve more “self-help” components than under- graduate programs.
Non-Proprietary Graduate Schools
• Non-proprietary graduate programs should use the same proposed measure of financial need as undergraduate non-profit institutions, the student’s 1040 adjusted gross income (AGI). It is at the sole discretion of the graduate school whether parental information (AGI) will be required or not. That number will dictate the amount of out-of-pocket costs the student will have to pay using the same or possibly different FCI scale as undergraduates.
• Then, instead of using publicly-funded grants to help bridge the gap between what the students must pay and the actual cost of the program, the students should be able to qualify for direct subsidized loans from the federal government in whatever amount is needed. The individual institution will simply determine that eligibility using the basic formula: Percent of the cost of attendance assumed by the student as determined by the FCI scale (which could be different from the undergraduate scale) subtracted from the cost of attendance, equals the total eligibility for federal loans. The graduate school is always encouraged to contribute institutional aid and employment, fellowships and TA/RA positions to its students in order to lower the amount of student borrowing and to make attendance at that grad school more appealing. As noted earlier, all of the need-based loans should be subsidized direct loans as in the current system. The difference is that there is no limit up to the actual costs of education. The school shall determine the total amount of loan eligibility based upon the FCI scale and the actual cost of attendance at the school. All interest and fee rates for public loans should be at a level that will essentially pay for the costs of providing loan program. At any time, the Department of Education can provide federal money to encourage students to enroll in any professional grad program when there is a shortfall in any critical field of study. That influx of grant aid can lower the loan burden on those students.
• Whenever federal loans are involved, at no point should parents of the student be required to co-sign anything. Parents should be entirely risk-free so they can have a life of their own and use their income as consumers and better yet, as builders of an adequate retirement nest egg.
Proprietary Undergraduate/Graduate Programs
In his response to President Obama’s weekly radio message on March 9, 2013, Senator Jeff Sessions declared that we should be “growing the economy not government”. What follows directly addresses Mr. Session’s plea.
Lynn O’shaughnessy, in an article (2/25/10) for MoneyWatch.com, noted that in an era of increasing student loan defaults, 44% of those defaults came from student borrowers at for-profit, proprietary higher-education programs. What is more interesting is that at the time those programs only constituted 7% of the students attending post-secondary schools. To address common-sense economic issues and the growing outcry for less participation by the government into “our lives”, we should consider creating a “private option” in education and let private sector loans serve as the sole source of student loans for proprietary schools. Since the schools are private and proprietary, so should be their sources of support, in this case the private sector banking arena. Loan availability and rates will be entirely market-driven and will be solely the responsibility of the private sector. Enabling legislation should include an iron-clad prohibition forbidding lenders from bundling student loans with any other financial instrument.
Because the federal government is not a party to the aid system of these schools, they should be set free to devise their own system of aid and whatever parameters of cost containment they wish. They will not longer have access to Pell Grants or any other federal aid programs. The private sector will have its government-free day under the new model. (Those sounds you hear in the background are the lobbyists donning their battle gear for what lies ahead.) If the proprietary segment (particularly financial institutions) stopped to think about this for a minute, it is actually a huge opportunity to make some serious money.
Proprietary programs, of course, are free to offer institutional grants at any time on their own “dime” which would further lower the student’s need and subsequent eligibility for loans while creating an incentive to enroll in that institution’s program. None of these non-loan practices involves or should involve the federal government or the public sector. But the “secret sauce” to smartly deal with the loan issue is found in the “after-the-fact” strategy to mitigate the effects of substantial education loans for the student.
To that end, here is an approach that may appeal to a very broad segment of the political spectrum. It applies to both public graduate and all proprietary programs that use student loans. We should immediately “tweak” the tax code and provide associated enabling legislation to institutionalize the following:
The Loan Payback Option
If a firm (for-profit and non-profit) hires a graduate with student loan debt from a proprietary or grad school, the firm should be encouraged to help the new hire repay the debt as a condition of employment.
It should work like this:
• The former student will be responsible for monthly payment of the interest only and will do so through a payroll deduction for as long as it takes to retire the debt. Provisions should be made to consolidate the loans and, if necessary, extend the payback period to up to 30 years in the event of a very large debt that would impoverish the student if it were repaid over a shorter period. While the former student’s take-home pay may be modestly affected, it will be offset, in part, by being able to deduct 100% of the student loan interest paid on his/her income tax.
• The employer will pay the monthly principal on the debt. Depending upon the way it is structured, that employee benefit may have some significant, positive tax implications for the firm. Remember too, the firm is one of the chief beneficiaries of the new hire’s professional education. Organizationally, the firm’s participation in repaying student loans is likely to engender greater employee loyalty which, in turn, is often manifested in greater productivity and lower rates of employee turnover, both significant, bottom-line outcomes for the employer. (There have been many and varied studies by firms as diverse as the Minnesota Center for Corporate Responsibility, Work and Family Connection, Inc., the Economic Policy Institute, PricewaterhouseCoopers, Vanderbilt University, Hewitt Associates and many more all of whom extol the virtues and financial benefits to an organization that offers family-centered employee benefit programs.) A somewhat different arrangement is in order for a non-profit entity that elects to adopt the plan for its organization. Because the non-profit will not receive the same tax-related benefits as a for-profit business, a loan forgiveness strategy (something on the order of 10% of the principal per year) seems to be reasonable except in the case of graduates from proprietary programs where it is unlikely that a private lender will forgive the principle in the absence of a federal offset of some kind. Under this system, an appropriate end-of-the year bonus could take the form of an accelerated employer-funded pay down of the employee’s education loan.
• To make it a sensible public “investment”, the interest rate on the government- issued loans for non-proprietary programs should be high enough to cover whatever costs are involved and to partially offset any tax advantages realized by both the former student and his/her employer. At the end of the day, for the government, it should be a monetary “wash”. The real payoff for the government and the nation is contained in the obvious long-term benefits of a highly-trained, well-paid professional and the taxes paid over a lifetime by that individual.
The incentives to complete the degree or program and find employment are real and compelling since no help with reimbursement will occur until the completion of the program and the attainment of a job. Moreover, there is a built-in reason to complete programs in “regulation time” (depending upon the program) in order to minimize the total student debt. To a firm participating in the plan, a potential new hire with an unusually large student debt becomes less attractive because of that debt. The model has this built-in safeguard against irresponsible and careless student borrowing.
The plan also carries with it some important quality-control dimensions. Because the key to the payback model is an employer-shared component, the education institution will have to become more involved in helping their graduates find employment. If they fail to do so and/or if there is a significant drop-out rate of students in the program, the institution risks the likelihood of losing its reputation and credibility with the public, a certain kiss of death in a shaky economy and the competitive world of proprietary education.
Unlike the current student loan quagmire, this plan removes much of the risk for both the federal government as the lender and private lenders since the loans are far more likely to be paid by a highly-trained former student who now enjoys the backing of a commercial entity (the employer) in addition to the student’s own resources as a fully-employed, fully-paid worker who pays his share in the form of an automatic payroll deduction.
By providing a creative way to retire student loans the government’s involvement is for the first time, a benefit that rewards success based on actual achievement of a degree or program and not simply the vague promise of possible success which as we painfully know is an elusive commodity at best. Relieving the federal government of any responsibility to front-load a financial support program for the wide variety of proprietary programs that all too often lead nowhere is likely to save the taxpayers of this nation a significant amount of money.
• As a protection for the former student, any company using the plan ought to be able to protect the employee’s interests in the event of the failure of the business. The tax code should require that the remainder of the publicly-funded student debt should be paid out ahead of the firm’s other creditors in bankruptcy proceedings creating an added measure of security for both the borrower and the government (the taxpayers of the nation). Moreover, the plan should automatically transfer in the case of a business sale or consolidation with another business. There are no doubt other protections that need to be considered given the many possibilities in the often mysterious world of commerce.
• The federal government should create a set of reasonable standards of fiduciary conduct for both the proprietary school and its lenders and should monitor the system to assure compliance with those reasonable standards. Failure to meet them will trigger a correctional process and failure to make those corrections could result in excluding that institution and that lender and the students affected from eligibility to participate in the IRS-based loan payback program outlined here.
When students can see a reasonable system in place that will help them pay back their student loans, students will once again be free to choose a career they may love rather than one that will enable them to afford to repay their student loans. When loan repayment is shared, the pressure on any one party is mitigated. Moreover, this payback program should be entirely voluntary. Businesses and non-profit entities are not required to offer this benefit but it makes good business sense to do so.
• The government should be empowered to designate any graduate or even proprietary school program as so vital to the national interest that it qualifies the program to be included in the regular college model outlined earlier. That designation should be at the sole discretion of the federal government and can be implemented at any time. So, for instance, if we needed to dramatically enlarge our pool of Farsi-speaking adults, the federal government could underwrite proprietary and grad schools that teach Farsi in a way outlined in the college model essentially “federalizing” the program during the emergency. This could instantly open special opportunities for students and institutions delivering such programs. Teaching and nursing programs and any other program in the national interest can be thus designated. The process will need to be carefully designed but it does not seem to be an insurmountable barrier for inclusion in a national, comprehensive approach to funding higher education. The national advantage is clear. Literally, with the stroke of a pen, the nation’s entire higher education system could be mobilized to address any emergency at any time.
A Further Recommendation as an Immediate Economic Stimulus: As the program outlined for proprietary programs and grad schools unfolds to the benefit of new students, we should empower and encourage businesses and employers across the nation to use the loan payback plan described here to help all students with public subsidized and unsubsidized education loans accrued under the current system. The benefits are obvious and immediate and the costs will be minimal since students receiving help with unpaid loans will be able to join the ranks of new consumers and use their enhanced discretionary funds to buy goods and services with cash and short-term credit.
The new comprehensive, post-secondary funding approach outlined in this overview could be operational for the 2015-16 academic year. The plan could be fully researched and refined by a relatively small task force of very smart, passionate people and then presented to Congress for its consideration in the spring of 2014 or 2015. There are endless details dealing with the data points in the Institutional Contribution Index (ICI) and issues like multiple family members in college at the same time, undocumented students and a host of others but once those are dealt with, there is a sufficient time window to put the “front end” of the implementation components (mechanics and process) in place by the close of 2014. Federal dollars in the form of direct aid to the colleges under the terms of the plan will not be needed until the summer or early fall of 2015.
In any dramatic and costly reform, the analysis should include a side by side cost/benefit or ROI projection of the new paradigm and the current model illustrating unambiguously not only the cost of implementing the new plan but the cost to the nation and the economy if we don’t.
A Final Remark
It is time for a real change; it is time to create a simple, user-friendly, transparent, yet comprehensive college funding model that can alter the post-secondary education landscape in a way that ensures access for any qualified student while it strengthens the financial viability of colleges across the nation and in doing so, it supports many other important segments of our economy. Integrating the higher education funding reforms as a component of the larger management of the nation’s economy is the hallmark of this proposal. It is not a standalone solution but, rather, a dynamic component of an economic foundation for a nation that has yet to see its best days.
© Paul R. Wrubel, 2013
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About the author:
Dr. Paul R. Wrubel holds four degrees. He received a BA from Middlebury College, an MAT from Wesleyan University and a Masters and PhD from Stanford University. His professional experience includes a decade of teaching in a Connecticut public high school and an 8-year stint in administrative roles in California including serving as the Principal of Gunn High School in Palo Alto. His community and volunteer work includes serving as an elected school board president in his home community of Half Moon Bay, California. Over the last two and a half decades, Dr. Wrubel has worked as an independent counselor for high schools, service clubs, government programs, non-profits and families across the economic spectrum and around the globe. He has been recognized from coast to coast as a preeminent authority on college funding matters and as such has been quoted in the print and broadcast media many times. He has appeared on talk shows from coast to coast and has conducted hundreds of free public workshops on college admissions and college funding issues around the nation. Dr. Wrubel has also founded two non-profit organizations, CollegeWorks, a program that helped inner-city youth in Oakland, CA and a new non-profit, MindWorksUSA with the broad mission to explore ways to provide education and college access to students around the globe. He has written literally hundreds of articles for the Internet and the print media. One of his more recent works was published in the Chronicle of Higher Education, considered by many to be the publication of record for college personnel. Dr. Wrubel is the co-founder of TuitionCoach, an Internet-based suite of interactive tools to help families navigate the daunting challenge of college funding. There are few, if any, individuals with as comprehensive knowledge of the financial aid system and its impact on families, colleges and the nation.