Before we embark on a “fix” for a system so large and so embedded in our culture, we had better be prepared to justify the reasons for change.  In the case of the college financial aid system, finding flaws is easy. Victims are everywhere.  Someone once said that a camel is a horse made by a committee.  Enter the college financial aid system.

A boatload of studies has chronicled the personal rate of return of a college degree.  The lifetime income of a college graduate is nearly twice that is a high school graduate and growing (Hill, et. al., 2005).  Others have estimated the rate of return from a public investment in college degrees.  Psacharopoulos and Patrinos, in a 2004 study of the social rate of return of college in 73 countries found a 10.8% rate of return but did not include the significant spillover of cost-related returns from external effects like better health, greater volunteerism and charitable giving and a reduced need for a wide array of social services.  Moretti, Hill et al. found that in regional economies with a high number of college graduates, wages at all educational levels increased because of higher productivity and more effective use of technology.  Their careful, exhaustive study in 282 cities found that a 1% increase in college graduates in a city resulted in wage increases of 1.9% for workers who did not graduate from high school, 1.6% for high school graduates and .4% for college graduates.

The revenue that a college-educated population brings to the table is stunning.  Just the tax revenue from a college graduate is about twice that of a high school graduate (Trostel & Ronca).  Even more noteworthy is a study by Philip A. Trostel of the University of Maine who found that whatever the public investment in higher education, that money is repaid in full within ten years or by the age of 31 if the student graduates from college at the age of 22.  Trostel’s findings include an estimated long-term fiscal benefit of $7.46 for every public dollar invested in support of college degree attainment nationwide.  And this estimate does not include the external effects of a degree mentioned above.  Trostel also noted that the rate of return is even much higher for those on the margins of college attendance, the low income and minority subsets of students who opt out of the college market for many reasons not the least of which is affordability.

Some of the more glaring imperfections in the current system are these:

•    The complexity of the application.  Every year, Americans of every social and economic background are compelled to answer an estimated total of about 1 billion questions on the FAFSA (Free Application for Federal Student Aid) alone.
•    The costly and expensive bureaucracy required to manage the system, a growing army of bureaucrats who educate no one.
•    The arcane formula that determines the EFC or the Expected Family Contribution (the amount a family can afford for college) defies all attempts at reason.
•    The absence of any penalties when a college using federal aid funds fails to provide its own funds to address the full demonstrated need of a family encourages endless abuse.  Thus, families who have a demonstrated need based upon their actual ability to pay for college as verified by the federal methodology are treated as families making much more money.
•    The failure of the federal government to provide financial resources that keep pace with college costs and inflation makes too many good people behave badly.
•    The system often drives students into careers geared to help them deal with college debt rather than ones that make their life work meaningful.
•    The system profoundly weakens the economy and in doing so cancels many of the obvious benefits of college for the individual and the nation.

A Sampling from the “Casualty List”:

Families:  The baby is born and the proud parents silently promise that no matter what, the child will go to college so money is put aside for things like 529 plans and other college investments.  Funds are transferred from the parents’ pockets and put in the coffers of financial institutions who promise to invest the money for college.  In that way, hundreds of millions if not billions of dollars that could and should go into the active economy are sequestered by banks and others to pay for future college careers.  And we know painfully well how responsible some financial institutions are with money that is not theirs.  But there is more.

Too often the cycle of economic life is this.  The family “goes without” many consumer goods as they save for college and then when college actually happens, they use the savings and probably some of their retirement funds which were partly depleted already because of the diversion of funds into college savings accounts.  Then, after college has been paid for, the family again “goes without” because their retirement funds are so marginal that there is little discretionary money left over to be an economy-strengthening consumer in their later years.  If there are multiple kids in the family, the problem becomes even worse.  These and other considerations have huge and ongoing quality-of-life implications for the ordinary families who form the backbone of American society.  The lesson for the government is that it would make far more sense for it to massively invest in the post-secondary education of our next generation over a limited time of about 4 years than to needlessly impoverish families and then be forced to support millions of marginally secure senior citizens over a 30 year retirement cycle.  No truly enlightened nation should force its citizens to choose between college for their kids and a secure retirement for themselves. This nation does it with every sunrise.

Minorities and the Disadvantaged:  The financial aid system was put in place in a fully justified and “feel-good” effort to help those most in need, minorities and first-generation college students.  But just the opposite is happening.  After the Civil War, basic citizenship rights were conferred on former slaves through the 13th, 14th and 15th Amendments.  The right to vote, enumerated in the 15th Amendment, was easily circumvented by literacy tests and the poll tax which were used to keep African-American voters out of the voting booth.  In the current era, the FAFSA is our modern equivalent of the literacy test which because of its inherent and daunting complexity, keeps minorities out of everything.  If by any chance, a needy family surmounts that hurdle, the probability of an insufficient financial aid award is likely to crush what remains of the dream.  By the time this demographic masters the FAFSA and the financial aid system, it is too late.  Life paths have already been chosen or have been pre-ordained by less-than-challenging high school courses, a direction often followed by students facing an uncertain, college-free future, where simply getting a high school diploma becomes an end in itself.  Even more tragic is that the complexity of the doorway-opening college funding system serves as a mountain high enough to create a high school dropout.  Some would say this is a sad coincidence; others would suggest it is a deliberate public policy to deny the full benefits of our society to targeted groups.  Either way, it is a national tragedy of mind-boggling proportions.

High Schools:  When high schools are filled with students who see no college future or any post-secondary training, those students will understandably behave in ways often unsuited to an academic community.  The cost of college and the “Rube Goldberg” nature of the financial aid system serve to increase the number of wayward students in our high schools.  The looming cost of college in the absence of any understanding of ways to master the college funding maze often drives many students to a community college, an important institution but one that accepts any student regardless of his or her past academic record.  Thus, why sweat high school grades when it doesn’t matter?

Veteran school administrators will report that the lion’s share of administrative time and costs are spent on the 10% of students who act out their fear of the marginal life ahead or their anger at being excluded from the mainstream high school community.  It is not always the fault of the student; it might be the fault of the education model that forces kids to endure an education system that is completely out of touch with their needs and one that promises no future of any tangible value.  Moreover, as a general proposition, it is always less expensive to deliver highly academic courses than remedial ones.  The absence of a clear, dependable road to a meaningful job or post-secondary education makes the high school education challenge even greater.  At the heart of the post-secondary education journey, the issue of money, perceived affordability and its step-sister, the specter of crushing debt loom as insurmountable barriers for an increasing number of Americans.  If high school is perceived as a road to somewhere better, enough so that kids stay and graduate, the benefits will be enormous. Lochner & Moretti (2003) in their study on education and crime found that a tiny 1% increase in high school graduation rates nationally would save $1.4 billion or about $2,100 per high school graduate.  Finally, in several studies, it was found that high school students from families with parents who attended college, tended to behave better and contribute more positively to the high school environment than students from a household where there was no prior college experience, an outcome that enhanced the education experience for all while lowering discipline-related costs.

Colleges:  Everybody tends to blame the colleges for the cost of higher education.  As a practical matter, in terms of the actual present value of the dollar, their costs have not gone up very much since 1980.  In a sense, the colleges have been “sand-bagged” by the federal government who championed the notion of need-blind admissions but has failed to do its part to make that dream a reality.  The reason is that while college costs have risen to a level somewhat above the rate of inflation and the consumer price index, the federal per student financial commitment has failed to keep pace with either the rising cost of college or the falling value of the dollar.  To be fair, some colleges have made it worse by playing fast and loose with their own budgets and priorities and by rolling the endowment dice on high-risk investments.  Using present dollar values, the federal contribution to the need-based financial aid system actually drops every year.  For instance, in the area of student loans while the cost of college has risen around 200+% over the last three decades, the maximum amount of per student need-based federal loans has increased by only about 12-14% over that time frame. Similar numbers apply to things like Pell Grants and other federal programs.  Because of this, colleges are left holding the need-based financial aid bag and the two easiest ways to deal with the federal shortfalls are to simply under fund the financial need of families (gapping) or raise the cost of college so that the more wealthy families can help to pay for the financial aid of less affluent families.  In addition, in an obvious effort to lower the college’s responsibility to provide campus-based aid, some colleges resort to using the CSS Profile form and formula to raise a family’s expected contribution in sometimes enigmatic ways.  No one really knows for certain how these colleges calculate need.  It is a mysterious, behind-the-curtain system that is almost impossible to monitor by the government or anyone else.

Nonetheless, it is clear that colleges are also victims of the failed system along with ordinary families.  In the December 22, 2008, issue of The New York Times, Tamar Lewin wrote that many independent colleges were reporting a drop in their admissions applications.  In the April 20, 2009 edition of the San Jose Mercury News, an article focused on students who were passing up on acceptances to elite colleges and opting for less expensive alternatives, painful choices largely driven by a failed financial aid system. The frequency of similar stories is increasing with each passing day.  Throughout, the drum-beat, root cause is the likelihood of insufficient financial aid.  But the bottom-line, big loser is our nation.  If the slogan, “A mind is a terrible thing to waste” is true and it is, our nation is rapidly becoming a garbage disposal facility for an unconscionable amount of untapped human talent.

Financial Services:  The financial services “industry” is both a beneficiary and a victim of the current system of college funding.  On the “front end”, it benefits by selling various financial products to help pay for college.  There’s money to be made particularly when dealing with “solutions du jour” like the silly 529 plans with their high fee structures, low spending flexibility and financial-aid-lowering issues.  And up to fairly recently, financial services made some money on high-interest private student loans and federally-underwritten college loan programs.  But, as always, greed and self-interest carried the day and much of the upside was squandered by the financial services sector through irresponsible bundling of education loans with other, even more risky investment instruments.

Because of the rapid rise of college costs, financial services have lost billions of dollars of the money under management as their client families are forced to invade their long-term investments to pay for short-term college costs.  Typically, there were not enough funds in the college savings plans (the national average is somewhere under $10,000 per saving-plan family) to pay for college so their clients had to pull money from other assets like retirement accounts and stock portfolios.  Other financial services entities lost their money in the private loan market simply through default on the risky loans to students who may have dropped out or failed to get a job with a salary high enough to manage orderly repayment of the loans.  Many of those students were often forced to turn to predatory private loans because of the shortfall in federally-sponsored, need-based financial aid.  Then, as an aside, there’s the credit “industry”.  By arbitrarily raising interest rates using mysterious and ever-changing standards, the costs of private college loans and every other kind of credit are increased.  Credit bureaus always win no matter who loses.  By any standard, they are a swiftly-moving target.  Like scavengers circling above our society looking for ways to make our financial lives more tenuous, credit bureaus, producers of nothing, increase the cost of college and just about everything else.  For most of us, the credit bureaus are our “due-process-free” Guantánamo Bay.  The less we have to rely on credit and credit bureaus, the better for anyone or any program that deals with ways to mitigate the specter of college costs.

The Economy at large:  This one is a no-brainer.  Whatever a “fix” would cost, it will be paid back many times over through enhanced productivity and innovation, a much higher tax base created by the holders of a college degree, greater consumption by a wealthier population with more discretionary money, and a diminished need for public investments in expensive services like prisons, rehab and welfare programs needed to serve an often aimless and under-educated citizenry.  Anyone with a calculator can do the math on this.  The only public expenditure that always pays back the investor is education with higher education creating the greatest rate of return.

A few years ago, The New York Times did a little piece (“To Retire Well or to Educate Well?”) that had giant implications.  They tracked two couples who at the age of 25 started putting aside $1700 a month for retirement.  In their 40’s, “couple one” stopped those contributions for 4 years to divert the money to help to pay for their child’s college education.  They even used some of their retirement funds to cover college costs and avoid student loans.  After 4 years, they again went back to the retirement contribution routine.  At age 60, according to the Times article, they retired on a nest egg of just over $600,000.  “Couple two” did the same thing except that instead of stopping contributions to retirement for 4 years or using retirement funds to help with college, they paid what they could out of income and borrowed the rest.  At age 60, with the loans having been paid off a few years earlier that couple retired on a tidy sum of just over $2 million.  There are many implications here but for the economy, the best part is that “couple two” could look forward to a retirement where they could also be active consumers by injecting their adequate retirement dollars into the economy at large. Unlike the current system, a college funding approach that protects the assets of parents will further enhance the return on any government “investment” in higher education.

The Nation:  In a letter to Colonel Yancey, Thomas Jefferson said, “…If a nation expects to be ignorant and free…it expects what never was and never will be.” Then we look at the recent survey of college students where a significant percentage of them could not name the three branches of our government.  For every one of those “students” there were many others who knew those answers and a good deal more but who were not attending college usually for financial reasons.  “In 2002, the federal Advisory Committee on Student Financial Assistance estimated that cost factors prevented 48% of college-qualified high school graduates from attending a 4-year college and 22% from attending any college at all. In a single year, this amounts to 400,000 college-qualified students who will not attend a 4-year college and nearly 170,000 who will not attend any college at all.” (2002).  That’s the kind of self-created, national mental deficit that breeds woefully under-qualified candidates for higher office and one that trusts and tolerates twisted leadership both in and out of government.  Smart, educated citizens demand smart, educated leaders.  Smart, educated citizens with an active sense of social responsibility, have less tolerance for governments and captains of industry who play fast and loose with the public trust in an ongoing effort to acquire unlimited personal wealth.  Moreover, in a century marked by a new level of intense world competition, while it is not a great idea to ship the means of production to an overseas competitor, it is even worse, much worse, to depend upon the brain power of off-shore nations though default because our nation has failed to produce enough high-level thinkers in every field of modern endeavor.  It is simply a matter of national survival.  It is our smart people who make us safe and competitive, not smart bombs.  A revamped, simple and transparent college funding approach lies at the heart of securing our future and “…the blessings of liberty to ourselves and our posterity”.

The present approach to recovery may be backwards.  It is a top-down plan that theorizes if a relative handful of banks and financial institutions are healthy, the benefits will eventually reach the average American.  While that may be true, it doesn’t resonate with the average, hard-working American family or with the realities of what makes this nation great.  We are a nation where real innovation happens in garages and academic institutions and not boardrooms where the sad truth is that all too often innovation takes a back seat to obfuscation and exploitation.  Ordinary Americans need direct help and when they recover, the financial services recovery will accelerate.  It is time to “stop being stupid” as Bob Herbert so properly framed it in his December 27, 2008 column in The New York Times.  The plan that follows will suggest a blueprint for that philosophy as it applies to the college funding dilemma.

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1 Comment on The Case for Financial Aid Reform

  1. Ken Levin says:

    – Dear Dr. Wrubel, I am an 81 year old college freshman. No, that is not a dyslexic error, I am an octogenarian. I am about to present a paper in a symposium having been volunteered (selected?) for the task by my Government Educator, Professor Hedi Jo Green. The topic I selected is “Is Secondary Education a Matter Of National Security?” I never meant it to be a question as I do not believe it is but Prof. Green chose the wording.
    – One of the best parts of this project is having found your writings and through them your verification of beliefs that I have come by on my own.
    – Being in my ninth decade of accumulating knowledge and experience also gives me the Hutzpah to make requests of people so, I was wondering if I could impose on you for a statement on my topic or, if you could meet my deadline of the end of next week, even a short (one to two minute) video that I can include. Either way, I am having a problem finding a picture of you to show while I am quoting you. Thank you for your consideration of my request and , even more so, thank you for the wealth of information in your writings! –

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