President Bush has jump-started what thus far has been a lethargic debate over the renewal of the Higher Education Act (HEA) -- the legislation that governs all federal student financial aid programs -- by proposing to increase the maximum Pell grant by $500 over the next five years. He also proposes to turn the habitually underfunded Pell program into a true federal entitlement.
The president should be commended for these proposals. But Congress should take this opportunity to push for broader reforms that would return the student financial aid system to the first principles that initially guided the creation of Pell grants: It should become a simple aid program that raises the educational aspirations of the most disadvantaged students while they are still in grade school by assuring them financial aid will be available. Just making Pell an entitlement will not make that initial vision a reality. Much more substantial reform of the system is needed.
One virtue of Bush's proposal to increase the size of Pell grants and make them a federal entitlement is that it would allay critics' concerns about recent changes in Pell eligibility rules that were designed to direct more financial aid to the most deserving students, but in the process cut off aid to thousands of more affluent students. Another virtue of the president's plan is that it would help solve the chronic federal student aid question of how to translate a range of possible savings in federal student loan programs that could be achieved by switching from government-guaranteed bank loans to direct government loans or other means into more funding for Pell grants. With both Pell and student loans as entitlements, the budget rules would allow for funding tradeoffs between the two. (For more about the potential savings from student loan reform, see "Straight Talk On Student Loans," by Robert Shireman.)
But Bush's proposals do not go nearly far enough to address the more fundamental challenges that American higher education faces, from chronic disparities in access between rich and poor students, to degree completion rates that are below average among industrialized nations, to tuition and other charges that have been growing at twice the rate of inflation for more than two decades. The debate over the HEA reauthorization should tackle these challenges, not skirt them.
So far, the debate about renewing the HEA has focused more on funding levels and relatively minor legislative changes than on major reforms. This is not surprising. For a variety of reasons, the reauthorization process doesn't seem to lend itself to major changes of direction. In fact, almost all major changes in federal aid over the past three decades since Pell grants were first created in 1972 -- such as the establishment of middle-income student assistance in 1978, AmeriCorps and direct student loans in 1993, and tuition tax credits in 1997 -- were enacted outside of the HEA reauthorization process.
Now is the chance for the president and Congress to buck that trend. They ought to address the substantial problems with the student aid system that limit its effectiveness in meeting the goal of expanding postsecondary educational opportunities for a broad range of Americans.
What are these problems? For starters, student aid has become far too complex for both families and administrators. In addition, political pressures to spread benefits to the middle class have eroded the ability of the system to target aid to the most disadvantaged students. And Pell grant and other federal policies are not sufficiently coordinated with each other or with state, institutional, and private efforts. That lack of coordination may have played a role in rapid increases in tuition and college costs.
Likewise, a lack of policy coordination may help explain why states and institutions have moved the aid they provide up the income scale. More than one-quarter of state grant aid is now based on merit, up from less than one-tenth a decade ago. Private and public institutions also are providing more of their aid to middle- and even upper-income students. At private institutions, middle-income students are now more likely to receive aid than low-income students. Not only that, middle-income students also receive more of this aid. Even students from the highest-income quartile are as likely to receive institutional aid as students from the lowest-income quartile. The patterns at public institutions are less dramatic but do show the same troubling trend. Thus, states and institutions seem to be blunting the national objective of helping the poor the most.
This means Congress must reinvigorate the postsecondary partnership between the federal government and others who provide aid, including states, institutions, and the private sector. This partnership has frayed over time; it should be redefined and strengthened to meet today's challenges. Specifically, Congress and the president should do the following five things:
First, the federal government should strip away burdensome red tape in the financial aid application process. Currently, eligibility for federal aid is calculated using a formula that weighs sources of taxable and nontaxable income, material assets, and family size, among many other things. That system requires students and families to complete a complicated application form. A better alternative would be to determine student aid eligibility using the standard information families provide on their federal income tax returns. Using income tax rules, awards could easily be calculated in a way that provides the maximum Pell grant to students from the lowest-income families, and progressively phases down the awards for families in higher income brackets. Students and families outside the regular income tax system -- such as those eligible for the Earned Income Tax Credit or Medicaid -- would be automatically eligible for the Pell maximum award.
Aside from the comparative simplicity of using income tax information to determine Pell eligibility, such a system would also have the added benefit of ensuring that the two major types of federal non-repayable student aid -- grants and college tax credits -- work in harmony with each other. Tax credits are already tied to the income tax system by definition. Calculating Pell grants the same way would help make the whole system fairer and more rational.
Second, the federal government should reform the way it provides student aid funds to states and institutions. Currently, federal programs fund states and institutions to help pay for the aid they provide to students in need of financial assistance -- including many middle-income students. In the future, it could match only the aid that states and institutions provide to Pell grant recipients. This matching provision would reduce any current incentives for states and institutions to move the aid they provide up the income scale.
Third, Congress and the president should tighten the restrictions that determine which student borrowers will benefit from federal payment of interest costs while they remain in school. These in-school interest payments -- the largest-cost item in federal student loans -- currently subsidize many students who are not low- and middle-income. Tightening the financial qualifications for in-school interest subsidies so the benefit only goes to those who need it most would help cut the federal government's student loan costs and thus free up funds either for higher loan limits or greater investments in other forms of student aid.
Fourth, the federal government should consider incentives such as paying institutions for the Pell grant recipients they graduate. Low rates of degree completion are a major problem in American higher education: Less than half of students complete a four-year degree in six years and graduation and transfer rates at community colleges are dismal. Rather than penalize or reward students, it may make more sense to provide incentives for institutions to improve student performance.
Fifth, the federal government should develop a much more aggressive early intervention strategy, rather than rely so much on student financial aid to change the attitudes and raise the aspirations of the most at-risk grade school and high school students. This should include a large expansion of the federal Gear-Up program of university and middle school partnerships as well as the establishment of college savings accounts for low-income students starting when they are in grade school. The Bush administration's 2006 budget request to Congress inexplicably eliminates the Gear-Up program, which is generally regarded on both sides of the aisle as a successful program.
A reform effort that includes these five steps would create a student aid system that is far simpler than the current aid system for students, their families, and administrators. Families could apply for aid by simply allowing their federal income tax information to be used for the calculation. Those not in the tax system would have ways to be judged eligible for Pell grants based on the other federal social programs for which they are eligible.
Pell grants also would be much better coordinated with tuition tax credits, the other major form of federal non-repayable aid. Pell benefits would fall as a family's income tax liability increased, but the family's eligibility for tuition tax credits would increase at the same time. Pell grants would be the major form of aid for lower-income students, while a new consolidated lifetime learning tax credit such as the one proposed by Paul Weinstein in "Universal Access to College Through Tax Reform" could become the major form of aid for middle-income students and older non-traditional students, including the growing numbers of distance learners.
President Bush has taken an important first step by putting a credible proposal to increase the Pell grant maximum award on the table. But his proposal is not a sufficient reform by itself. It's now up to Congress and the higher education community to ensure that this reauthorization of HEA includes a substantial and meaningful reworking of the federal student aid system to better meet the needs of the most disadvantaged students while expanding educational opportunity for everyone.
