Is financial aid broken?

August 27, 2013
  • AACRAO Connect
  • Financial Aid and FAFSA

education savings

President Obama caused a bit of a stir during his State of the Union address when he proposed the most sweeping changes to federal aid since the 1970s, calling for new performance-based accountability measures and an alternative accreditation system. His remarks and the policy document he subsequently released were met with surprise in many quarters of the higher education community.

But this should not have been a shock to anyone, says Kevin Carey, the director of Education Policy Program at the New America Foundation. In a recent article for the Chronicle of Higher Education, he argues that the regulatory mechanisms for financial aid have been obsolete for some time now, and that everyone involved in collegiate life knows an overhaul of financial aid policies is overdue. 

The entire article is interesting, but here's a quick breakdown of its key points:

The history 

The current financial aid regime can be traced in large part back to the 1970s, an era of rapid expansion for American colleges. It was at that this time that it was determined that financial aid should be given directly to students instead of universities, and initiatives such as the Pell Grant were born. Federally guaranteed student loans became an essential part of the higher education experience for generations of Americans. 

The problem

While these measures created a new source of revenue for colleges beyond state appropriations, and helped create healthy competition to enroll more students by demonstrating their quality, they rested œa gigantic amount of money on a small, feeble regime of quality control.┬"

The rise in tuition prices has outpaced the rate at which citizens can afford them; student debt is reaching unsustainable levels; and taxpayers are essentially subsidizing the spike in costs.

Who benefits?

(1) State governments, for whom œhigher-education appropriations have been used as a kind of fiscal balance wheel." In hard financial times, states can decrease spending on students and shift the cost to universities and, in turn, students themselves, financed by federal aid.

(2) Universities and colleges themselves “ traditional and for-profit “ because œas states spend less and colleges spend more, students and their families are making up the growing difference in tuition that is increasingly financed by debt."

The root cause

There are, of course, many theories about the root cause of the problem.

Many contend that the problems are structural: One line of thought associated with the economist William Baumol posits that higher education is labor-heavy, and the costs of its growth be cut through technology-driven productivity increases; another school of thought spearheaded by former university president Howard Bowen argues that colleges increase costs because they can, as they vie for status with their competitors.

But Carey sees these theories as stacked upon a deeper root cause: “All three forms of exploitation of the current financial-aid system have the same root cause: a weak, opaque system of quality control. Federal lawmakers assumed that the combination of accreditation, state regulation, and consumer choice would be sufficient to safeguard public funds.”

So, what now?

According to Carey, a number of possible options may be considered in the aftermath of Obama’s call to reconsider how the federal government can enhance students’ ability to decide about and take part in academic life. These range from ideas floated by economists like Cass Sunstein to make income-based loan repayment the default option for all borrowers, to re-evaluating tax breaks for financially comfortable students.

For Carey, the prospective “reorientation of how higher-education quality is measured and defined” is the most profound source of long-term changes. In particular, a market in which colleges and non-colleges “compete on a level financial playing field would behave very differently form the traditional higher-education ecosystem we know today,” he observes.


By: AACRAO Connect



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