A Time for Change in the 21st Century
Addressing Economic Realities: A New Paradigm for College Financial Aid
The College Financial Aid Crisis
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. There is no better example than the federal college financial aid system. It represents a herd of camels that carry all of us aimlessly into a desert wilderness with unintended consequences punctuating an already barren landscape.
Study after study have 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 stunning 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
trillion 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.
? 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 college in 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 13
ththth, 14 and 15 thAmendments. The right to vote, enumerated in the 15 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 an insurmountable barrier for an increasing number of Americans. If high school is perceived as a road to somewhere 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 practical 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.
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 Guantanamo 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 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 the college costs. 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, 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
games 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 27th column in The
New York Times. The plan outlined below will suggest a blueprint for that philosophy as
it applies to the college funding dilemma.
A Plan for the 21st Century
We have already noted a few of the many flaws in the college financial aid system.
There are others to be sure but that would require a book-length critique. It is sufficient
to note, 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 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. It is time…it is beyond time to heed Lincoln’s advice. So let’s stop
putting lipstick on this college financial aid pig. Let’s just release the poor beast to some
food bank and create something better, something that doesn’t require lipstick or any
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. Now that is really 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 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. And 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. And the feds go along with this, no questions asked!
Change Two: Once the college has enrolled the 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. 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.
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, 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 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 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 pay for college out of their normal income stream.
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 general marketplace of the nation. 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 needs to be addressed on a national scale.
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.
Change Six: The Department of Education will create another index, this one for
colleges, the Institutional Contribution Index (ICI) using transparent benchmarks like endowment, certain data points within the college budget, debt, contributions from state resources such as the California’s Grant Program and fund raising expectations and activities. The ICI will determine the degree to which the college must contribute to the total cost of underwriting the need of its students. Obviously, more highly endowed colleges will be expected to contribute a larger percentage to student aid than less affluent 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 highly-trained cadre of professionals to help colleges complete and submit the required data needed to determine the ICI rating for every college.
The ICI formula must include rewards and 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 disincentive to dramatically increase 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.
So now, using the example started above, we may have something that looks like this if
the ICI (the institutional/college contribution or “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 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 AGI. 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 forms a year to fewer than 20,000.
Change Eight: Student Loans should be completely eliminated as a form of need-based aid although unsubsidized student and federally-back parent loans 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