A New Course for Higher Education

Higher education is becoming increasingly expensive. Since the 1999–2000 academic year, the average price paid by students for tuition, fees, room, and board (adjusted for inflation) has increased by 70% at public four-year schools, 21% at private nonprofits, and 10% at public two-year institutions.

The Pell Grant, the federal government’s largest source of need-based grant aid, has helped millions of Americans achieve a postsecondary education but has failed to keep pace with rising prices, placing strains on low- and middle-income families. At the same time, declining state funding for higher education has led public institutions to rely more heavily on tuition revenues. This has contributed to rising levels of unmet need, meaning the gap between out-of-pocket higher education costs and available student resources, which includes all grants, scholarships, loans, family support, and wages.

Rising unmet need has, in turn, led to a growing reliance on student debt, as evidenced by the roughly $1.5 trillion in outstanding federal student loans. Conversely, the federal loan program itself has been criticized for putting upward pressure on tuition prices by providing a source of easy credit that leaves institutions with little incentive to cut costs. Parents are also increasingly taking out federal loans (called Parent PLUS Loans) on behalf of their children. These loans have minimal underwriting standards, and they pose a threat to financial security among parents who lack the resources to meet their obligations.

To make matters worse, federal programs designed to promote higher education access and affordability are often poorly designed and complex. For example, higher education tax expenditures flow primarily to high-income filers, and federal campus-based aid programs—which provide resources to schools to distribute to low-income enrollees—are allocated based on an outdated formula that disproportionately benefits wealthier campuses. Similarly, federal loan forgiveness options provide outsized benefits to borrowers with large balances, who tend to have high incomes. There are also numerous loan repayment options, each with varying terms, making it difficult for borrowers to determine which is in their best interest. For example, borrowers can choose from several income-driven repayment, or IDR, plans. These plans support struggling borrowers, as monthly payments are limited to a share of the borrower’s income. Unfortunately, the enrollment and income verification process is cumbersome, which hampers uptake. The Free Application for Federal Student Aid, or FAFSA, which must be completed annually in order for students to receive financial aid, similarly suffers from complexities, and the annual submission requirement harms retention, particularly among low-income students.

Improving access and affordability is a critical component of higher education reform, and this report contains a comprehensive package of bipartisan recommendations that would primarily focus on reducing unmet need among low-income and middle-class students. Importantly, the task force’s package of recommendations is roughly budget neutral, an outcome achieved by curtailing benefits enjoyed disproportionately by high-income families in favor of additional supports for students who struggle to afford college.

Key to this package is the establishment of a $5 billion annual federal matching grant aimed at incentivizing greater state higher education investment (Box 1), as well as a substantial expansion of the Pell program to reduce financial barriers for low-income and middle-class students (Box 2). Other reforms, such as making Pell funding available to incarcerated students, easing the process for low-income students without a high school diploma to access Pell funding, and extending Pell to short-term programs (initially on a pilot basis), would further promote affordability.

Although a postsecondary degree remains a worthwhile investment—the typical bachelor’s degree recipient earns roughly $900,000 more over the course of their lifetime compared to the typical high school graduate—the sad truth is that too few students actually make it to graduation day. Only two-fifths of first-time, full-time students complete a bachelor’s degree within four years, with 60% completing in six.

Unsurprisingly, low graduation rates translate to a large number of student borrowers unable to meet their monthly loan obligations. Just around half of new borrowers are able to reduce their principal balance within three years of entering repayment, and 39% of loans in the federally managed portfolio are either delinquent or in default. Part of this problem can be attributed to a broken federal accountability system: the government allocates $156 billion annually in federal loans and grants with ineffective oversight and quality control.11 A further problem is that many institutions—particularly community colleges and some Minority-Serving institutions, or MSIs—lack adequate financial resources, which hinders their ability to provide sufficient support to students.

The task force has developed a series of reforms designed to strengthen institutional accountability and boost institutional capacity, with the goal of holding every school to a uniform set of standards while simultaneously making targeted investments to improve student outcomes (Box 4). Specifically, the task force recommends investing $400 million in additional annual mandatory funding for MSIs, community colleges, and low-resource institutions in other sectors that enroll a high proportion of low-income students. As these supplemental funds are provided, an independent national commission should assess current federal allocations to MSIs (delivered through Titles III and V of HEA). To the extent that these funds are being allocated ineffectively for supporting students in need, the commission should make recommendations for improvement.

The American public has a strong interest in understanding the higher education sector’s performance, to ensure the system provides students and taxpayers with a sound return on investment. However, the Department of Education’s data system, the Integrated Postsecondary Educational Data System, or IPEDS, leaves out large swathes of the student body, does not report on some important outcomes, and obscures school spending patterns.

Student borrowers also lack critical information needed to make fully informed decisions about their educational goals and repayment options. At a time when overall indebtedness is rising, along with the prevalence of loan default and delinquency, it is alarming that many borrowers lack detailed knowledge of their student loans.

To aid decision-making for students and inform public policy, the task force recommends expanding student-level data. This would provide students and policymakers with increasingly robust and granular information about earnings and employment outcomes for students, which would be disaggregated by demographic characteristics.

The task force also endorses several reforms to institutional data that would prioritize transparency and comparability. These changes include establishing standardized reporting periods for IPEDS surveys to improve cross-comparability; reforming institutional spending metrics to better reflect what institutions spend on student success versus spending designed to attract additional revenue; and additional proposals designed to promote data quality, such as an audit of IPEDS to assess data quality and a tightening of data definitions within IPEDS’ various surveys.

Finally, students often lack the information needed to fully guide their decision-making in what is among the most consequential investments of their lifetime. To provide students with better information about financial aid and college costs, the task force recommends standardizing financial aid offers. These are communications that institutions send to accepted students and include information about the student’s financial aid package relative to the school’s cost of attendance. Standardizing these forms would aid student decision-making by promoting comparability across institutions.

The task force also favors evidence-based reforms to federal loan counseling, the development of personalized, easy-to-understand disclosure forms for student borrowers, and an annual notification of students’ federal financial aid uptake relative to aggregate limits. Providing such information to students is crucial in order for them to have an accurate picture of their financial aid package, their out-of-pocket costs, and the costs associated with their student loans.

High prices, lackluster student outcomes, and a lack of data transparency plague the U.S. higher education system. Students face rising levels of unmet need, which has led to ballooning debt levels within a financial aid system that is poorly targeted and difficult to navigate. Earning a college degree remains a worthwhile investment for most students, but too many fail to graduate and realize these gains. Despite the billions of dollars of taxpayer funding dispersed to schools annually, a lax federal accountability system fails to hold institutions accountable for subpar student outcomes and protect students from the impact of school closures. At the same time, higher education outcomes are opaque due to inadequate data systems, and students have insufficient information to inform their decision on where to enroll.

BPC’s Task Force on Higher Education Financing and Student Outcomes has developed this comprehensive package of recommendations that Congress should consider as part of reauthorization of the Higher Education Act. If implemented, these reforms would put downward pressure on tuition prices, promote efficiency and improve the targeting of federal aid programs, boost quality assurance and institutional accountability, and enhance federal data systems while providing better information for students. Most importantly, these recommendations would measurably improve higher education access and affordability for lowand middle-income students, as well as promote positive student outcomes. Ultimately, this package of reforms would work to ensure every student shares in the benefits of America’s higher education system.