Before June draws to a close, Congress is expected to decide whether to allow the interest rate on new federally subsidized student loans to double to 6.8 percent as of July 1. If that happens, borrowers will pay, on average, an additional $38 a month, less than their monthly cellphone bill. Keeping the rate at 3.4 percent will cost the government $41-billion over 10 years, according to an analysis by the Congressional Budget Office.
The small benefit to borrowers and the sizable cost to an already stretched government budget hardly seems worth the time and effort that lawmakers and lobbyists have spent on this issue in recent months. If Congress and President Obama truly want to repair the federal student-loan program and better position the nation's higher-education system for the future, they should focus on no longer treating every college the same when it comes to doling out student aid.
Right now, as long as students attend an accredited higher-education institution, they are eligible for federal loans. The only check on the program is a college's default rate: If too many of its students fail to pay their debts, the college loses its eligibility to offer federal aid. That rarely happens, however, because the bar is set pretty high.
Federal student-aid dollars should be tied to much more than whether graduates pay back their loans. Rather than spend $41-billion keeping the interest rate on student loans low for everyone, the government should redesign its financial-aid programs so that it rewards colleges that graduate a more economically diverse student body.
Since the end of World War II, a college education has been seen as the great leveler of income disparity in the United States. Not anymore. In the past decade, the percentage of students from families at the highest income levels who got a bachelor's degree has grown to 82 percent, while for those at the bottom it has fallen to just 8 percent. Children from families that earn more than $90,000 a year have a one-in-two chance of getting a bachelor's degree by age 24. That falls to a one-in-four chance for those from families earning $60,000 to $90,000, and a one-in-17 chance for those earning under $35,000.
Perhaps most worrisome is that at the nation's 200 most selective colleges, only 15 percent of entering students in 2010 came from families earning less than $65,000, while nearly 70 percent came from families making more than $108,000.
The measure widely used to determine a college's commitment to low-income students is how many Pell Grant recipients it enrolls, since Pell is a need-based program. Some wealthy colleges do much better than others in this regard. Among public colleges, for instance, Pell recipients make up 36 percent of the undergraduates at the University of California at Los Angeles, but only 16 percent at the University of Michigan at Ann Arbor.
How successful an institution is at attracting low-income undergraduates comes down to motivation and money. A good example is Amherst College. Its previous president, Anthony Marx, made attracting talented low-income students a priority, and the college saw its percentage of Pell recipients increase from 13 percent to 22 percent during his eight-year tenure, which ended in 2011.
But Amherst didn't depend only on the federal government to move those numbers. It also dedicated plenty of institutional dollars to need-based aid. The average net price for tuition, room, and board at Amherst for families who make less than $30,000 is just $448. (This at a college where the sticker price tops $50,000.) As a result, in a recent report from the New America Foundation, Amherst topped the list of private institutions with endowments of at least $500-million with high percentages of Pell recipients and low net-tuition prices for financially needy students.
The country's changing demographics mean that the financial needs of college students are going to grow. As more low-income students graduate from high school, we're going to need many more colleges like Amherst. And the only way we're likely to get them is if institutions are encouraged with federal dollars.
First, money from the federal government's campus-based aid programs—Perkins Loans, the Supplemental Educational Opportunity Grant, and work-study—should be awarded to colleges in part on the basis of how well they graduate Pell Grant recipients above the national average, as well as students who are the first in their families to go to college.
Those extra funds could go a long way toward helping colleges reduce costs to students from low-income families. Right now that money is clustered at private colleges in the Northeast and public flagships because of a formula established in the 1970s.
One potential unintended consequence of such a change would be that colleges would simply use the additional federal funds in place of institutional aid for poor students. Those colleges could then spend their own dollars elsewhere, including on merit aid to attract high-achieving, wealthier students. So institutions should also be rewarded for keeping down their net price for low-income students, as Amherst has done. The New America Foundation study found that nearly two-thirds of the private colleges it analyzed charged a net price of more than $15,000 a year to students from families making less than $30,000.
Another key reform that has been suggested recently is to give bonuses to colleges that graduate large percentages of Pell recipients, and to require institutions that charge high net prices to needy students to match a portion of the Pell Grants, discouraging those institutions from spending their aid dollars on buying the best students in order to gain prestige.
The institutions that do the best with low-income students should also get access to additional federal student-loan dollars with lower interest rates. We shouldn't encourage needy students to take on more debt, yet they often are forced to take out high-interest private loans when they hit the federal government's loan limit for dependent undergraduates (currently $31,000). If those students must take on debt, let's at least give them access to better loans.
For the past several decades, many colleges have developed sophisticated financial models with the help of the enrollment-management industry, allowing them to charge students vastly different prices in an effort to craft the ideal class. The federal government now needs to adopt equally sophisticated models to offer differential financial aid, so that needy students can find themselves on an even playing field when it comes to getting a college degree.