There are tremendous inconsistencies between the commitment that we want students to make to achieving their higher education goals, and the commitment that we are willing to make to support them in reaching their fullest potential.
We want students to commit to completing a credential, be it a certification, license, or degree, yet we have a financial-aid system that treats each year as a discrete and separate entity. Low- and moderate-income students have a difficult time planning for the long term when they have no idea from one year to the next what level of financial assistance will be made available to them. Each year takes the student back to the beginning, with another FAFSA to complete, and another anxious waiting period to see how much, if any, aid will be offered.
Each year a new set of decisions must be made regarding which, if any, loans to take, and from whom. For students who attend direct-loan schools (where the Department of Education is the lender), the decision may be clear, but for those who attend FFEL schools (where private lenders issue loans with the backing of federal subsidies and guarantees), and wish to shop for the lowest origination fees and interest rates, a substantial amount of research is required. And for those students whose need exceeds the limits of the federally guaranteed student-loan programs, yet even more decisions must be made regarding private loans.
And don’t even get me started on the complexities involved in repaying student loans when four years of borrowing is likely to result in four discrete loans, which means that the student might be required to write four different checks (each potentially for a different amount and due on a different date) each month. Sure, students can consolidate their loans to reduce them to a single payment, or to extend the repayment period, thus lowering the monthly payment but increasing the total cost of the loan, but in many cases, consolidation results in an increase in the interest rates on at least some of the loans included in the consolidation. In other words, sure you can consolidate your loans, but it will cost you.
Think about how different our lives would be if, instead of taking a single mortgage to cover the full purchase price of our homes, we instead had to take a new loan each year to cover the annual allocation of the total cost of the house. The inefficiencies of such a system are obvious and laughable, and yet this is exactly what we expect of our youngest, most inexperienced, and most vulnerable borrowers — students, to whom we have promised a million dollars in added lifetime earnings if they go to the right college or university and pursue the right degree or credential.
I wonder if we wouldn’t see higher college retention and graduation rates if we organized student aid around earning a credential, rather than around a traditional academic calendar or an annual progression. Let’s say that a student is planning to attend a public institution where he or she plans to earn a bachelor’s degree in four years. Why don’t we put together a single financial-aid package that plots the path to degree completion in terms of federal and institutional aid that will be provided during each of the four years? If loans are required, then why don’t we allow the student to take a single loan, at a single interest rate, with a single lender (which could be the government), and that would result in a single payment?
Of course, the student would be limited as to how much could be drawn down from that loan in a single year, and there should be no penalties for early repayment should the student’s borrowing needs suddenly diminish. Think about the impact that credential-based financing might have in encouraging students to complete a credential on time and at the institution where the financing was originally developed.
Under this scenario, students wouldn’t be prevented from transferring to another institution, or extending the time to degree completion by one or more years, but either of those changes would require the student to complete a new financing plan, including the completion of a new FAFSA form, waiting for a new institutional aid letter, and even taking a new loan. Having completed many FAFSA forms and taken many student and parent loans in my lifetime, I can definitely say that I would think twice about a transfer or extended enrollment period if it meant that I had to go through the process again while sticking with the original plan eliminated the annual burden.
Another advantage of a credential-focused aid program (which could be the primary reason that many private institutions would send their lobbyists running to the Hill to fight this idea) is that students would enter college with a more realistic and accurate understanding of just how much the full credential will cost. The difference between a $10,000-per-year school and a $40,000-per-year school sounds much less dramatic than does the difference between a $40,000 credential and a $160,000 credential. Sure, most college students can do the multiplication (provided their calculator is working) to determine the full cost of the credential they seek, but in reality, the annual funding paradigm is an effective way to hide the true cost of higher education and make students think that they can afford higher priced schools. Students who get the thick envelope from the college of their dreams are reluctant to force themselves to look at total costs when, instead, they receive a financial aid letter that provides a false sense of affordability on an annual basis (remember that a large chunk of the “aid” offered might be in the form of student and parent loans).
It would also be easier for students to understand the full loan repayment burden they would face if they took a single loan to cover all four years rather than four individual loans to finance the annual costs of higher education. The problem with the current system is that the student has the opportunity to take more and more loans before they ever begin repayment of the loans they already took. They don’t necessarily feel the pain of adding a new $50 or $100 per month payment burden each year when this is presented to them on paper, but many are shocked and overwhelmed when, upon graduation, they realize that the cumulative sum of their individual loan payments is hundreds of dollars each month — or more.
A single loan would also allow students to better understand the real cost of earning a credential, including the cumulative costs of loan interest and fees. While colleges and universities love to say that few students actually pay the sticker price, I suspect that, in reality, most students and families pay far more than the sticker price once loan interest is added in. Those $1000 and $2000 “scholarships” at expensive private schools seem less significant when a student or parent realizes just how much they will be paying in loan interest over the 10-, 20-, or even 30-year repayment period (yes, consolidated loans can be extended to terms of 30 years).
Another advantage of credential-based aid and financing is that students might be more likely to commit emotionally to completing a credential if they know from the start that the financing is in order for each ensuing year. Beyond that, a total financing package might persuade colleges and universities to allocate institutional aid in a way that motivates completion rather than yield decisions. How many times do we hear about students who are offered generous institutional aid for their freshman year, but then experience a disappointing reduction in that aid during subsequent years? The front-loading of institutional aid is a serious problem and I believe it is a significant contributor to the low retention rates we see.
I fully recognize that there would be tremendous policy hurdles to clear if we were to change from a chronologically based financial aid system to a credential-based system. For one thing, it would cost a lot to make out-year financial-aid awards based on a single year’s income tax returns, as opposed to the current practice that considers annual changes in income when awarding aid. While income levels among full Pell recipients are unlikely to change substantially from one year to the next, and awards may vary by only tens of dollars per person as a result of year-to-year income changes, given the number of participants in the program, these tens of dollars could add up to billions over the course of a decade. It is hard to know where Congress would find the money to make the shift from an annual award to a credential-based award, but over time, I believe that this new award paradigm would increase retention and graduation rates, thus saving the taxpayer a substantial amount of money. Unfortunately the Congressional Budget Office “scoring” process (the process by which CBO determines the annual and long-term costs of legislation) does not allow for consideration of savings offsets such as the ones realized through increased retention and graduation rates.
Yes, the initial price tag for this shift would be substantial, but if we can find money to help middle- and upper-income people purchase new cars, and we can bail out billion-dollar banks, then I believe we can find the money to fix the financial-aid system in a way that will support the young people in whose hands our collective future lies … and that will lead to the higher retention and graduation rates that we all agree are of paramount importance.
