Rebalancing Resources and Incentives in Federal Student Aid

Policy Paper
Jan. 29, 2013

Washington, DC – The New America Foundation’s Education Policy Program today released a comprehensive package of policy proposals that would provide an overhaul of federal financial aid. The report, Rebalancing Resources and Incentives in Federal Student Aid, calls for specific changes to grants, loans, tax benefits, college outreach programs and federal regulations to provide more direct aid to the lowest-income students while strengthening accountability for institutions of higher education to ensure that more students are able to earn affordable, high-quality credentials.

Rebalancing Resources and Incentives in Federal Student Aid argues the current federal financial aid system is no longer up to today's demands. Built in a different era, its haphazard evolution over the decades has made it inefficient and overly complicated. The existing system wastes taxpayer dollars and fails to provide institutions and students with the resources and incentives they need to access high-quality credentials and succeed in higher education and the workforce.

With the need for higher education never greater and college growing increasingly unaffordable, the report argues the time has come to put everything on the table. Students and taxpayers need a streamlined aid system that is more understandable, effective and fair. With this new report, New America’s Education Policy Program offers more than 30 specific policy recommendations that are designed to create such a system. Taken together, these recommendations can all be financed with the existing resources that policymakers have already committed to federal student aid. The proposals include:

• Pell Grants: Permanently eliminating the Pell Grant funding cliff and putting the program on a firm financial footing by making it into an entitlement program. Increasing the maximum Pell Grant and providing Pell bonuses to public and private non-profit colleges that serve a substantial share of low-income students. Requiring schools that enroll a small share of low-income students but charge them high net prices to match a portion of the Pell Grant funds they receive.

• Federal Loans: Significantly simplifying the federal student loan system and reducing the dangers of default by requiring all borrowers to repay their debt based on a percentage of their earnings. Encouraging colleges to hold down their costs by eliminating both the Parent PLUS and Grad PLUS programs that currently allow for unlimited borrowing.

• Tax Expenditures: Eliminating poorly targeted higher education tax benefits, such as the American Opportunity Tax Credit, in favor of direct aid for students.

• Accountability, Transparency, and Reform: Holding institutions accountable for providing high-quality, affordable educations by extending broad accountability metrics to all colleges. Creating a federal student unit record system to provide a clearer picture of how students fare as they proceed through the educational system and into the workforce.

“Our policies ask more of students and institutions, and provide more in return,” said Kevin Carey, director of the Education Policy Program. “We have designed a simpler, fairer system that will reorganize and leverage existing federal dollars toward the nation’s college completion goals imperative to our economic success.”

Rebalancing Resources and Incentives in Federal Student Aid is part of the Reimagining Aid Design and Delivery (RADD) project, an initiative supported by the Bill & Melinda Gates Foundation. The project seeks to shift the national conversation on federal financial aid away from incremental policy decision-making and toward a broader aid reform agenda which places a focus on achieving better outcomes for students and developing innovative policy ideas.

To read the full report, please click here.

For more information or to schedule an interview, please contact Ross van der Linde.