Report on Student-Aid Reform Calls for Making Pell Grants an Entitlement

January 29, 2013

Expanding the federal Pell Grant program, reducing student-loan debt, and eliminating tuition tax breaks are necessary steps toward improving the federal financial-aid system, according to recommendations released on Tuesday by the New America Foundation.

In a report the foundation's Education Policy Program proposes more than 30 specific, budget-neutral policy changes that would reorganize several hundreds of billions of dollars in spending to deal with what the authors say are inefficiencies in the postsecondary financial-aid system.

The report is based on the foundation's study of the student-aid system, one of 16 commissioned by the Bill & Melinda Gates Foundation as a part of its $3.6-million Reimagining Aid Design and Delivery project. Other reports issued in recent weeks have come from the National College Access Network, the Institute for Higher Education Policy, the Committee for Economic Development, and HCM Strategists, a consulting firm.

The foundation's report seeks to overhaul the federal student-aid system by expanding grant opportunities as well as by consolidating parts of the federal loan programs and increasing accountability among institutions that serve low- and middle-income students.

"We wanted to work with all of the existing resources that policy makers have committed to spend ... and find ways to make those programs work better and a little more rationally," said Jason Delisle, an author of the report.

While many of the recommendations follow common themes in financial-aid reform, some involving the Pell Grant program are unique to the report.

Much of the report centers on changes that would prevent the Pell program from falling off a "funding cliff"—needing a multibillion-dollar appropriation to maintain the maximum grant award each year at a time when Congress is facing maximum pressure to cut spending.

One goal of the report is to establish the Pell Grant program as an entitlement, making it a mandatory cost in the federal budget rather than financing it through the annual appropriations process. The result would be to largely insulate the program from yearly budgetary tumult.

Such an approach "costs absolutely nothing, and it also provides security for the Pell program," said Amy Laitinen, another author of the report.

Holding Colleges Accountable

Other recommendations would increase the maximum Pell Grant award over the next 10 years and re-establish the year-round Pell Grant, which was eliminated in 2011 as a cost-saving measure to maintain the maximum grant amount.

The authors also propose awarding bonus incentives to four-year colleges that serve a large percentage of Pell recipients and to community colleges with strong graduation and transfer rates. President Obama proposed a similar reform last year for the Perkins Loan program that also included incentives for universities.

The report also seeks to hold universities accountable by instituting a Pell matching program at those that do not meet the financial need of their low-income students. Universities at which Pell recipients make up less than 25 percent of the student body would be required to match a portion of the Pell Grant funds if they charge students from low-income families a high net cost. Low-income students who do not receive sufficient financial aid from universities often turn to federal loans to cover the cost of attending college.

On the issue of cutting student-loan debt, the authors recommend establishing an income-based repayment program as the sole repayment option for borrowers, and a fixed formula for setting student-loan interest rates. The report also suggests eliminating Parent and Grad PLUS loans, federal programs that allow for unlimited borrowing and thus increase the possibility of default for borrowers.

The authors seek to save money in other areas, such as cutting unnecessary tax benefits. They estimate that eliminating tuition tax breaks, such as the American Opportunity Tax Credit, could save nearly $160-billion over the next 10 years—savings they say should be redistributed to the Pell program. Critics of the tax breaks say they waste money by helping well-off families whose children will go to college anyway.

Demanding a set of accountability measures that would encourage colleges to keep higher education affordable could save more than $1-billion in 10 years, the report states. One recommendation revives a proposed national student unit-record system—a way to track students throughout their academic careers as a means of gauging colleges' performance. The proposal was rejected a decade ago over security and privacy concerns.

"For the most part, these federal dollars are coming with very few strings attached," Ms. Laitinen said. "Institutions aren't really on the hook for student outcomes ... and we think that has to be a central part of any financial-aid reform."

Correction (1/29/2013, 12:08 p.m): This article originally mischaracterized Parent and Grad PLUS loans. They are federal loans, not private loans. The article has been updated to reflect this correction.