Study: U.S. financial aid fails students who need it most

The $86 billion system is so complex and piecemeal that experts call for an overhaul.

The United States government spends upward of $86 billion a year on grants, loans, work aid, and tax benefits for college students. But the patchwork system is a barrier to many who are academically qualified for college, say a group of policy experts and higher-education professionals who laid out their recommendations in a report Sept. 18.

The "piecemeal, rickety financial aid system" needs an overhaul, according to by the Rethinking Student Aid study group. The College Board, a nonprofit association in New York, convened the group two years ago.

"There's a growing recognition that the federal student aid system is simply too complicated," says Sandy Baum, the report's co-author and an economics professor at Skidmore College in Saratoga Springs, N.Y. "We're seeing proposals in Congress; we're seeing the Department of Education talk about simplification…. People are really ready to do something more dramatic to the system."

The goal is to increase access to college and persistence through graduation, particularly among students from low- and moderate-income backgrounds. A variety of business and education groups have been sounding the alarm in recent years, concerned that if the US fails to generate more college graduates, it's at risk of falling behind economically as other nations step up their education levels.

Among the group's recommendations to simplify aid and make it more transparent:

•Eliminate the complex Free Application for Federal Student Aid (FAFSA). Tax information would be supplied by the IRS to the Department of Education to determine eligibility for Pell Grants, the main form of federal grants. Families receiving income-based public benefits would qualify for maximum grants without needing tax data.

•Increase Pell Grants based on the annual consumer price index, base the grants on family size and adjusted gross income, and notify families in advance about what amount of aid their child could expect if enrolled in college.

•Combine the myriad education tax credits and deductions into a single credit, and let students spend some of it on nontuition expenses.

"There's no question [that eliminating FAFSA] would encourage college attendance among our lowest-income families," says Tom Parker, dean of admissions at Amherst College in Massachusetts. "Every year we are not able to award aid to some families because they simply have not filled the forms out, in spite of our doing everything we can to encourage them, and that's a real tragedy."

There have long been calls for simplifying FAFSA, but they've been met with resistance, partly because of the fear that some families would hide assets and get aid they don't deserve. But to Mr. Parker, that risk is "overwhelmed by the good it would do the vast majority of families."

The group also wants to ease loan burdens. About two-thirds of students at four-year colleges take out loans, and on average they graduate nearly $20,000 in debt, according to the Project on Student Debt in Berkeley, Calif.

Rather than a 10-year mortgage style repayment plan for loans, payments should gradually increase, the report notes, since most people's income grows over time. It would also defer payments for people making less than 150 percent of the poverty rate. And it would cap payments in any given year at 15 percent of the graduate's income above that amount. This would strengthen an income-based repayment option recently enacted by Congress.

Currently most federal loan subsidies allow students to defer interest and payments until after college, but they have to qualify up front based on income level. By eliminating those subsidies, applying for a loan would be simplified and the government would save an estimated $8 billion, which could be directed to the new repayment subsidies and larger need-based grants, Ms. Baum, the economics professor says.

Some of the proposals require certain trade-offs that will spark debate – including the loss in assets reporting, the loss of loan subsidies during the years people are in school, and tying Pell Grants to inflation, which would basically make them an entitlement, says Terry Hartle, a senior vice president of the American Council on Education, a higher education research and advocacy group in Washington. "The challenges of implementing these ideas are much more substantial than the report lets on, but … this is a very good time to talk in broad terms about federal student aid,… how effectively it works, and how it can be improved."

To give low-income families the incentive to start planning early for college, the group also calls for creating savings accounts for families that would qualify for Pell Grants. This would be a counterpart to the tax benefits that higher-income families enjoy through popular 529 college savings plans. Costs would depend on various factors, but if the accounts started at age 12, for instance, and the government put in 10 percent of the Pell Grant the family would qualify for each year, the estimated cost would be about $3 billion a year.

To encourage schools to help low- and moderate-income students reach graduation, the group recommends incentive grants for colleges. While 40 percent of low-income students start college, only 12 percent earn a bachelor's degree by age 24, compared with 73 percent of their higher-income peers, according to The Pell Institute for the Study of Opportunity in Higher Education in Washington.