CHAMPAIGN, Ill. — A series of modifications to federal student financial aid policy have eroded perceptions of higher education as a public good in the U.S., creating a “flawed” financial aid system that promotes both personal debt and tuition increases, a new study suggests.
Daniel A. Collier and co-author Richard Herman, both of the University of Illinois, trace current problems in higher education affordability and financing to several public policy decisions that shifted the costs of paying for college from public coffers to students. This trend toward privatization triggered the surge in student loans and enabled state colleges to repeatedly raise tuition as their state funding shrank.
Subsequent modifications to the Federal Higher Education Act of 1965 contradict the law’s intent – that a college-educated workforce is a social good and sound investment for government, the researchers conclude in their paper, published in a special issue of the journal Higher Education in Review.
The linchpin of the HEA was the federal loan guarantee, which, along with the wide availability of grants and scholarships, made college affordable for masses of Americans and also made student loans secure investments for private lenders. Almost immediately after the law was enacted, however, federal officials began phasing out the grants and scholarships in favor of loan-heavy aid packages, the researchers wrote.
This shift from public support for higher education to privatization was instrumental in shifting perceptions of higher education from that of a societal benefit to a personal good, ushering in further systemic changes that shifted college costs to students, increasing their reliance on debt to fund their educations, Collier said.
Collier is a recent alumnus of the doctoral program in education policy, organization and leadership, and Herman is a retired faculty member in the department.
These reforms included revisions to the methodology for calculating families’ expected contribution that increased the amounts families were expected to pay.
As students became more dependent on borrowing, the federal government introduced unsubsidized loans, which shifted interest costs for student loans from the government to borrowers. Unsubsidized loans quickly became the norm in student aid, generating millions of dollars in revenue for the U.S. Treasury, according to the study.
However, with interest rates that are higher than the rate of inflation and repayment obligations that can stretch for decades, calling unsubsidized loans “financial aid” is akin to calling a mortgage “housing aid,” Collier said.
This cost shifting at the federal level was paralleled in state legislatures across the nation as lawmakers systematically slashed appropriations for public colleges and universities, triggering record-level tuition increases, according to the study.
Federal officials most recently overhauled the student aid program with the passage of the Student Aid and Fiscal Responsibility Act of 2009-10. The law ended government guarantees to private lenders, transitioned the Perkins Loan to the Direct Loan and established the federal government as the lender, collector and guarantor for a greater share of educational loans, the researchers wrote.
The new law – which, according to Collier, “has more positives than negatives” – gave the federal government greater autonomy to create new repayment options, including several types of income-based repayment plans.
“Income-contingent repayment plans are wildly underutilized, with only about 1.5 million borrowers enrolled in them in 2012,” Collier said. “Many of these people were only enrolled in these plans after they defaulted and their finances were ruined. Borrowers were generally unaware of their options and were steered into standard repayment plans that didn’t help them manage and retire their debt quickly.”
With more than 40 million borrowers carrying student loan debt, and their total amount owed soaring past $1 trillion, educational loans are becoming increasingly problematic for individual borrowers and the nation’s economy. Collier and Herman suggested that Congress consider a number of reforms to help people better manage their debt, including making income-based repayment plans the standard payment option, curtailing unsubsidized loans and providing more grants and scholarships.
The researchers also advocate restructuring bankruptcy regulations to specify particular circumstances in which student loans could be discharged in the same manner as other personal debts.
Congress could fund these initiatives by reallocating to higher education the $100 billion in direct subsidies currently provided to corporations, the researchers suggested.
Although Collier and Herman agree this particular funding strategy is radical and unlikely to be considered by lawmakers, Collier said the solution is a just one because industry drives societal demand for college-educated workers and profits from their expertise.
Plans for tuition-free higher education promoted by President Obama and Democratic candidates Hillary Clinton and Bernie Sanders, and the growing political influence of the “Indentured Generations” – the young adults who carry a significant proportion of the nation’s student-loan debt – may increase pressure on Congress to address college affordability and student loan issues through reforms to the student aid system, Collier said.
Editor’s notes: To reach Daniel Collier, call 847-727-7418; email daniel.anthony.collier@gmail.com
The paper “Modifying the Federal Loan Guarantee Provision in the Higher Education Act of 1965: An Overview of Federal Loan Policies that have Transitioned Higher Education from the Social Good” is available online or from the News Bureau.
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