Obama Proposes Radical Reform of College Financial Aid

Posted by Jason Van Steenwyk

militaryauthority.com obama college financial aid reformThe President has outlined a proposal for a sweeping reform of how federal college aid is allocated, which could affect what schools students can afford, after about 2018.

The problem of inadequate returns on college aid has been attracting Congressional scrutiny for some time. Outstanding student loan balances now top $1 trillion and they are still growing, yet a substantial portion of Americans now in their mid-20s and even older have not graduated with a degree. Among those who have graduated, a substantial number are defaulting on student loans, or barely getting by because of a deeply depressed job market for young graduates.

President Obama introduced his plan while speaking to a college audience yesterday in Buffalo, New York. Obama’s plan would tie student aid to a series of metrics on which colleges must compete against each other. Examples would include default rates, affordability and cost, scholarship availability, graduation rates, earnings of graduates, advanced degrees attained, percentage of students receiving Pell grants, and the like.

The Administration plans to push to make the new system effective in 2018, giving colleges a chance to improve their ratings in these key metrics. The extra time will also give federal officials a chance to refine their criteria.

The Obama Administration suggested that extra resources would go to schools that did well on these factors. Specifically, students enrolled at schools that rank high according to the new criteria would receive more generous Pell grants and lower interest on student loans.

Additionally, the President called for taxpayers to fund a bonus for schools that demonstrate that they actually graduate a high percentage of students have received Pell Grants in the past.

The President’s plan also called for more accountability on the part of students. Obama’s proposal would make students show periodic progress, expressed as a percentage of completion, toward a specific degree before the student could receive additional federal assistance.

Veterans may also benefit from a proposal, also outlined within Obama’s plan, to encourage colleges to award credits for professional experiences, life experiences and on-the-job training.


Pay As You Earn

The President also expressed a desire to expand ‘pay-as-you-earn’ programs. These programs tie student loan payments to income. The more you earn, the more you can afford to pay on your student loan. The president’s plan calls for a cap on student loan payments equal to 10 percent of a student’s income.

Critics of the plan are already lining up. Some of the points raised in objection include:

  1. Basing the criteria on graduation rates creates a perverse incentive for colleges to game the system in the worst possible way: By lowering standards.
  2. It would take a new bureaucracy to administer the program and maintain the ranking system.
  3. The rankings could take schools serving remote or hard-to-serve communities and put them out of business altogether.
  4. The system could unfairly penalize colleges that serve nontraditional students. For example, older students with more established, full-time careers are more likely to get sidetracked from their degree program by familial responsibilities and professional opportunities. These could well cause them to withdraw from a degree program through no fault of the institution.
  5. The very fact that the federal government is creating necessarily arbitrary ratings criteria invites the possibility of rent seeking, manipulation and cronyism. Key members of Congress could manipulate criteria to favor colleges in their own districts, for example.
  6. The plan seems tailor made to route federal dollars to traditional state colleges with largely liberal faculties and reliable Democratic Party donors at the expense of colleges in the private sector, who often hire part-time instructors who are actually working in their fields, and who are less likely to be political allies of the President.

Another more indirect criticism is that it won’t matter how good a job these colleges do creating qualified graduates if the economy is not creating jobs to employ them.

At the same time, Congress also has a responsibility to the taxpayer to ensure an adequate return on money committed to providing financial aid. Colleges with inordinately high default rates or that do not produce graduates commensurate with the amount of money invested are not providing a great ROI when the same dollar can be awarded to another student with a better shot at success and eventual repayment of the loan.



The President has little authority to accomplish this on his own: At some point, Congress will have to pass legislation for the President to get what he wants. Such an occurrence is not likely as long as the House of Representatives remains under GOP control. 


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