Down the Financial-Aid Hole

Two articles in the Chronicle of Higher Education today illustrate the complicated, head-spinning world of financial aid.

First, the White House issued a response yesterday to the Democrat’s proposed bill to cut interest rates on student loans. The response states:

Reducing student loan interest rates would direct subsidies to college graduates, not to students and their families who are struggling to meet current and future educational expenses. College graduates have higher lifetime earnings, and can already take advantage of flexible repayment options available under current law and reduce the effective interest rate they pay through the existing tax deduction for student loan interest.

While I agree with the White House’s argument that the Democrats’ bill neglects needed increases in grant aid, I disagree with the implication that all college graduates are equally able to repay student loans, or that current policies sufficiently help students with low post-graduation earnings. Few students take advantage of alternative repayment options--only 11%, according to an NCES report--and yet those with high debt or low incomes are at much higher risk of default. This is likely because 1) students don’t understand their options and 2) these programs don’t provide a real benefit to students, they only increase the repayment term and total cost of loans. Also, while current interest rate tax deductions provide some relief, it is minimal compared with the Democrats’ proposal. According to a GAO report, the average annual deduction is $134, which, over a 10-year loan amounts to much less than the $4,000 benefit under the Democrats’ plan.

Add to this mix story #2 from the Chronicle about a recent report from Eduventures on the rise in institutional aid among colleges and universities. While not entirely new information (see here and here), the report adds fuel to criticisms of colleges’ use of institutional aid. The report states that "need-based awards may be used, in part, as a recruiting mechanism to attract students of relatively higher academic profiles." This also means that less of this money is going to low-income students.

All this to say that financial aid in this country has become too complicated, too much of a black box, for most students and families to understand, much less optimize. The complicated and changing array of federal programs, not to mention state and institutional aid programs, makes a comprehensive financial aid reform bill both formidable, and absolutely necessary.