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Guest Post: Bolder Steps are Needed to Help Low-Income Students Avoid Debt

By Mark Kantrowitz

While the Obama Administration's proposal to index the maximum Pell Grant to one percent over the inflation rate is a step in the right direction, it would not do enough to increase the number of low income students enrolling and graduating from college. Congress needs to take much bolder steps to enable and encourage the pursuit of a college education, such as eliminating debt from the financial aid packages of the lowest income students.

Contrary to popular opinion, low income students do not get a free ride. Pell Grant recipients are forced to borrow more for their education than non-recipients even though they have a greater aversion to debt. Moderate and upper-income families don't like debt, but it doesn't prevent them from enrolling in college. Among low-income families, however, the prospect of debt can have a chilling effect on enrollment, retention and graduation rates.

According to the U.S. Department of Education's latest student loan borrowing data, Pell Grant recipients in 2007-08 who obtained a bachelor's degree were 73 percent more likely to graduate with debt than their more-affluent peers, and their average total debt load was $3,405 higher. In fact, only 13.1% of Pell Grant recipients who obtained a bachelor's degree graduated without debt, compared with 49.8% of bachelor's degree recipients who never received a Pell Grant. Middle and upper income students were almost four times more likely to graduate without any debt than Pell Grant recipients.

Let's consider the out-of-pocket cost expressed as a percentage of total income among students graduating with a bachelor's degree. (Out-of-pocket cost is the net cost of attendance after subtracting grants.) The out-of-pocket cost represents 61.3% of total income for low income families earning less than $50,000 a year, compared with 22.9% of total income for middle income families earning $50,000 to $100,000 a year and 13.8% of total income for upper income families earning more than $100,000 a year. Among students from families with exceptional financial need (earning less than $25,000 a year), the out-of-pocket costs represent 78.6% of total income. Imagine spending more than three-quarters of your family's total income paying for college!

The federal student aid system currently expects low income students with exceptional financial need to assume more debt for their education than their parents earn in a year. Nearly 90 percent of bachelor's degree recipients who applied for federal student aid and whose families have total income less than $25,000 graduated with an average of $24,959 in cumulative education debt in 2007-08 ($26,830 if Parent PLUS loans are included). One-third graduated with more than $25,000 in student loans.

A decade ago Princeton University adopted a "no loans" student aid policy, replacing loans with grants in the financial aid packages of low income students in 1998-1999. The rest of the Ivy League followed their lead, along with more than five dozen elite colleges with large endowments (about two-fifths of colleges with endowments in the billion-dollar-plus range). After they implemented no loans policies, many of these colleges have experienced substantial growth in the number of low income students enrolling and graduating.

To eliminate loans from the financial aid packages of Pell Grant recipients nationwide would require doubling the maximum Pell Grant to $10,600 in 2009-10. Increasing the maximum Pell Grant by $5,000 would cost an additional $35 billion a year. Congress appears to lack the political will to pursue such a change. But perhaps there's a less expensive approach that will increase bachelor's degree attainment by the most financially needy of Pell Grant recipients, namely students with a zero Expected Family Contribution (EFC). These are students whose parents earn so little money that the federal government doesn't expect them to contribute any money to their children's education.

Congress could establish a supplemental annual $2,500 grant for zero-EFC Pell Grant recipients that would be contingent on the college agreeing to replace all loans with grants in the financial aid packages of students who received this grant. Such a policy would challenge colleges to increase the amount of need-based institutional aid they provide to students with exceptional financial need. The availability of these funds would encourage zero-EFC students to enroll at colleges that adopted no loans policies, putting pressure on colleges with less generous financial aid policies. It would also encourage elite colleges that already have no loan policies to increase the number of Pell Grant recipients they enroll.

This proposal is similar to the idea of providing colleges with a bounty for graduating Pell Grant recipients (as Robert Shireman, the Deputy Undersecretary of Education, proposed in The Chronicle of Higher Education in 2004, and officials at the California State University System are currently championing), but would provide an intermediate and up-front reward for colleges that improve their retention of Pell Grant recipients, would focus aid on the neediest of the needy, and would leverage increases in institutional need-based grants. Depending on the number of colleges that adopted such no loans policies, this would cost between $1.8 billion and $7.0 billion per year.

How would Congress pay for the new program? Part of the cost could be obtained by eliminating the subsidized interest on federal student loans. Subsidized interest does not increase access to higher education because the benefit is mostly realized after the student graduates and enters repayment. Providing supplemental aid to Pell Grant recipients would be a much more effective means of encouraging low-income students to pursue a college education since it would provide the financial aid up front when students need the money to pay their college bills.

Mark Kantrowitz is the founder and publisher of FinAid.org, a leading source for financial aid information, advice and tools; and publisher of FastWeb.com, a free scholarship matching site. He has written extensively on issues surrounding financial aid and student debt. His most recent book, FastWeb College Gold, is a step-by-step guide for students and their families  to pay for college.  His views are his own and do not necessarily reflect those of the New America Foundation.


Bolder steps to help low income students

I strongly support increasing available finanical aid to facilitate college access and choice for low income students, and agree that paying for postsecondary costs with future income is far from ideal for those students. My suggestions as we consider Mark's proposal are 1) that we need to refine need analysis methodology so we can identify the truly neediest applicants, and 2) that we need to find a way to recognize and divide the continuum of need in a meaningful way. The first suggestion will be difficult and time consuming to agree on and implement, so work on it should not impede the consideration of proposals for change. The second suggestion might be accomplished by using levels of family income and household size, rather than EFCs, to determine a student's eligibility for additional financial aid. Families whose incomes place them at or below 150% of the federally defined poverty level, for example, might represent such a group.

Reverse the Incentives

Thanks to the New America Foundation for publishing guest posts from leading policy analysts.

Mark Kantrowitz has made a good proposal, which Congress should heed. He knows that adding funding to Pell Grants will not necessarily reduce student debt burden, so he proposes that institutions must make commitments themselves toward that goal through use of their own institutional aid and their own student loan policies.

This would be a reversal of current law incentives, through which institutions may use Pell increases to subsidize shifts of their own aid toward the non-needy, leaving the financially needy with greater debt. Such Congressionally-approved incentives have led the country into decline in higher education opportunity over the past two decades.

The Obama Administration deserves credit for trying to reverse current incentives through the Perkins loan program, but likely it will also take measures such as Mark Kantrowitz proposes to get the job done.

I fully respect Mr.

I fully respect Mr. Kantrowitz's view and the impulse of the commentors and the administration - but at some point don't students - all students - have to have some skin in the game?

Putting aside the truly wealthy - those with parents making above $1 million per year - it is very frustrating to see calls for more and more aid go to the bottom while folks in the middle have to take out home equity loans (which is much tougher now) or attempt to pay for school out of pocket. I have relatives now that struggle to pay other bills because they have to pay for their child's schooling -- all because they live in high wage/high tax states and they aren't eligible for Pell.

A far better proposal would be to provide low interest loans to everyone. A loan at government interest plus administrative costs would help many more people. While there is no doubt cultures that shy away from borrowing, this proposal would help more people in the long term and relieve stress on middle-income families.

As far as reducing/eliminating the subsidized interest - this may have merit. Indeed, if those that are getting Pell are getting subsidized interest, it would be far better for the students to have taken out less in loans. To the extent that a broader selection of students get subsidized interest than Pell, then we need to find away to ensure that it is not another benefit transfer from the middle to the poor.

I am all for helping the poor pay for college, but it always seems to come at the expense of the middle, who continually seem to get squeezed.

knowing your net costs before applying helps avoid college debt

A college's published cost of attendance does not represent the amount that a student or family must pay out-of-pocket because that figure fails to take into account student aid. Surprising to most students is that the cost of going to college - even the same college - can be different for each student.

Until college aid award letters arrive in April, there is no way for students and families to evaluate college affordability, because they don't know their student aid eligibility. The heavy debt burden many students and families bear after college exists because they weren't able to compare their true out-of-pocket (net) costs including their specific aid eligibility before applying to colleges.

Colleges have two more years to meet the federal deadline to make costs more transparent by providing net cost calculators.

Consumers don't have to wait for colleges to learn their specific net costs. A new service from StudentAid.com determines a student's merit and need-based aid eligibility and out-of-pocket (net) costs for the colleges a student is interested in attending - years before applying.

A consumer focus on comparing net college costs and finding the best college value could help turnaround a system that today encourages students to apply to college without knowing if they can afford it.

College should be no-loans for all

Everyone's tuition should be completely covered to attend a public university or community college in this country. It is a bit of a fallacy to determine that one student or another is low-income due to their family--when we know that many times parents of middle or high income refuse to pay anything towards their child's tuition costs anyway, and the FAFSA people certainly can't force them to, so taking such a calculation isn't always accurate. College should be free for all qualifying students, paid for by a progressive level of taxation. That is justice, not little tweaks on the system like this. Certainly, what we need most is to have standard consumer protections returned to all student loans, including bankruptcy protections.