With the reauthorization of the Higher Education Act on the horizon, analysts, advocates, and policymakers have issued proposals for improving the federal student aid system, hoping to make the complex array of programs that distributed about $161 billion to students in 2014-15 more effective. Although there is some agreement around broad policy directions, there are considerable differences of opinion about the details.
Advocates with priorities ranging from increasing college enrollment and completion to pressuring states and institutions to reduce costs support automatically placing the 10 million students who borrow federal student loans each year into income-driven repayment plans, which set payments at some percentage of discretionary income. And virtually no one argues against consolidating existing tuition tax credits and deductions, which benefit about 14 million students each year, into one credit.
Because of the differences in proposed policy designs, however, a member of Congress would face a real challenge in actually writing a bill in line with the broad consensus. In a new report we examine the details of more than twenty proposals for reforming student loan repayment and education tax credits and deductions, evaluating the equity and efficiency of proposed provisions. For policymakers and others interested in these aspects of reform, here are five lessons from our review:
Lawmakers can strengthen student loan repayment by designing a single income-driven plan that is universal and automatic and provides reliable insurance without being overly generous. Basing student loan payments on borrowers’ incomes makes a lot of sense as a way to prevent financial distress and loan defaults among those who are not experiencing the expected financial benefits of their education. But providing this sort of insurance need not involve minimizing required payments for all borrowers. Some proposals—and some policies already in place—risk directing subsidies to relatively affluent individuals with many years of education. For example, doctors and lawyers with high incomes but very high debts can end up having significant portions of their professional school debt forgiven. Moreover, some plans, in their search for precise targeting, would involve too many different provisions for people in different circumstances, introducing considerable complication.
Lawmakers should simplify the current system and make it accessible to all borrowers, setting parameters to benefit those facing unexpected difficulties rather than those who borrowed excessively. Most borrowers enrolled in income-driven repayment should eventually repay their debts, even if they must postpone payments when they hit rough spots. Otherwise, a real concern is that the program will become too generous to too many borrowers, costing taxpayers so much that it will sink under its own weight.
- Lawmakers can strengthen education tax credits and deductions by consolidating them into a single refundable credit and clarifying its goals. A fundamental issue is that the purpose of these benefits, which include the American opportunity credit, lifetime learning credit, and tuition and fees deduction, is not clear. Is the goal, as President Bill Clinton indicated when he proposed higher education tax benefits, to eliminate financial barriers to college enrollment among those with very limited resources? Or is it, as others suggest, relieving financial burdens facing middle-class families paying for their children to attend college? Simplifying and consolidating the credits and deductions makes sense in either case, but the best way to target the benefits depends on priorities, which must be better defined.
- Some proposals conflict with general principles of sound public policy design. A common pitfall is the introduction of “cliff effects,” which create a bright line above which individuals are treated dramatically differently from those just below the line. For example, if only students receiving Pell Grants were eligible for interest rate subsidies, missing the Pell cut-off by a few dollars could cost an individual hundreds of dollars in benefits. Requiring borrowers with debt over a fixed limit to repay for an extra five years before receiving loan forgiveness could create a large gap in the obligations of two students borrowing similar amounts of money and earning similar incomes over time.
- Well intentioned policy ideas sometimes lead to unintended and undesirable consequences. For example, the current policy allowing graduate students to borrow essentially unlimited amounts of money and remain eligible for loan forgiveness might cause tuition to rise, borrowing to soar, and taxpayers to foot the bill for a lot of graduate education. Some income-driven systems lead students with similar income profiles to repay similar amounts over their lifetimes, even if they borrowed dramatically different amounts.
- Reviewing the details of proposals attempting to simplify federal student aid provides a reminder of how the system became so complicated. Designing fair and efficient policies involves trade-offs. Targeting benefits necessarily complicates programs, but complexity itself hinders the ability of anyone—particularly young people and people facing serious financial constraints—to make choices and to take actions that will serve them well in the long run.
Federal student aid makes paying for college possible for millions of students each year. Modifying existing programs has the potential to improve the effectiveness of the system for both students and taxpayers, but not all well intentioned proposals are equally promising. We need a simple student loan repayment system that protects borrowers facing unforeseen difficulties, and—as long as we use the tax code to subsidize students—a simple and well targeted tax credit that does not exclude those who most need the help.