Alternatives to Reauthorizing the Higher Education Act

Posted by Kevin Bauman on 6/2/15 12:30 PM

Higher_Education_Act_signing-1The primary purpose of the Higher Education Act (HEA) is to ease the burden of the cost of college by allocating federal student loans and grants to students. It is a large piece of legislation, and touches nearly every aspect of federal higher education policy. The HEA was first signed into law by President Johnson in 1965, and has been reauthorized 9 times. The most recent reauthorization was in 2008, so it’s likely to be up for reauthorization by Congress this fall. The amendments that are being suggested for this year’s reauthorization focus on (1) making higher education more accessible by providing more financial aid to students, and (2) streamlining the financial aid process to make it more intuitive for students and parents. These are noble, important goals, especially considering that student loan debt in the U.S. has now surpassed $1 trillion. However, economic realities that exist today in our global, “sharing economy” are vastly different than they were in the Johnson era that informed the original legislation.

HEA for Today’s World

Five decades ago, most people could get a decent-paying job with just a high school diploma, and the cost of a college degree as a percentage of future income was drastically lower than it is now. The current intense competition to get accepted into college was not a reality when Johnson was in office, and the ROI for a college undergraduate degree was probably 1-2 years. Today, a 4-year private school can cost $240k1 and the ROI could take a decade - or longer. The HEA is old and outdated. Instead of reauthorizing it with slight modifications, we need to start from scratch and write new legislation that fits our current academic and economic landscape. By just reauthorizing the archaic HEA, we are continuing to incentivize bad behavior, and throw good money after bad into degrees that may or may not pay off on the investment.

Federal Government has Overstepped

The US federal government has rapidly taken over almost all of the student-loan market. Federally-owned student loans rose from zero in the mid-1990s, to about $850 billion in late 2014,2 and now the federal government makes more than 90% of student loans.3 Our government should not own 90% of the student loan market. Instead, we need to transition to the private sector, a much more efficient allocator of capital. There are some creative financial products that could be offered if the federal government stepped to the side. These “human-capital contracts” can be fully privatized, with students receiving an upfront investment from investors in exchange for a share of their future earnings.

Suggested Solutions

graduation_hatsA few solutions have already been suggested and tested in this regard. In Oregon, state legislature developed a pilot program that would eliminate tuition and fees for students in the Oregon state university system if they agreed to pay about 3% of their income to the university for the next 20 years, which would help finance the education of future students.4 And earlier this year, the president of Purdue University, Mitch Daniels, suggested a similar system in which “students would have the option to find an investor - possibly a Purdue alum - who would finance their degree in exchange for a share of their future income”. Federal legislation needs to change, though, to allow something like this to happen. Daniels said that to make this possible, the financial aid system would need to be simplified to reduce regulatory burdens on schools, giving them the flexibility to try new solutions.5

Changes to the Academic Model

We are also seeing changes in credentials and degrees, in which students don’t necessarily need the pre-determined Bachelor’s ‘bundle’ of coursework. Instead, they can pay for the courses that tie directly into the work they are doing - the courses that they know are directly applicable to the career they plan to pursue. Not only would these smaller chunks of education be much cheaper for students, but it would be a more more cost-efficient way for students to pay for school. What they would be learning would tie directly into their future job, producing a higher and more direct ROI.

Changes to the Financial Model

Rather than rely on legislative changes to the HEA, schools can take action themselves to decrease the federal government’s presence in student loans. Institutions of higher education can shift away from the government by offering affordable, pay-as-you-go education options in which students pay as they consume knowledge. This is different than how most traditional institutions operate, where you pay up front - whether you learn or not. In the traditional model, if a student stops their studies, they still have to pay - and still have the debt.  Penn Foster employs a pay-as-you-go model.  We do not take Title IV funds from the Federal Government, and we are committed to providing a low cost solution for our students.

Looking Forward

We need to move away from editing an old and irrelevant piece of legislation. The HEA needs to be retired. Instead, we need to create legislation that will allow the private sector to allocate money for high education. At the same time, institutions need to create more financially viable options for students. Colleges and universities should move to swear off Title IV money to help make education more affordable from an institution level. Let’s work together to eliminate the financial barrier between students and their education.


Recommended for You: Back, But Not By Popular Demand: Ability to Benefit


Resources: photo President Johnson; photo grad hats; (1) 10 Most Expensive Colleges in America (2) Three Charts Explain the Student Loan Mess (3) Student Loan Securities Stay Hot (4) Let Your Rich Uncle Pay for College (5) Mitch Daniels Pushes New Plan to Pay for College

Topics: Industry News, College Enrollment & Retention

 

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