Who Benefits from Financial Aid? - America's Future

November 1, 1996

Who Benefits from Financial Aid?

By: Adam Goldin

Higher education has always been the road to economic success in America, but today it should be called the autobahn. Since the 1980’s the difference in earnings between a high school graduate and college graduate has grown from 40 percent to more than 70 percent. At the same time, however, college tuition has increased faster than the overall rate of inflation, forcing today’s students to borrow immense sums of money. Why? Because another one of Lyndon Johnson’s “Great Society” programs has boomeranged and hit Generation Xers squarely in the head.

The Higher Education Act of 1965 established three ways for individuals to receive financial aid for college: grants, loans, and work-study programs. Designed to make college more affordable, it has made it less so by increasing the price of tuition and setting into motion a damaging chain of events.

Federal financial aid serves as a disincentive for schools to control costs because it is a free source of funds. In fact, U.S. News and World Report believes that, “if colleges and universities were rated on their overall financial acumen, most would be lucky to escape with passing grades.” Syndicated journalist Don Feder concurs, observing that “the typical college makes a government agency look lean and cost-conscious.” Let me explain using simple numbers. Let’s assume that schools charge $100 for tuition and students pay the entire fee. Suddenly, the government offers $50 to each student. Now the student pays $50 and the government pays $50, right? Wrong. Realizing that students were willing to pay $100 before financial aid, schools simply increase the tuition by $50. The result: tuition costs $150 rather than $100, and students have a $50 loan to repay.

This is no theoretical exercise. Over the past 15 years, tuition costs have increased 234 percent. That’s more than three times the rate of inflation as measured by the Consumer Price Index, which increased 74 percent. As a result, a higher percentage of a median family’s income is spent on college tuition and fees – from 4 percent in 1980 to 9 percent today at public colleges, and from 17 percent in 1980 to 38 percent today at private colleges.

These figures have negative ramifications. Charles Manning, the chancellor of the West Virginia University system, is afraid these debts may “wind up negatively influencing students’ lifestyles, their choices of careers, their willingness to go to graduate and professional schools and their ability to buy homes, cars and other consumer products.” His fears are not unfounded. A student who finances his education at an average public university through a loan can expect monthly loan payments of about $165. That’s money that could have been spent on a car, saving for a house, or starting a family.

Colleges and universities, themselves, suffer from dependence on federal assistance, thereby jeopardizing their academic freedom. The government often ties financial aid to compliance with various regulations, many of which indirectly dictate a college’s selection of students and curriculum. Grove City College in Pennsylvania, for example, recently pulled out of the federal Stafford student loan program (opting instead to offer student loans through a local private bank) because of restrictive government regulations.

Parents and students are understandably distressed. A Texas government employee involved in higher education says “people are so worried. They tell us they can’t sleep at night wondering how high tuition is going to get.” The problem is so severe that a recent U.S. News and World Report expanded coverage explaining how people can save for college. “There is one thing upon which experts on college admissions agree: no part of the process causes more anxiety than financial aid.” One education expert offered this advice for parents: “Saving for [college] education should begin sometime between the maternity ward and middle school.”

For Generation X, this advice comes a little too late. Students are becoming ever more dependent on loans rather than grants. Of the $50.3 billion in financial aid for the 1995-1996 school year, 57 percent was doled out in student loans. Never before has the number of students relying on loans been greater (6.5 million), partly because Congress amended the Higher Education Act in 1992 to make it easier for individuals to obtain loans (it also increased the borrowing limit). Now it is not uncommon for students to graduate from college $8,000 in debt. In fact, the dollar value of loans made between 1990 and 1995 was greater than the total debt accumulated between 1960 and 1990.

Something must be done to end the spiraling costs of tuition for future generations – including our children, whose education we will be financing. Naturally, Bill Clinton’s solution for the tuition crisis involves more government intervention (despite his proclamation that the era of big government is over). He wants to make the already infuriating tax code more complicated by offering families that make less than $100,000 two options: tax deductions up to $10,000 or $1,500 in tax credits for the first two years of college, costing the American taxpayer some $43 billion over six years.

The President’s risky tax scheme will only discourage colleges from controlling costs, increase tuition costs further, and force students to borrow even more money. Chester E. Finn, Jr., an assistant secretary of education under President Reagan, said of Clinton’s tax plan: “Instead of devising more ways to make our institutions of higher education become leaner and more efficient, the Clinton plan will help them let out their belts another notch to ease their bulging midriffs.”

So what then is the solution? First, the federal government should get out of the business of financing higher education. Second, parents and students should be encouraged to save for college rather than borrow. Many innovative state and private sector proposals do just this. For example, the Texas Tomorrow Fund is a state program that allows parents to begin paying their young children’s college tuition now so they can lock themselves in at today’s lower rates. Another idea that deserves attention is that proposed by a private company named Human Capital Resources. Human Capital Resources pools finances for the education costs of students, who are then required to pay a percentage of their income back to the fund fifteen years after graduation.

What does this mean for today’s students? It means that promises of more federal aid should be viewed with skepticism. Federal aid increases college costs, encourages wasteful spending, and leaves students buried in mountains of debt. Young Americans can do without this type of aid.