Obama’s Plan to Reform Student Aid: Tie Federal Funds to School Performance

In his speech at the University of Buffalo yesterday, President Obama finally threw a bone to the demographic that elected him, announcing his plan for reforming the federal student loan program.

Swift tuition inflation (250% over the last three decades, per Obama’s speech), coupled with exploding numbers of students seeking a degree, has left many students and families taking on huge debt loads to make up the difference. In 2012, seniors graduated with an average debt load of $27,000. Plugging this number into Bankrate’s student loan repayment calculator (the current interest rate for unsubsidized federal loans is 6.8%) shows that the average graduate can expect to pay about $311 each month for 10 years. This may not be a terrible burden for employed grads living in a low cost-of-living area. For graduates stuck living with their parents and working at a McJob, it’s a huge problem. (Aside: The Official Aunt Merryweather Spreadsheet of Financial Pain shows that I’ve made almost $19,000 in payments since graduation. I could have a sweet pair of gold shoelaces by now.)

Obama’s 3-point plan for higher education reform includes:

  1. Ordering the Department of Education to establish a ranking system for colleges based on outcomes (like graduation rates, average debt levels, accessibility for students on federal aid), instead of the typical criteria (selectivity, student-teacher ratios, etc.)
  2. Pay-As-You-Earn loan repayment terms that cap payments at 10% of income.
  3. Encouraging innovation and competition between colleges.

Holding colleges accountable for their students’ futures is a good goal. A big missing puzzle piece has been a lack of information for students and families, leaving many to assume that price implied quality. National Review’s Dave Wilezol commends the effort to have colleges compete “on the basis of price and quality, not on a perception of prestige.” That said, it’s easy to see how unscrupulous university administrators may feel obliged to game the system with a strategy of heavy recruitment of Pell Grant recipients + widespread grade inflation. Moreover, expensive and exclusive private schools that cater to wealthy families may find that it’s more economical to double-down on courting affluent students, eschewing federal money (and low-income students) altogether, perhaps merging with one another if enrollment drops too precipitously.

A mass refinancing of student loans into longer-term debts will surely bring relief to some students, but of course, stretching out the repayment period means paying much more in interest than you otherwise would. (See: 15- vs. 30-year mortgages).

Obama’s call for innovation appears to be the most promising. In his speech, he noted new low-cost online degree programs, 3-year bachelor’s degrees, and programs that award credit for mastery rather than coursework as examples of colleges that have disrupted the conventional model and become more responsive to students’ needs.

Sending fewer taxpayer dollars to inefficient colleges is a good start, and if the administration’s data analysis and funding scheme helps schools eliminate programs that produce little value (sorry, art – yeah I said it, hate on me in the comments), all the better. I’m skeptical, however, that online courses or a new ranking system will be a magical key that converts the large numbers of unprepared students who matriculate every fall into top-grade students, or employable adults.