Archived Information

Financing Postsecondary Education: The Federal Role - October 1995

Cut the Cloth to Fit the Student:
Tailoring the Federal Role in Postsecondary Education and Training

Arthur M. Hauptman


Amendments in 1972 to the Higher Education Act (HEA) of 1965 established student aid in the form of grants, loans and work-study as the federal policy vehicle of choice for expanding opportunities in postsecondary education and training in this country. Decisions since 1972 have reinforced the hegemony of student aid and underscored the federal belief in putting money in the pockets of students and having them vote with their feet.

Within this student aid framework, there has been pressure over time to expand eligibility to include more and more students in the federal aid programs. As in every generalization, this one has its exceptions: eligibility for loan subsidies was capped in 1981 to stem a massive expansion of borrowing, and the eligibility for aid of financially independent single students was sharply restricted in 1992. By and large, however, federal student aid policies have been more inclusive than exclusive.

The federal government also has tended to treat all students and institutions alike. Its policies typically have sought to make as many students as possible eligible for all forms of aid. Similarly, one set of federal rules and regulations has applied to all participating institutions. Again, there are exceptions to the rule: graduate and professional school students are not eligible for need-based grant programs; loan programs have been created to aid specific groups of students and to help parents; and those institutions that perform badly are targeted for elimination from the federal programs. But overall, there has been a strong federal culture to have uniform rules for all students and institutions.

To meet the very demanding national objectives of increasing access, keeping college affordable, raising retention and completion rates, and improving quality, I argue in this paper that there should be greater differentiation in federal policies toward both students and institutions. Federal aid programs should be tailored to meet the wide-ranging needs of different groups of students. Federal rules and regulations also should vary in how they treat different categories of institutions.

In this paper, I further argue that federal policies should move beyond student aid to include institutional incentives and tax provisions. Such a mix of policies may prove more effective in meeting certain goals, such as increasing retention or improving quality rather than having the federal government continue to rely solely on student aid to achieve all its objectives.

The first section of the paper discusses why existing federal policies may not have achieved their objectives. The second section suggests a strategy for the future that might prove more effective in promoting access, choice, retention and quality.

Assessing the Effectiveness of the Federal Student Aid Programs

Much has been written and said about the decision in 1972 to shift federal policy to a strategy focused on student aid. But the Education Amendments of 1972 and subsequent funding decisions actually consisted of two related but not identical strategies: one was the decision to rely on student aid rather than have the government provide general support to institutions. The second was to provide most student aid directly to students rather than through the campus-based aid programs that already existed.

A number of implicit policies have evolved over time from these two explicit decisions in 1972. Two important ones are:

How Well Have the Federal Programs Worked Since Enactment of the HEA in 1965 and Adoption of a Student-Aid-Based Strategy in 1972?

On the positive side, federal aid has helped millions of students go to college who otherwise would have been unable to attend. Federal aid, particularly loans, has greatly expanded the range of choices that students have in where they go to college. The numbers of low-income and minority college students have increased dramatically over the past three decades, at rates much faster than the growth of these groups in the population.

But a number of other indices suggest the federal programs are not working as well as they could or should. Unacceptably high default rates are only the most obvious sign of trouble. Equally troublesome, if not as visible, has been the inability over the past three decades to close the gap in college participation and retention rates between students from low- and high-income families and between white, black, and Hispanic students.

One way to assess the effectiveness of the federal aid programs is to compare performance to the various policy goals espoused in the legislation and its amendments. These goals include: increasing access, keeping college affordable (providing greater choice), raising retention, and improving quality.

lncreasing Access. While much concern has been expressed about the need for more access to American postsecondary education, it arguably remains the most accessible system in the world. More than 5 percent of all Americans attend some form of postsecondary education every year; that is astounding by international standards. Student aid, particularly grants, has undoubtedly played a major role in providing this access. But many other factors, particularly the willingness of states to invest in public institutions thereby keeping their tuitions low, also have been key components in providing greater access.

Keeping College Affordable. Although a spate of reports decry the growing unaffordability of college, high participation rates suggest that American higher education is still affordable. ("Affordability" seems to have replaced the term "choice" that was popular in earlier policy discussions.) The perception of unaffordability or lack of choice stems mostly from the high tuition charged by private institutions. But the growing availability of student loans in the face of rising tuition is one of the most important factors in the stabilization of private college enrollments as a share of all college enrollments over the past two decades. This stability is in sharp contrast to the preceding quarter century when the private college share of all students fell from one-half to one-quarter.

Raising Retention. Two of the less discussed but more troubling trends over the past quarter century have been the decline in the proportion of students who complete their degree and the time it takes to attain a degree. Less than one-quarter of students who now enter a four-year program complete it; completion rates for community college students are much lower. Moreover, the average time-to-degree, especially in public institutions, has lengthened over time. Although there are many reasons for these disturbing trends, there is little evidence to suggest that student aid has been an effective tool in raising retention or completion rates.

Improving Quality. Much rhetoric has been devoted to the notion that the quality of all education and training in America, including postsecondary, must be improved in order for us to remain competitive in the global marketplace. But the federal student aid programs from their inception have placed a much higher priority on providing access than on ensuring quality. Student aid programs contain minimal standards of performance. This lack of attention to quality can be seen in the federal government's willingness to provide financial aid, especially loans, to students who have not demonstrated an ability to do college-level work. The great difficulty in removing clearly abusive institutions from eligibility to participate in the federal aid programs is another indicator of the inattention to quality concerns. It is fair to say that of the four policy objectives listed here, the student aid programs have been least effective in promoting the goal of better quality.

Why Haven't the Federal Aid Programs Been More Effective?

Many argue that inadequate funding is the reason federal student aid has not worked better. But that surely is not the only answer. Perhaps a better question is: With the funding that has been available, why haven't the federal programs achieved more?

One explanation is that the premises underlying the federal aid programs have not been fulfilled. For example, a strategy that relies on consumer choice must provide adequate and accurate information to consumers. Too often, this has not been the case.

Relying on aid recipients to vote with their feet requires the government to ensure that students receive a quality education at the institution they choose. This premise, too, often has been unfulfilled as evidenced by the many questionable institutions that qualify to receive federal student aid funds.

Another premise of the student aid strategy was that the availability of aid itself should not influence the price that institutions charge. But there is reasonable evidence that a number of trade schools have set their tuition based on federal aid availability. (And with recent increases in loan limits, there is reason to be concerned that this problem could spread to nonprofit colleges and universities in the future.)

The federal government's tendency both to expand eligibility and to be uniform in its treatment of students and institutions also may have restricted the effectiveness of the student aid programs. Efforts to expand eligibility, no matter how well intentioned, have meant that less is available for the initially intended beneficiaries. Treating students uniformly has limited the capability of the federal programs to meet the much different needs of various groups of students. Oddly, this federal tendency toward uniformity runs counter to the great diversity in higher education that we readily acknowledge and favor.

The "failure" of federal student aid may also be a case of unrealistic expectations. Since 1972, policy makers have come to believe that the problems higher education faces -- accumulated over decades through policy decisions at federal, state, and institutional levels -- can be solved through a set of federal aid programs that represent 10 percent or less of all resources devoted to the postsecondary enterprise. This is simply too great a burden on any one set of policies, no matter how well-funded or well-devised they may be. (And most observers agree, federal student aid has been neither well-funded nor well-designed.)

Given the tremendous diversity of the 20 million or so students who attend postsecondary education and training each year, it is unrealistic to expect that the same set of policies will be best for all of them. In this context, it is not surprising that older and part-time students do not benefit as much from an aid system designed largely for full-time students.

Federal student aid may also have been ineffective because it ignores or fails to leverage the states, the largest governmental investor in higher education. Federal policies typically take as a starting point the existing pattern of state support of institutions, public sector tuition, and state student aid. The one exception to this rule is the State Student Incentive Grant (SSIG) program that is too small to affect state behavior very much and is in perpetual danger of losing what funding it has. To the extent that state tuition and aid policies often do not mesh well with federal policy goals, more pressure is placed on the federal aid programs to achieve national policy objectives.

A Strategy for Increasing the Return on the Federal Investment

The preceding discussion of why federal policies may not have met their stated objectives leads me to conclude the following:

First, to increase the return on the federal investment in postsecondary education and training in the future, the student aid programs should be targeted where they work best. Grants should focus on improving access for students who otherwise would be unable to attend. The principal aim of loans should be to make college more affordable for students who can most benefit from borrowing.

Second, alternatives to student aid such as institution-based approaches or tax provisions should be utilized to help those groups of students for whom the traditional aid programs have not worked well or to help achieve those objectives such as more retention and better quality where the aid programs appear to have been less effective.

Third, the federal government should be more proactive with the states by providing incentives that ensure federal and state policies work in tandem rather than at cross purposes.

To achieve these three notions, this paper suggests a new federal strategy in which the student aid programs are combined in various ways with institution-based approaches and tax provisions to meet the specific needs of the following four categories of postsecondary students:

In addition, federal policies should acknowledge the needs of the growing numbers of nontraditional students enrolled in any of these four levels of instruction, including less than half-time students, adult learners, and full-time workers. The remarkable growth in the numbers of nontraditional college students has been well documented. There are more older students than ever before. Many more students are also taking less than a half-time course load. More than a million students enrolled in college also work full time. The traditional college student -- enrolled full time, 18 to 22 years old, living in a dorm on campus -- is now in a distinct minority.

The sustained growth in the number of nontraditional students has occurred despite the fact that the federal aid programs are not designed with these students in mind. In the past, the traditional aid programs have been stretched to include this group of students. Instead, federal policies are needed that better meet the needs of this group of students directly.

A summary of what these strategies might entail for each group of students is shown in the matrix on the following page.

Strengthening the Student Aid Programs

The student aid component of the strategy obviously would include need-based grants, work-study, and loans. This component could be supplemented and enhanced by the use of both merit-based aid and national service provisions in selected instances. Establishing an overall annual limit on how much students can receive in federal aid also could make the aid programs more effective.

Need-Based Grants. The best weapons in the federal arsenal for providing access to a broad range of postsecondary education are need-based grants. Within feasible budgetary constraints, however, need-based grants are less likely to be effective in promoting affordability and improving retention. Need-based grants appear to be virtually ineffective if not counterproductive in improving quality. In light of this (overly broad) generalization about need-based grants, they should be used primarily to promote access. To do this, need-based grants might be divided into two components: one to support living expenses of students, and the other to help narrow the tuition differential among institutions.

Pell Grants should be available to defray the living expenses of all needy postsecondary students enrolled at least half-time in remedial programs, short-term training, and at the undergraduate level. This grant should equal a standard amount that meets basic living expenses whether a student lives on campus, off campus, or at home, minus any expected family contribution. Institutions would be responsible under this system for providing assistance to cover whatever amount of additional living expenses was entailed above this basic level.

The tuition differential component of need-based grants should be limited to undergraduates and to students in long-term vocational programs. For Pell Grants, this could be accomplished by adding a tuition differential component to the award formula, as was contemplated but ultimately rejected in the 1992 reauthorization of the HEA. Tuition differentials also should be recognized in any campus-based undergraduate grant formulas.


Type of Student
Type of Assistance Remediation Short-term Vocational Undergraduate & Longer Term Vocational Post-
Need-Based Grants For living expenses only For living expenses only For tuition, fees & living expenses Not eligible for grants For tuition and fees only
Merit Aid Not eligible Not eligible Merit-based Pell component Fellowships & Scholarships Yes, where applicable
Loans No borrowing No borrowing Line of credit for tuition and fees only Line of credit for tuition & other expenses Line of credit for tuition & other expenses
Work-Study Not eligible Not eligible Yes Yes Not eligible
National Service Not Applicable Not Applicable Loan forgiveness Loan forgiveness Loan forgiveness
Student Aid Packaging Not Applicable Not Applicable Overall Aid Maximum Not Applicable Aid maximum if applicable
Student Support Services TRIO programs Not Applicable TRIO programs No No
Payments to Providers Performance-
based contracts
based contracts
Payments for Pell Grant graduates No Payments for Pell Grants graduates
Tax Credit/
No, if no tuition is charged No, if no tuition is charged Tuition tax credit for parents; no parent loans Tuition component of EITC Tuition component of EITC

Merit-Based Grant Programs. Although merit-based grant programs tend not to help much in increasing access, they can be very effective in promoting better quality. They also can help in promoting choice and in improving retention to the extent that receipt of merit-aid is tied to successful completion of study at a relatively high level of achievement. Merit-aid, almost by definition, seems much more suitable for academic programs than vocational ones. As a result, merit-aid should be focused on graduate students in the form of fellowships and assistantships and, in a more limited way, on undergraduates, in both cases preferably in combination with some consideration of financial need.

Loans. The primary instrument of federal postsecondary policy and the most effective form of aid for providing greater affordability and choice are loans. But loans also have become the principal instrument for access, which is regrettable since they are far less suited for this role. In terms of retention, there are mixed views on the effectiveness of loans relative to grants. A recent GAO study concluded that grants were more effective than loans in encouraging retention. But this study compared a dollar of grant to a dollar of loan and the measure of retention was whether students completed one year of school, not whether they finished their program on time and received a degree. A more appropriate study would compare grants to the subsidy value of the loan and would use degree completion as the measure of retention, not a year of study. Such a study might well show that loans are better than grants in improving retention, because borrowers have a greater incentive to finish their programs more quickly, but loans are probably no better or worse than grants in promoting higher quality.

Loans remain the best mechanism to help undergraduates and graduate students finance their investment in themselves. Going to college on average continues to pay high dividends in the form of increased earnings, and borrowing is a perfectly reasonable way to finance this investment.

To make this correlation between loans and investment more evident, I would limit the amount of loans that undergraduates could borrow to the tuition and fees they pay, and use grants and family resources to meet their basic living costs. To the extent that post-baccalaureate students often do not pay tuition, and because we as a society do not expect parents to provide financial support to their children once they have graduated from college, graduate and professional school students should be able to borrow to pay for their non-tuition-related expenses.

To discourage institutions from raising their tuition to increase the eligibility of their students for loans, I would limit the amount of tuition and fees that could be used in calculating eligibility for loan subsidies by subtracting expected family contributions from these federal limits. The remaining tuition and fees could be financed through institutional aid, grants, or family resources, at least for undergraduates.

For the growing numbers of students who require some form of remediation when they reach the postsecondary level, however, there has been far too much dependence in the past on loans. Every year now, at least several billion dollars are borrowed by individuals who have not demonstrated an ability to perform at the postsecondary level. Not surprisingly, these borrowers have unacceptably high rates of default. This large and growing use of loans for remediation, I believe, is the most objectionable aspect of present federal postsecondary policies.

We also have come to rely too much on loans for students in short-term vocational programs lasting one year or less. These individuals, like those in remedial academic programs, simply do not have the prospects for success that merit borrowing on the scale that now exists. By having them borrow as much as they now do, many, if not most, of these people are being further imprisoned in a world they are trying to escape.

To address this problem of excessive borrowing, students who have not demonstrated an ability to do college-level work and students in vocational programs lasting less than one year should not be allowed to borrow. Past proposals in this direction typically suggest replacing loans with grants. But this student-aid-based tradeoff is doomed to fail in the current and foreseeable budgetary environment: not enough grants can be provided to offset the loss of loans. Nor is there enough evidence that an infusion of grant money will solve the problem. I suggest that loans for these students be replaced with performance-based contracts that reward those providers of short-term training that do the best job at the lowest cost, as is discussed in the next section on institution-based approaches.

For loans to be more effective in the future, it is also important that the current crazy-quilt system be rationalized and depoliticized. The current arrangement of a dozen federal loan programs -- direct and guaranteed, subsidized and unsubsidized, student and parent -- needs a major overhaul. This discussion would entail another whole paper. Suffice it to say here that the federal student loan system of the future should: capture the best aspects of the public and private sectors; target subsidies on those borrowers who need them most at the time they need them; and provide repayment options that suit the needs of different borrowers. I also believe federal loans should be available in the form of a line of credit where students might borrow on a number of occasions over their lifetime, as long as they had satisfactorily repaid their previous student loans.

College Work-Study. The forgotten sibling of the federal student aid family is the College Work-Study program. This overshadowing is ironic in that work-study often seems to be the most popular aid program among many members of Congress who hark back to the time when they worked their way through college. (Although with the more youthful demographics of Congress, more members seem to have borrowed than worked during college.) Congressional funding levels of work-study, however, have not matched the rhetoric.

If anything, college work-study should become a more prominent part of the federal strategy because it not only helps to provide both access and affordability, it may contribute to greater retention as well. (At least one study indicates that students on work-study are more likely to complete a year's study than students who do not work.) A good argument can be made that work-study is best focused on students who are in good academic standing and, therefore, should probably not be available for students in remedial or vocational programs.

It may also be worthwhile for policy makers to consider establishing an explicit tradeoff between work-study and loans, one in which students could choose to borrow to meet their costs, and thereby free up more time for study, or work in order to minimize their debts once they graduate.

National Service. After several decades of playing a minor to nonexistent role in federal policy, National Service took center stage in the legislative debates of 1993. The issue of national service has now become so politicized, however, that it is difficult to have a rational discussion about either its merits or its flaws.

But in one aspect of national service, there may be a greater degree of bipartisanship and consensus: allowing student borrowers to repay their loans through designated forms of national and community service. (Income contingent repayment schedules represent another means for encouraging college students to take less remunerative positions when they graduate.) Repayment through service--whether through loan forgiveness or income contingency--has several important points in its favor. Two are that debt burdens would no longer inhibit borrowers in making career choices and the range of useful social activities that college graduates perform would be greatly expanded.

Student Aid Packaging. Debates over the specifics of Pell Grants and student loans often neglect the issue of student aid packaging. The federal government has never had an explicit policy for how much total federal aid a student could receive or how its aid programs are packaged. Yet, how different federal aid programs are put together can have an enormous impact on their effectiveness.

One of the most frequently discussed packaging issues over the past decade is the notion of frontloading grants, that is, giving students a higher proportion of grants in their first and possibly second year of study. Frontloading would probably have a very positive effect on access, at least at community colleges and trade schools where students are concentrated in the first two years of study. But to the extent that grant funds would be diverted from students at four-year institutions, frontloading could have a negative impact on choice. More importantly, frontloading would probably detract from retention to the extent it would encourage students to enroll but not finish their course of study. Frontloading also seems unlikely to promote better quality.

Another packaging issue is whether the federal government should establish an overall limit on the amount of aid it provides, as was recommended by a bipartisan national commission in 1993. An aid maximum, I believe, would make the federal aid system more effective for several reasons. It would provide greater predictability in the federal aid process in that students would know how much total federal aid they can receive. It also would allow the federal government to set policies for how its aid was packaged.

For example, if policy makers want to frontload grants in the first year or two of study and require more borrowing in later years, or allow students to choose between loans and work-study, these tradeoffs would be more easily accomplished if some overall federal aid maximum existed. I would establish an annual aid maximum for undergraduates, starting at $10,000 with adjustments over time for inflation. (A very small percentage of students currently receive more than this amount of federal aid.) To the extent that I would not allow remedial students and short-term training participants to borrow, no aid maximum would be warranted. To the extent that graduate students would be eligible for only loans or possibly work-study, no overall maximum seems warranted for these students either.

Relying More on Institution-Based Approaches

Institution-based programs have been the poor stepchild of federal policy since the decision in 1972 to move toward a student-aid-based strategy. This is unfortunate in my view because, in some instances, provisions that seek to affect institutional behavior may prove to be more effective in achieving some commonly sought after goals. To this end, I suggest consideration be given to utilization of institution-based efforts in the form of student support services programs and performance-based incentives.

Student Support Services Programs. An important and underutilized vehicle for achieving federal postsecondary policy objectives is the Student Support Services programs. The same legislation in 1972 that began the shift to a student-aid-based strategy ironically also reinforced the importance of the TRIO programs -- Upward Bound, Talent Search, and Student Support Services -- as a necessary complement to student aid.

TRIO-type programs often work well in helping academically at-risk students make a successful transition to college. They also can be critical in enabling disadvantaged students to complete their courses of study in a timely way. Given existing budgetary constraints, however, students in vocational training should not be participants in the TRIO programs. Instead, the TRIO programs should continue to be focused on helping at-risk students succeed in academic programs, including those students requiring remediation, who can most benefit from TRIO-type student support services.

The TRIO programs currently serve only a small fraction of the eligible population. Thus, perhaps the biggest question associated with a greater reliance on TRIO and other support services programs involves "going to scale," that is, how does a program move from a demonstration project basis to one that funds a much broader range of institutions.

Performance-Based Funding of Institutions. I believe that performance-based funding of institutions holds great potential for increasing retention and improving the quality of students and institutions. Institutional incentives for retention do not currently exist in the federal set of programs. But, a number of states provide incentives in one form or another for institutions, both public and private, to graduate more students. Perhaps the federal government would do well to take a page out of the states' book.

Performance-based contracting would seem to work best for those types of postsecondary education and training in which the results are relatively easy to measure. (In many cases, technology-intensive approaches may work best with these students since so much of the learning can be accomplished through computer-based learning and the results are easily measurable.)

As noted earlier, I would not allow students in remedial programs to borrow and would replace loans with performance-based contracts with the various organizations that provide remedial courses, including community colleges, trade schools, high schools, and community based-organizations as well as a growing number of four-year colleges. The amount that providers receive would be tied to the reasonable costs of providing that remediation.

These contracts should be structured to reward those providers who get the best results at the lowest cost. To participate, providers would agree not to charge tuition to students for the remedial courses. As mentioned previously, need-based grants should be provided to the economically disadvantaged students to help defray at least some of their living costs while they are enrolled in remedial courses.

Performance-based contracts also should be considered as a replacement for loans for participants in short-term vocational programs. As in the case of remedial programs, short-term vocational training seems well-suited to performance-based contracts. Unlike the proposed remediation program, however, performance-based contracts for short-term training should be administered by the states in conjunction with the Department of Labor, since they are more aware than the federal Department of Education will be of local and regional labor market needs.

Federal incentives for retention should also be considered for addressing the problem of falling completion and graduation rates in academic programs. Rather than trying to address this problem through the student aid programs, perhaps more could be accomplished by providing incentives for institutions to graduate more of their economically disadvantaged students. For example, a portion of Pell Grant funding could be set aside to make payments to institutions on the basis of the number of Pell Grant recipients who graduated. With such a program, it would not be surprising to discover higher graduation rates for these students over time. This might also have the beneficial effect of institutions paying more attention to the needs and progress of their Pell Grant recipients.

Utilizing Tax Provisions

The federal tax code traditionally has contained a number of provisions that confer tax benefits on college students and their families. These include allowing parents to continue to claim an exemption for their college-age children who enroll in college as well as allowing employee and employer deductions for tuition benefits. A tuition tax credit or deduction for college tuition expenses, either for students directly or their parents, could have an impact on college enrollment trends.

Tuition Tax Credits or Deductions. Periodically over the past thirty years tuition tax credits or deductions have been proposed to allow parents to deduct or receive a credit for the college tuition expenses of their children. Ironically, the creation of the Guaranteed Student Loan program in 1965, and a major expansion in 1978, were both efforts to derail tuition tax legislation that was then pending. (With hindsight, we might have been better off with a thoughtful tuition tax plan than with the pell mell growth of loans. No pun intended.) The Clinton Administration climbed onto this well-travelled bandwagon in 1995 with its Middle Class Bill of Rights legislation.

Most economists and policy analysts argue against tuition tax credits or deductions because of their regressivity and the likelihood that they will benefit most those whose behavior will be unaffected (dead weight loss), while underserved populations will benefit the least. But a well structured tuition tax credit (not a deduction) could be beneficial in that it would provide tuition relief in a less intrusive way than having parents fill out financial aid forms to qualify to borrow subsidized loans. To reduce the budgetary impact of such a tax provision, however, students who qualify for the tax credit should be ineligible for any loan subsidies and their parents should not be eligible to borrow in the federal PLUS program.

It is also important that tuition tax benefits not be restricted to the parents of traditional-age college students. Tax benefits should be extended to nontraditional students for their own tuition expenses, at least for those individuals with limited means. One way to accomplish this would be for the federal government to pay an additional amount to cover a portion of the tuition expenses of individuals who qualify for the Earned Income Tax Credit (EITC). The EITC has been an important instrument of federal tax and social policy for the past twenty years. Although it recently has come under (somewhat surprising) attack by the Republican majority in Congress, it remains probably the most effective federal tax provision for the working poor.

Adding a tuition benefit to the EITC would encourage full-time workers to take one or two courses to enhance their employability, an incentive that is virtually nonexistent in the current system. Expanding the use of the EITC to include tuition, I believe, would have a far greater impact on the behavior of these people than the more typical prescription of extending Pell Grants to less-than-half-time students.

Improving Federal Quality Control and Regulation of Institutions

Ultimately, efforts to improve the effectiveness of the federal aid programs must address the issue of how the federal government ensures that participating institutions are of adequate quality. Although these questions of quality assurance typically take a back seat to more glamorous policy considerations, they are extremely important to the future health of the federal student aid programs.

The same student aid philosophy of one size fits all students seems to infuse federal policies regarding institutions. The notion of differentiating policies for various groups of students should apply to how the federal government deals with institutions. The same set of rules and regulations for institutions that are performing well should not apply to those institutions whose performance is questionable at best. It also seems appropriate that non-profit institutions should be governed by a different set of rules than proprietary schools.

Changes in federal policies for policing institutions should work in two directions: first, in reducing the regulatory burden on institutions that are performing well; and second, in providing greater scrutiny and oversight of institutions that are not performing at an adequate level.

Providing Regulatory Relief. Much has been made of the increasing burdens on institutions to comply with a growing number of complex federal regulations. Much of this burden arises because the regulations that are used to govern the behavior of problem institutions apply with equal weight to mainstream institutions that are performing adequately or well. Many observers have suggested that the federal programs would work better if those institutions that perform well were provided with some relief from pro forma regulatory requirements. The Clinton Administration's efforts in this area seem to be moving in this desired direction.

Improving Oversight of Poorly Performing Institutions. The federal government has traditionally relied on the "triad" of accreditation, state licensure, and periodic federal program reviews to provide quality control of the institutions that participate in the federal student aid programs. The much maligned State Postsecondary Review Entities (SPREs) were created in 1992 because of the widespread belief that the triad was not working.

The need to ensure adequate quality of the institutions that participate in the federal aid programs is no less diminished with the recent apparent demise of SPREs. To gain greater public trust of the student aid process, it is critical that problem institutions be identified and prevented from perpetrating further abuses. A good first step is to identify problem institutions on the basis of objective measures of performance, as again seems to be the direction the Clinton Administration is moving.

Another important step is to reassess the traditional federal program review process, which requires large amounts of staff time and resources (neither of which is in abundance in an era of government restraint). The traditional federal policies assume a certain degree of trust that institutions are in fact reporting accurately the information requested of them. This presumption of trust has backfired on any number of occasions as evidenced by congressional hearings and media reports on instances of fraud and abuse.

Rather than continue to rely on this program review process, the federal government should revise how it determines whether institutions are reporting accurately. Instead of trust, the federal government should adopt businesslike quality control procedures that assume a certain amount of fraud and deceit in the system. Institutions would then be periodically audited, with an oversampling of problematic categories of institutions, to determine whether the information they reported is accurate.

Concluding Remarks

The basic point of this paper is that federal policy makers need to think beyond student aid to mechanisms that may be more effective for certain groups of students. Federal policies also need to get beyond the notion that the same set of programs will serve all students equally well.

For undergraduates and graduate students, student aid should remain the primary vehicle of federal assistance. Collegiate and postbaccalaureate programs on average continue to pay high dividends in the form of increased earnings, and borrowing is a perfectly reasonable way to finance this investment. To clarify this correlation between loans and investment, I would restrict loans for undergraduates to the tuition and fees they pay up to a federal limit, and utilize grants and family resources to meet their basic living costs. To the extent many graduate students do not pay tuition and are not expected to rely on their parents for support, they should be able to borrow to meet living expenses.

Federal policies have run aground in the past when loans have been used extensively to finance activities in which the personal gain is less clear and much more uneven. In short, loans work best when the education and training that is being paid for is a good bet. For students requiring remediation and for participants in short-term vocational programs, therefore, alternatives to student loans should be employed to maximize the effectiveness of the federal investment. Performance-based contracting and other institution-based approaches hold promise for these types of postsecondary education and training in part because the results are much easier to measure than for undergraduates or postbaccalaureate students.

The federal system also ought to be more responsive to the needs of the non-traditional students who constitute a growing share of all college enrollments. Making an ongoing federal line of credit available to finance the multiple entries of these students into the postsecondary pipeline would seem like a good first step. Extending the Earned Income Tax Credit to pay for some college tuition expenses would be a good source of assistance for lower income workers taking a course or two to improve their employment prospects.

To ensure that the federal investment yields high returns, it also is necessary to improve the quality control exercised by the federal government on the institutions that participate in the federal programs. One element of this strategy should be to identify institutions that are not performing well and to institute business-based quality control techniques to better detect instances of fraud and abuse. The other aspect of this strategy should be to provide regulatory relief for those institutions that are performing well, thus freeing them up to do their job of educating and training millions of Americans every year.

Arthur M. Hauptman is an independent public policy consultant specializing in higher education finance issues. He also currently serves as a Senior Fellow of the Association of Governing Boards.

[Federal Student Aid Policy: A History and an Assessment] [Table of Contents] [Starting Points: Fundamental Assumptions Underlying the Principles and Policies of Federal Financial Aid to Students]