Archived Information

Financing Postsecondary Education: The Federal Role - October 1995

Summary of the National Conference on the Best Ways for the Federal Government to Help Students and Families Finance Postsecondary Education

From across America on October 8 and 9, 1995, 60 prominent local, state, and Congressional leaders, representatives from the postsecondary education community, and senior officials from the U.S. Department of Education gathered in Charleston, South Carolina, to discuss the future of financing higher education. The Honorable Richard Riley, Secretary of the U.S. Department of Education, and the Honorable Nancy Kassebaum, Chair of the Senate Committee on Labor and Human Resources, U.S. Congress, led insightful discussions focusing on the appropriate goals for federal aid to America's college students, identification of problems in the current financial aid system for postsecondary education, obstacles to change, and proposed solutions to address identified problems. Because the U.S. Department of Education provides more than two-thirds of all financial aid for college students, making it work more efficiently and effectively is very important for this nation's students and families, and for our future.

This outstanding group of leaders represented a broad spectrum of interests, political views, and geographic regions. Participants included presidents of institutions in each sector of postsecondary education, education association leaders, education policy experts, elected state officials, congressional staff, state postsecondary education agency representatives, students, trustees, representatives of the business community, and parents. These participants enthusiastically shared their visions of the future and engaged in in-depth discussion and analysis of options for financing higher education. The discussions were enriched and informed by a set of excellent papers commissioned to analyze many of the key issues in finding the best ways for the federal government to help students and families finance postsecondary education across the United States.

The conference began with remarks from Secretary Riley and Senator Kassebaum and a plenary session led by a panel of experts. Later, conference participants broke into small groups led by professional facilitators for in-depth discussions. The small group discussions focused on the following questions: What components of the federal student aid program are working well and should be retained? What should be changed? How would you change them? Each group's priorities for change were presented to the full session for general discussion.

Summary of Secretary Riley's Remarks:

Since the passage of the Higher Education Act 30 years ago, numerous accomplishments have been achieved in American education, including: increased college enrollment rates for high school graduates, higher college completion rates, and increased enrollment of women and minorities. However, because of the changing times and economy, more education and a higher standard of education are needed. College enrollments will continue to increase over the next decade, with the segments of college students who are most likely to need financial aid (undergraduates, younger students, full-time students, and low-income students) growing rapidly. As a result, the pressures on the federal financial aid system will increase.

In light of these pressures, the Secretary asked conference participants to consider and discuss the following issues:

  • What is a reasonable balance of public and individual investment in higher education?

  • What are the appropriate goals for the federal financial aid system?

  • How can the federal government meet these goals in the best way possible?

  • What is the best way to encourage and ensure accountability for federal dollars?
  • The Secretary reminded everyone that America's higher education system is the "jewel of the world." Therefore, we must find ways both to strengthen it and to help qualified students have access to it. The Secretary encouraged fresh thinking and bold ideas and asked the group to put aside the politics of the moment and to think ahead about the course of postsecondary education in order to better assist families and students and to build a stronger America.

    Summary of Senator Kassebaum's Remarks:

    The public has made it clear that they do not want business as usual. Although this conference focused on the future, Senator Kassebaum stressed that it is impossible to ignore the events of the moment or the changes that have taken place in the political landscape. There are several important similarities between government and higher education:

  • Both are perceived as being set in their ways.

  • Both are facing budgetary constraints.

  • Both are unnecessarily costly.

  • Both are being called upon to demonstrate results.
  • Although the purchasing power of federal aid has declined, an increase in federal or state financial aid is unlikely. Therefore, the Senator asked participants to consider how to maintain an effective system of education without additional outside resources. As college costs continue to increase, institutions must review their costs and consider how to reduce them.

    The Senator expressed particular concern over the debt burden students are incurring and expressed strong support for the Work-Study program. She also called for increased attention to quality and ways to measure quality, a greater respect for learning, closer cooperation between K-12 and higher education, and reexamination of the best ways to support short-term training. She also expressed concern about the role of the states in measuring performance of training programs and the level of remedial education occurring in colleges. Finally, she stressed the importance of graduation.

    Reaffirmation of the Federal Role:

    At the time of the conference, the roles of local, state, and national government in education were being debated nationwide. Therefore, it was significant to note that the participants unanimously agreed that there is an appropriate role for the federal government in financing postsecondary education. They asserted that the federal government has changed the face of and strengthened higher education through the Land-Grant program, the Serviceman's Readjustment Act (GI Bill), and the Higher Education Act, and that investing in young people and adults who are continuing their formal education will continue to provide economic and social returns for both individuals and society. Many participants believed that the federal government should continue to be the principal source of student financial aid.

    Social and demographic factors will increase budgetary pressures on the federal government. Over the next decade, the number of students graduating from high school will increase significantly, and these students will be more likely to have financial need than current students. At the same time, increasing numbers of adults are participating in postsecondary education, both because of their personal interest and because of public policies that encourage adult participation. Unless resources for financial aid are increased or programs are redesigned significantly, access to postsecondary education for deserving students will decrease. Participants agreed that decreasing access to postsecondary education is not the answer to balancing the federal budget. One of the small groups indicated that the federal government's commitment to access has already been eroded somewhat due to a number of factors, including: the expanded definition and population of eligible students; decline in the political will to help working low-income families; and a general resistance to change.

    The Federal Work-Study program is an extremely successful program that has received too little attention. Work-Study jobs provide job experience, mentoring, and bonds to college campuses, as well as financial aid. Many participants advocated expanding this program, along with loan forgiveness and national service initiatives.

    Virtually all participants thought that the federal government should move its guaranteed student loan funding entirely to Direct Loans or should sustain both the Direct Loans and Federal Family Education Loan (FFEL) programs. Many noted that institutions that participate in the Direct Loan program are able to process student applications more quickly than they were able to do under the FFEL program.

    Some participants thought that the current political process should be changed to provide less regulation and more collaboration with associations, states, and institutions. It was suggested that a federal, state, and institutional commission on financial aid be established to make substantive recommendations about policies or process to the U.S. Department of Education and Congress.

    Under the current system of annual appropriations, institutions cannot predict the availability of federal funds more than one year in advance. Better public understanding and support for higher education is necessary to obtain a strong federal commitment. Some participants believed that advocating for reallocation of limited funds instead of advocating for increased funding for federal aid is wrong. Others indicated that federal resources for postsecondary education are significant and are unlikely to grow in the future, particularly in the current budget environment, though more deserving students may become eligible.

    Goals and Principles:

    Participants agreed that clear goals for federal financial aid programs are necessary, and that tinkering with programs and policies before goals are defined is minimally useful. Accordingly, the conference began with a discussion of the appropriate goals and principles for federal financial aid programs.

    Originally, the primary goal of federal financial aid was to help those that might not otherwise have had access to postsecondary education. Over time, however, the federal role has been expanded to include relieving the economic burden on middle-income students who would probably have obtained postsecondary education without federal support but with increasing personal and family sacrifice. Some participants believed that the federal government should return to its original objective of helping those with the largest need. Others noted that, when financial aid is focused more heavily on students with the lowest incomes, many middle-income and worthy students get priced out of certain colleges and universities. Others noted that stronger political support comes when middle-class students also benefit.

    There was some discussion of providing merit-based financial aid in addition to, or instead of, need-based financial aid. Most participants thought that the need-based emphasis of the current system should be continued. Others argued that there should be less focus on access and more focus on student success in higher education. One of the small groups suggested providing modest merit programs for low-income college and graduate students to provide incentives for student success. Some participants believed that students who do not have the aptitude for college studies or who lack the will to perform well are receiving financial aid, leading to increased costs, decreased credibility, and decreased productivity.

    Several participants suggested that the federal govenment should create incentives for institutions and students to engage in certain behaviors. For example, the federal government could provide incentives to encourage schools to provide services to at-risk students in inner cities or could create incentives to encourage students to enter particular careers or to complete college.

    Shared Responsibility:

    There was near unanimous agreement that financing higher education should be a shared responsibility of students, families, the federal government, states, and institutions, and that these entities should work more closely together to be more effective. One group suggested defining the relative levels of responsibility as follows: students are the principal beneficiaries; students and families should be the principal support system; the federal government should be a safety net; states should be major supporters; and institutions should fill in the financing gaps.

    Today, there is a societal expectation that the federal government will play a greater role in funding postsecondary education. Changes in the family structure, including higher divorce rates and the increasing number of single parents, have reduced the amount that parents are saving for their children's education. One participant noted that, given current financial restraints, federal and state governments are not likely to pay an increased share of college costs in the future. Therefore, the focus should be shifted to students, parents, employers, and institutions. Parents should be encouraged to save for their children's education and must be provided with realistic goals for doing so. Some participants suggested establishing tax policies and a need analysis formula that encourage saving for college.

    The private sector should be encouraged to provide more scholarship money for higher education. One participant suggested that the federal government should provide monetary incentives to colleges and universities that raise private dollars for scholarships. Others suggested that tax incentives should be provided to businesses and communities that provide scholarship money.

    Several participants noted that federal and state governments set their policies without working together and that they need to define clearly their respective missions to avoid overlap and conflicting policies. Some asserted that the federal government's role in financial aid should be pivotal, because each state has a different approach and many students migrate between states. Another participant, however, suggested that the federal government should provide block grants to the states for some programs.

    Participants also noted that federal programs, including School-to-Work, Goals 2000, and student assistance, should be integrated better.


    Many participants proposed ways that federal programs could be restructured to improve the effectiveness and efficiency of the programs. The following is a summary of those proposals.

    Consolidation of Programs:

    Most participants believed that the federal government should continue to provide a combination of grants, loans, and work-study programs. Many participants thought that the current array of federal programs should be consolidated into one grant, one loan, and one work-study program. Consolidating programs would minimize the cost of administering the programs for the U.S. Department of Education and institutions and would reduce student confusion. There were several variations on how this consolidation should be done. Many participants stated that the funds from the Supplemental Educational Opportunity Grant (SEOG) and State Student Incentive Grant (SSIG) programs should be combined into the Pell Grant program, which would operate as the sole federal grant program. Many participants also recommended that the Pell Grant program be an entitlement program with benefits tied to inflation. Some also thought that the federal government should require institutions to maintain current levels of institutional investment for participation.

    Pell Grant:

    Some participants believed that grants should be "front-loaded"--in other words, students should receive larger Pell Grants during their first two years than in other years. One group suggested developing a front-loading system in which the amount of aid would taper off over the four-year period. Others argued against front-loading, because attrition is a larger problem for college students than initial access to college programs. Some believed that front-loading would create a great incentive for economically disadvantaged students to attend two-year colleges and would harm four-year institutions, particularly private, four-year institutions.

    Federal Work-Study:

    One group suggested expanding the Federal Work-Study program by offering tax incentives to employers to make more work-study jobs available in the private sector. Others suggested that a greater tie should be created between work-study jobs and a student's career goals or community service and that penalties against working students in the need analysis formula should be reduced.


    Although all participants believed that remediation is important and that the amount of funding for remediation should not be reduced, many participants suggested that remediation should be provided through another funding source, perhaps from high school budgets or additional federal commitments. Others suggested that remedial work should be funded through grants rather than loans, and that a federal/state cooperative program for remediation should be established. Some also indicated that remedial courses should be offered only in community colleges and not in universities.

    Student Loans:

    One participant proposed providing loan forgiveness to students who complete their programs and have need. Participants also suggested changing the repayment plans for student loans. Some believed that all loans should be repaid based upon the borrower's income. Others believed that students should be provided with many options for repayment including an income contingent repayment option.

    Institutional Flexibility:

    One participant suggested that an institutional line of credit should be established that would allow institutions to determine how to allocate financial aid between grants and loans.

    Financial Aid Packaging:

    Some participants believed that financial aid should be packaged over a two- or four-year period so that students can anticipate their future financial aid. One group suggested providing a debit card with a line of credit of $100,000 to each high school graduate. The debit card would provide loans, work-study, or grants depending upon the student's need. This type of system would send a strong signal to students about the availability of aid and personal responsibility for their educational choices.

    Need Analysis Formula:

    One group suggested that the need analysis system should be revised to better target subsidies and measure financial need. Under the current system, some middle-class and high-income families can manipulate their income to qualify for Pell Grants. Participants agreed that these grants should go to low-income students.


    Many participants believed that the current financial aid system is too complex. Excessive regulation increases the cost of education, and students are confused by the different programs. Some suggested that the Department of Education should simplify its applications, awards, and oversight of Higher Education Act Title IV programs. Others noted that consolidating programs would simplify the system and would reduce the amount of administrative paperwork.


    The current mix of federal aid programs does not adequately address the real needs of different groups of students pursuing different types of education and training for different purposes. Many participants believed that different sectors of postsecondary education should be treated differently. Some thought that the federal government should provide different incentives to different types of institutions and should not provide uniform funding and regulations to institutions regardless of their role and mission. One group suggested that the federal government should differentiate the mix of assistance and institutional accountability by program type, population served, program length, and student intent. Others suggested that different standards should be created for trade and proprietary schools.

    Excessive Borrowing:

    Many participants expressed concern about the increased reliance on loans by students, especially for first-time, entering students, and students in remediation programs. This phenomenon of reliance on loans is based on the premise that increased access is a benefit primarily to the individual. Some participants expressed dismay at the lack of understanding that access is a great benefit to society as well as to the individual. Encouraging low-income people to take out student loans can lead to excessive indebtedness, especially when the students do not complete their course work. The rising debt burden will create an increasing problem for many students, especially those from low-income families, with respect to access, persistence, completion, and career choice.

    One group suggested reducing reliance on loans for certain groups -- low-income students, students taking remedial courses, and students enrolled in short-term training programs. Many suggested that remediation should be funded through grants rather than loans. Others suggested targeting grants to students with the greatest need and giving institutions discretion regarding whether to provide loans to students.

    Others noted that the student loan volume has grown, because loans have become available to middle-income students who have not been saving for college. Some participants believed that these families could borrow money from commercial lenders.

    Others, however, noted that middle-class families are a strong political force that believes federal financial aid should be available to their children.

    Participants disagree as to whether lower loan limits should be established. One representative of a community college suggested that lower loan limits should apply to all students, including graduate students. She argued that society has a responsibility to provide access but cannot assume responsibility for subsidizing all forms of higher education. Others believed that access should be provided to any institution, and that a bright but low-income student should not be limited to a community college because he or she cannot afford to attend a more expensive institution. Another participant suggested limiting the amount of loans to tuition and fees.

    Ties with Elementary and Secondary Education:

    Many participants suggested better coordination between elementary and secondary institutions and postsecondary institutions. Many students who are not well prepared for college come from low-quality elementary and secondary institutions. Although most young people want to go to college, often their information about college opportunities is poor, especially if they are first-generation college students. Several participants noted that information must be provided to students as early as seventh and eighth grades so that students will have time to prepare themselves academically and financially for higher education.

    Other participants noted that a higher priority should be placed on support services and outreach programs such as those currently funded through the TRIO programs (Student Support Services, Upward Bound, and Talent Search) and that more support should be provided for counseling and consumer information.

    Credibility and Accountability:

    Participants agreed that there is a need for increased accountability and credibility in postsecondary education. Participants noted sound economic and equity reasons for public support of education and the need for greater credibility in financial aid programs in order to continue strong government support. Some noted that institutions need to embrace competitive pressures calling for greater accountability and develop quantifiable and objective measures of institutional performance. Many noted that the marketplace alone is not enough to ensure accountability .

    Some participants noted that the federal government is currently not able to measure the effectiveness of all institutions. There was disagreement, however, as to which measures of performance the U.S. Department of Education should consider. Some noted that the Department should not consider graduation rates, because many students leave school because of personal, financial, and family reasons rather than because of dissatisfaction with the education. Some also noted that measures of persistence, such as graduation rates, are particularly inappropriate performance measures for community colleges, where students may enroll for only a few courses. Additionally, if society invests in the most risky students, some will not succeed.

    Some participants suggested that the Department of Education should continue to penalize institutions with high default rates. Some even suggested the creation of stronger penalties for institutions with high default rates. Others, however, argued that default rates are too simplistic and that measuring accountability with default rates has damaged the public perception of the system for financing higher education.

    One participant suggested establishing sector-specific standards for institutional performance. A new accrediting process would be responsible for assessing educational performance with the Department of Education responsible for assessing administrative and fiscal performance.

    Some participants believed that the criteria for institutional eligibility and for student readiness should be strengthened, and that aid to students should be marginally linked to institutional performance. It was also suggested that the Department should strengthen student eligibility requirements to incorporate the notion of readiness to succeed. One participant suggested adding institutional performance as a factor in determining an institution's eligibility to participate in Title IV programs.

    Participants also suggested that the Department establish a better information system for consumers. This system would provide greater information about the availability of aid and the effectiveness of providers.


    Secretary Riley and Senator Kassebaum found these discussions to be extremely helpful and informative. Ideas raised at the conference will be considered with respect to future policy choices and will form the basis for discussions surrounding the next reauthorization of the Higher Education Act. The Senator and the Secretary hope that these issues will continue to be discussed in the higher education community and that dialogue between policy makers and those affected by federal education policy will continue.

    Although many issues were left unresolved and require more thought and discussion, there were several important areas in which consensus was reached at the conference. First, participants unanimously agreed that the federal government should play a significant role in financing postsecondary education. Because of the extensive economic and social returns of postsecondary education for both individuals and society, all participants agreed that decreasing access to postsecondary education is not the answer to balancing the federal budget. Participants did not reach agreement as to the precise role of the federal government in financing postsecondary education. However, there was general agreement that the Work-Study program is highly effective and has been underemphasized, and that the Direct Loan program should be continued either as the only loan program or in combination with the FFEL program.

    Second, participants agreed that financing postsecondary education is the shared responsibility of students, families, the federal government, states, and institutions, and that these entities need to work more closely together to be more effective. Because it will be difficult for federal and state governments to pay an increased share of college costs in the future, students, parents, employers and institutions must be encouraged to play larger roles. In particular, all participants agreed that parents should be encouraged to save for their children's education.

    Finally, participants agreed that there is a need for increased accountability and credibility in postsecondary education in order to maintain strong government support. Participants did not agree as to how to improve accountability but expressed willingness to consider the issue further and engage in a continuing dialogue with other members of the higher education community.

    [Message From Richard W. Riley, U.S. Secretary of Education] [Table of Contents] [The Federal Role in Financing Higher Education: An Economic Perspective]