PART 2: A College Financial Aid Plan for the 21st Century


The college financial aid system is badly broken.  Even when a family’s need is validated by the daunting forms and its arcane formulae, there is no guarantee that sufficient aid will follow.  The system has been reduced to an exercise that focuses on process, not results.  What matters is doing the paperwork correctly, not the financial and educational outcomes which are becoming more uncertain with every passing year.  It is a model created in another age with different challenges and a very different demographic.  What was spawned in good faith over 50 years ago has become a dysfunctional and often cruel anachronism in the 21st century.

The casualty list under the present system is nearly endless.  Americans at every income are excluded from college because the financial aid paperwork alone serves as the 21st century’s version of the old literacy test once used to exclude former slaves from the voting booth.  More important, the failure of the federal government to adequately support its own system results in financial aid shortfalls across the economic spectrum.  Over the last 30 years, the federal infusion of funds has not kept pace with either the rising cost of college or the rate of inflation.  As a result, families routinely discover that they can’t afford college even when their need is validated by the financial aid formula.  This compels families at every income to make hard choices between mostly bad options.  The government’s failure to adjust to a changing landscape and to adequately support our colleges in the financial aid arena is forcing American citizens to divert money from retirement and the economy in general in order to send their kids to college.  The financial aid system’s inadequacy is going to come back and haunt this nation in the form of having to support millions of retired families economically marginalized by unexpected college costs.  You can do the math.  Is it smarter to massively invest in a four-year college experience that is likely to return the investment with interest in the form of a more productive work force and a higher tax base or a 30-year handout to retired people financially neutered by college costs?

What is needed is a system that is rational, transparent, relatively paper-free and 100% reliable, one that promises college or any post-secondary training  as a non-negotiable part of the American birthright where the primary currency required to enter those programs are things like character, talent and vision, not dollars.  In addition, we need to create a system that includes not only a funding strategy for our public and private colleges and universities but also proprietary schools and graduate programs.  Only then will we have the kind of comprehensive approach to putting the American dream within the grasp of any citizen and only then with we have the logistics in place to ensure that our nation’s arsenal of talent and brain power will always remain strong.

In very broad strokes, the new model should work like this:

What students and families will contribute: 

Anyone can apply to any college and if the student is accepted, the college will require a validation of the parents’ and/or student’s adjusted gross income as reported on their 1040.  This can probably be done electronically through the current arrangement between the Department of Education and the IRS.  The adjusted gross income (bottom line on the front page of the 1040) will determine the percentage of the cost of attendance (tuition, room and board and fees) the family will be expected to pay.  That percentage scale (called the FCI or Family Contribution Index) should be published every year by the Department of Education in the form of a very public and widely distributed document.  The scale should be presented in $1,000 increments.  This will allow parents with younger college-bound kids to plan ahead by simply looking at a copy of the current FCI well in advance of the college years.

Let’s suppose that we have a family making $40-50,000 and they look at the FCI that says at their adjusted gross income they will be expected to pay 5% of the cost of college, any college.  So if this family opted for a state public college costing $20,000, they would be expected to pay 5% or $1,000.  If the family opted to attend a college that cost $65,000 they would pay $3,250 but that is their choice and because the index is published every year with only minor annual tweaks, the family would have lots of time to prepare.  No assets of any kind will be a factor affecting the contribution under the FCI.  The family is free to use their savings and income as normal consumers and/or preparing for retirement.  There are no financial aid forms of any kind.  It might look something like this with the family contribution moving up or down depending upon the IRS reported adjusted gross income.  But just for purposes of keeping our illustration simple we will pretend this family opts for a public college costing $20,000.

Adjusted Gross Income Determines % of the cost of college/Family

$46,000                                                             5% (or in this case $1,000)

What the colleges will contribute in the form of campus-based Aid:

The colleges will gather the appropriate adjusted gross incomes for all new and returning students and in that way, the college can determine how much they will receive in cash payments or accounts receivable from all attendees.  All of the above can be done electronically.

But herein the key to true reform is revealed.  Up to now families have had to complete financial aid forms since they represented such a wide and varying range of income and wealth.  That was done so that provision could be made in the system to address those differences.  The problem is that we assumed that colleges were equally equipped to provide campus-based aid and they are not.  The wrong people have been completing financial aid forms all along.  It is our colleges who have been the victims of the economy as well.  It is they who should be completing financial aid forms to level the financial aid playing field from the perspective of one of the key providers, the colleges.

To deal with this largely ignored reality, another table or index will be created annually as well.  This will be a scale relating to the expected percent of need-based aid that colleges will be required to contribute in the form of campus-based aid depending upon a known set of variables like endowment, completion rates, diversity and many other factors.  Care should be taken to create a formula that encourages colleges to continue and expand upon what they do best, educate and innovate.   In fact, it is appropriate that creation of the institutional contribution index should be done by responsible members of the college community to ensure that the data points reflect and are weighted according to the realities facing colleges at all levels.  Annually, the college will complete an Institutional Contribution Index Form (ICI) that will determine the percentage of financial need  (the entire cost of college if everyone paid full freight minus the accounts receivable) that the college will be required to fill with campus-based aid.  Put another way, the ICI is essentially a means test of a college’s ability to contribute campus-based aid. In this way, the number of forms headed to the U.S. Department of Education every year will be reduced from 10-15 million or so to fewer than about five thousand.

This is how it might look using the above example:

Cost of college: $20,000

The family making $46,000 contributes 5% or $1,000 leaving an unfunded need of $19,000.

Let’s suppose according to the Institutional Contribution Index (ICI) this college is required to cover 23% of student need, then it would have to contribute $4,370 (23% of $19,000).  So now we have  $5,370 of the $20,000 cost of college covered.

     $1,000 FCI  (Family Contribution)
$4,370 ICI (College Contribution)
                  $5,370  (Total Revenue for this student)

$20,000 (Total Cost of college)
   – $ 5,370  (Total costs by FCI + ICI)
$14,630 (Total Remaining Need)

Note:  Included in the college’s ability to pay is whatever their state contribution is in that state.  It is folded into the ICI Index and affects the percentage of the college’s ability to provide campus-based funding.  The index formula will tend to reward states with greater funding programs than those with states who fail to provide state-based aid to all non-proprietary colleges within their borders.

What the Department of Education (Taxpayers) will contribute:

Once the colleges add their aid driven by the requirements of the ICI, they will submit to the Department of Education a pro forma document that has calculated the total cost for all students minus the total family contributions and the total college contribution.  The federal government will then provide to the college the funds required to cover any remaining unfunded need.   That amount is guaranteed provided the college’s numbers can be verified.  Proprietary schools and grad schools should have a somewhat different approach with private student loans forming the primary support system for proprietary schools but with a plan that will encourage future employers to help with the payback of those loans, a plan that takes advantage of tax rules already in place for both the employee and the employer.

The Total Cost of college:  $20,000

          $ 1,000 (The family Contribution FCI)
+ $ 4,370 (College Contribution ICI)
+ $14,630 (The Federal Contribution)
$20,000 (The Total Cost of College)

One of the many benefits of a smarter system is that because there are no loans involved for non-proprietary school undergraduates, students are more likely to choose career paths that are personally fulfilling rather than ones geared to helping pay back student loans.  The absence of student loans will allow graduates to put their money into the active economy rather than to live a financially marginal life created by a large student loan burden.  Because parents’ assets will no longer be a part of a financial aid formula nor the primary tool to pay for college, parents will be able to put their income and savings where they belong, into the general economy and retirement funds.  Moreover, with the specter of college costs being so dramatically mitigated, parents are more likely to spend money more freely in support of the general economy before and during the college years, an important stimulus in today’s world.

Missing in this discussion but under consideration in this plan are issues relating to graduate programs, proprietary (for profit) colleges and ways to mitigate and pay back the horrific $1.3 Trillion dollars in student loans already in place.

A new, more rational approach to paying for college, one that is an integral part of the nation’s larger economic strategy is clearly in the public interest.  If it is true that a college graduate is likely to make at least a million dollars more over a lifetime than a person without a degree, the increased taxes a college grad is likely to pay will more than reimburse the nation no matter what it costs to educate the person.  Moreover, the productivity and creativity of the college-educated citizen will add important dimensions to the nation’s security and its competitive edge in an interconnected world economy.  Part of the payback includes a lower demand for expensive public services that college graduates rarely require; things like prisons and rehab programs, food stamps and a host of other programs and services most of which are the step children of an inadequate education and the despair and hopelessness that often follow.

© Paul Wrubel, 2016
All Rights Reserved

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