PROBLEM: Despite success in helping to meet these needs, the Higher Education Act of 1965 still needs reform. Since its inception, the act has shifted from focusing on meeting the needs of low-income students to subsidizing students of all income levels. The increasing use of federal higher education programs by middle-class and wealthy students is costly to taxpayers, contributes to student indebtedness, fosters greater individual and institutional dependency, increases entitlement spending, and contributes to the rising cost of higher education. Congress can enact a number of reforms that would return federal higher education aid to its original purpose.

Phase out subsidies to middle-class and wealthy Americans. Congress should end the PLUS loan program and remove the subsidies from the Stafford Loan program by bringing the interest rate closer to the market rate. The student interest rate, currently linked to the Treasury Bill, is 2.82 percent (in school) and 3.42 percent (in repayment), far lower than the rate charged to students using private education loans. Taxpayers make up for the difference between what the student pays and what the bank receives. Taxpayers also pay for administration, default insurance, and other costs not covered by the small origination fee paid by students. Congress should change the mechanism for calculating the interest rate and the origination fee structure so that the “unsubsidized” program becomes truly unsubsidized and imposes little or no cost on the taxpayer. Students would still receive the loan guarantee and a rate that is lower than the maximum 14.2 percent interest rate charged for unsecured loans (to individuals with no credit history), a benefit that saves them $8,900—or more—in interest on a $10,000 loan.

Additionally, Congress should amend the consolidation loan program so that interest rates fluctuate according to the market. At present, borrowers may consolidate their loans at a fixed rate for up to 30 years. When interest rates rise, taxpayers pay the difference. According to a recent study, subsidies on current and future loans could cost taxpayers $35 billion or more between 2005 and 2011 if no legislative changes are made.

Reduce or maintain total loan limits for Stafford loans. A January 2004 study by the Congressional Budget Office found that “the majority of students from low-income families are able to finance their college costs without exhausting the government-subsidized loans for which they are eligible. The loan limits on Stafford loans for dependent students are $2,625 for the freshman year, $3,5000 for the sophomore year, and $5,550 for junior and senior years. Total debt from all Stafford loans is $23,000 for dependent undergraduates, $46,000 for independent undergraduates, and $138,500 for graduate and professional students. In any event, Congress should not raise the loan limits. Higher limits will encourage more borrowing. Higher rates of borrowing will increase student indebtedness and could further inflate college costs.

Ensure that subsidized loans and other benefits are given to needy students. This can be accomplished by including home equity in the determination of benefits, as was done prior to 1992.

Eliminate loan forgiveness. The government should not favor one profession over another. Additionally, Congress should eliminate loan cancellation in the Direct Loan program. These are intended to be loans, not grants.

Phase out campus-based programs: Perkins loans, Supplemental Educational Opportunity Grants (SEOG), and the Work-Study Program. The savings from this phase out should be used to increased grant awards under the Pell Grant program. The savings from this phase out should be used to increase grant awards under the Pell Grant program. The Perkins program is outdated, duplicative, ad less efficient than the other loan programs. Congress should end the program but allow universities to keep existing funds in their revolving accounts. The SEOG program is also redundant. The Work-Study program subsidizes up to 75 percent of student salaries for jobs that are often located on the university campus. Institutions make up the rest. The public should not subsidize the labor costs of institutions. By replacing campus—based programs with more direct aid to students, Congress will eliminate the middleman.

Reduce fraud in the Pell Grant program. The U.S. General Accounting Office (GAO) recently reported that Pell Grant fraud cost $600 million from fiscal year (FY) 2001 to FY 2002. Funds were given to students who were not eligible and submitted incorrect information on their applications. To reduce fraud, Congress should authorize the Internal Revenue Service and the Department of Education to share information about applicants’ eligibility. Representative Sam Johnson (R-TX) has proposed such cooperation in H.R. 3613.

Treat institutions and programs equally. Congress should help minority-serving institutions become self-supporting by establishing endowments and by phasing out yearly funding. The default cohort rate system should be the same for all institutions. Congress should also end Title 22 teacher education programs that duplicate programs in the No Child Left Behind Act (NCLB) and should transfer reporting requirements to NCLB.

Reform accountability provisions and make reporting transparent and useful to students, parents, and the public. The current system is costly, provides, little public accountability, and does not adequately measure quality. According to the National Commission on the Cost of Higher Education,

Institutions of higher education, even to most people in the academy, are financially opaque. Academic institutions have made little effort, either on campus or off, to make themselves more transparent, to explain their finances, As a result, there is no readily available information about college costs and prices nor is there a common national reporting standard for either.

Congress should create a system to collect information or to use information that is already being collected about college and university costs and quality outcomes. This information should be disseminated in a way that parents, students, and the public can easily understand.

Representative Howard P. “Buck” McKeon (R-CA), Chairman of the House Subcommittee on 21st-Century Competitiveness, is spearheading an effort to create an information database or parents and the public. However, information availability alone is unlikely to change the behavior of institutions and individuals if the government continues to pay out billions of dollars in aid.

Given the cost and inadequacy of accreditation as a gatekeeper for the HEA, Congress should de-link accreditation from HEA eligibility. Institutions would still be free to seek accreditation, but it would not be required to participation in federal programs or to admit students carrying federal aid. Accountability would be maintained through state and U.S. Department of Education certification and the public database. Representative Thomas E. Petri (R-WI) has introduced H.R. 838, a bill that would achieve this reform.

Colleges and universities would be required to obtain certification by the Secretary of Education demonstrating that the institutions are legitimate and have the administrative and financial capacity to participate in aid programs. To prevent fraud and “fly by night” operations, the Department of Education should have additional authority to seek out and prosecute fraud. By disseminating information about schools to consumers and actively prosecuting fraudulent operators, Congress could provide consumer and taxpayer protection in a more efficient and less costly manner.

Conclusion: Every year, billions of dollars of federal state, institutional, and private aid is made available to students. What was once out of reach is now accessible for low-income students. “[F]inancial barriers are not a major obstacle to college attendance” for low-income families, according to a new Congressional Budget Office study.

This solution was adapted from the article "Refocusing Higher Education Aid on Those Who Need It," originally published April 26, 2004 at the Heritage Foundation website. Although the ideas it expresses are still highly relevant, the statistics it quotes and the Congressional legislation it references are a reflection of that original publication date.