Possible Higher Education Budget Reforms on the Horizon

Andrew Gillen

In April, we released a report highlighting reforms that would both save taxpayers money and improve higher education, and we are delighted that some of these ideas are being put forward by the House Appropriations Committee. The proposed bill takes up three recommendations from the report: 

• Convert subsidized student loans into unsubsidized loans (the subsidized version waives interest while the student is still enrolled)
• Cut funding for the Federal Supplemental Education Opportunity Grants (FSEOG)
• Cut funding for work-study

These reforms would be worthwhile even if they didn’t save taxpayer money, because each of these programs suffers from serious flaws, even when their stated purpose is taken as given. For example, subsidized loans have very little impact on student enrollment decisions yet cost more than a billion dollars every year. FSEOG and work-study, the campus-based aid programs, are not allocated based on the share of needy students on each campus (their stated purpose) but rather based on historical political power. (See the full report for much more detail on why these reforms are worthwhile.)

But these reforms would also save taxpayers money, which the bill would then use to address the current shortfall in Pell grant funding. Pell grants, essentially means-tested vouchers for college attendance, are the best-designed aid program and the least objectionable on libertarian grounds, so cutting these programs and using the savings for Pell grants should be considered a win. 

The main objections raised so far tend to overstate the cost to students of eliminating subsidized loans. For instance, the National College Attainment Network (NCAN) argued that

ending subsidized loans—which don’t accrue interest while students are attending college at least half-time—would increase average student debt by $6,000.

This is quite misleading. Not all students borrow (about 37% of students borrow), and not all are eligible for subsidized loans (around one-third of borrowers). Moreover, a student who borrows the maximum subsidized loan each year and graduates in four years would have around $3,000 of interest accrue over those four years at current interest rates. Thus, the quote should read something like “increase average student debt for those that previously borrowed the maximum amount of subsidized loans by around $3,000.” The average across all students would be much smaller, less than $400. Lots of other adjustments could be made, such as accounting for dropouts, those that take more than four years to graduate, or those that don’t attend four-year colleges. But the bottom line is that $6,000 is a dramatic overestimate. 

Overall, asking students to pay interest on their student loans to fund Pell grants is an eminently sensible tradeoff.