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How lessons from health care and housing could fix higher education affordability

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The federal government spends more than $160 billion each year on subsidies for college, but nobody believes the country has come remotely close to meeting the goal of universal college affordability. By contrast, under the landmark 2010 Patient Protection and Affordable Care Act, the share of uninsured Americans has dropped by roughly one-third and is now at a historic low.

The number of Americans struggling to pay medical bills or forgoing care because of costs has also fallen. Increased college grant money during the same period, meanwhile, boosted the number of students receiving this assistance by roughly 2 million people. But it has failed to reduce the rate at which these students borrow, and the maximum award still covers less than a third of the price of a public four-year education. The price of attending college has also continued to rise.

The federal government falls short on making dramatic strides in college affordability because of a fundamental flaw in the way the federal financial aid programs work: They focus too much on the dollar amount provided, and too little on ensuring those funds are enough for families to actually afford college. The ACA provides a better model, and our new research shows that it’s not unique.

The flawed structure of higher education assistance programs makes them an anomaly among other key parts of our social insurance system. Failing to set a clear standard for affordability that programs are intended to meet leaves families unsure whether they can pay for college. It also creates inequities across states, where some students are charged thousands of dollars more or less based simply on whether they happen to live somewhere with historically high or low tuition rates.

How the current system fails

Today, families applying for financial aid are given a number, known as an expected family contribution, which is calculated based on their income and assets. This figure dictates the maximum amount of grants and some types of loans borrowers can receive, but has no impact on what families actually pay.

This means colleges can charge students whatever they want — and they do. In fact, 86 percent of full-time students are so low-income that their expected contribution is $0 — yet they are still asked to pay at least $5,000 to cover the total price of college after subtracting all forms of grant assistance.

In other areas, such as health care or housing, federal programs aim to meet a defined standard of affordability. Those programs set a benchmark of how much a family should pay out of pocket and then fill in the gap between those two numbers.

Under the ACA, for example, families eligible to purchase insurance on the individual market and making between 100 and 400 percent of the federal poverty level (currently between about $33,500 and $97,200 for a family of four per year) can receive tax credits. The quantity of assistance is set to cap the share of annual income (ranging from 2 percent to 9.5 percent) needed to afford a "silver" plan under the ACA’s regulatory definition of different tiers of insurance plan quality. The tax credit then fills any difference between those amounts. So if the plan costs $100 a month and the family’s contribution is $50, then the credit will cover the remaining $50.

Federal housing assistance, more commonly known as Section 8, has a similar structure and guarantees that families in the program will spend no more than 30 percent of their income to rent a place that charges the median rent in their area. A key difference is that the ACA is an entitlement program, where everyone who fits the program criteria get the money they need. Section 8, by contrast, has its total pool of funds limited by the annual appropriations cycle — meaning a huge share of theoretically eligible families don’t get help.

But families who are in the program have their out-of-pocket housing costs capped, and the clear program goal means we can tell exactly how much current funding levels fall short of the program’s goal of universal affordability.

Bringing the states back in

Tying benefits to a clear goal of what they should purchase will also clarify stark geographic disparities. Right now, the sufficiency of a student’s federal financial aid varies substantially across the country. Students attending the typically low-priced community colleges in California will pay little to nothing, allowing them to use federal funds to help with living expenses. A student at the same income level in New Hampshire may still owe hundreds of dollars just to pay for tuition.

Because states are under no obligation to play a role in keeping college prices reasonable, they are free to reduce their spending on public higher education anytime budgets are strained.

During the last recession, the federal government spent tens of billions more on higher education, essentially offsetting the dramatic higher education cuts made by states without achieving any net increase in affordability. The current system also makes it virtually impossible for families to budget how much they will realistically need to pay for college, forcing students to take out far more debt than is reasonable to attend college — or choosing not to attend college at all.

Moving from the current laissez-faire higher education system to one that targets specific affordability goals in a structured way will require several steps:

  • The federal government should require that families can afford the total price of a public in-state higher education with no more than a reasonable family contribution plus some small levels of debt.
  • In tandem, the expected family contribution should be made binding for students attending these schools so they are not charged more than they can afford.
  • From there, the federal government must divide the cost of closing that gap between itself, states, local governments, and colleges — and this division need not be the same in every instance. For example, the federal government should pick up a larger share of the cost for the lowest-income individuals.
  • Last, the government should also make historically low-funding states close more of the gap, especially those who have the resources to spend more but do not.

These changes would create a higher education system that incorporates more of the lessons learned from other federal benefit programs. It would establish clear responsibilities for everyone in the system, ensuring that families and the feds do not continue to pick up an unfair share of the cost.

Today, more than 41 million Americans currently hold a combined $1.2 trillion in federal student debt, including 7.5 million borrowers in default. States continue to extract money from their public institutions of higher education, driving up tuition and debt, and family incomes simply cannot keep up with prices that grow, yearly, at a rate faster than inflation.

More money from the federal government is part of the solution, but to achieve results we need a new approach to higher education affordability — one that builds on lessons learned from other policy areas and ties federal spending to specific standards with defined roles for all levels of government.

Ben Miller is the senior director for postsecondary education at the Center for American Progress. Antoinette Flores is a policy analyst on the postsecondary education team at CAP.