Report: Colleges Should Share the Risk and Reward of Federal Aid

Quick Takeaways:

  • Colleges and universities could be eligible for a reward or a penalty based on the performance of students with Pell Grants, or those who take out federal loans, compared with similar colleges.
  • Both the federal government and colleges and universities would be required to make additional student outcome data available to the public, including cohort default rates over a longer period of time, PLUS loan default rates, and the percentage of students in current repayment and income-based repayment plans.
  • Colleges would be grouped with similar institutions based on the type of degree or certificate offered, institutional selectivity and resources, to avoid unintentionally punishing schools that serve a large portion of disadvantaged students.

By Allie Bidwell, Communications Staff

Policymakers in recent months have increasingly turned their focus to issues within higher education – college affordability, accountability, and student success. But while the federal government spends billions of dollars each year on financial aid alone, there’s a growing concern that students aren’t set up for success after college, and a belief that colleges should be at least partially on the hook for student outcomes.

With the reauthorization of the Higher Education Act (HEA) underway, members of Congress and higher education stakeholders have repeatedly discussed the potential benefits of performance-based funding (which many states have implemented) and institutional risk-sharing systems. Under the former proposal, institutions would ideally be rewarded for helping improve student outcomes, and under the latter, they would be held responsible to a certain degree for poor performance.

A new report from Robert Kelchen, an assistant professor of higher education at Seton Hall University, proposes combining the two ideas in the reauthorization of HEA. Institutions would be rewarded with bonus funding for above-average performance of Pell Grant-recipients or student loan borrowers, and penalized for lower performance by having to repay a portion of federal financial aid dollars. Kelchen also proposes decoupling eligibility for institutions to receive federal grants and student loans “so financially needy students with no loans would not be hurt by a college with high loan default rates.” Currently, Kelchen writes, a college can lose access to Pell Grants if its default rate is too high.

Still, while legislators appear to be in agreement that some form of risk-sharing should be included in the reauthorization bill, there hasn’t been a clear consensus on exactly how it should be structured, particularly in a way that would minimize unintended consequences for students.

“Performance-based funding or risk-sharing proposals have the potential to improve student outcomes, particularly among students from lower-income families, by focusing attention on how well colleges are serving these students,” Kelchen writes. “However, lessons from state and federal accountability policies show that colleges’ responses must be monitored in order to ensure they are seeking to improve their performance without simply becoming more selective or admitting fewer lower-income students.”

Kelchen proposes, for example, comparing the performance of students with their peers at similar institutions. Students at community colleges, then, would not be compared with students at elite, private colleges. The peer groups would be determined based on several factors, including the type of degree or certificate offered, institutional selectivity and resources.

“Current federal accountability systems do not take these differences into account, which contributes to the set of colleges at risk of losing federal financial aid dollars being those with disproportionately large percentages of low-income, minority, and first-generation students,” Kelchen writes.

The proposal also locks institutions and the federal government into an agreement, with each side agreeing to make changes to improve accountability, and ideally, student outcomes. In addition to decoupling federal grant and loan eligibility, the federal government would be required to make more data available to the public, including information on student loan cohort default rates over a longer period of time, PLUS loan default rates, the percentage of students in current repayment, and the percentage of students enrolled in income-based repayment plans. Certain data points are not reported to the federal government and not widely available to the public due to the federal government’s ban on a “student unit record” data system.

Colleges, on the other hand, would be required to participate in the Federal Direct Loan Program in order for students to be able to receive Pell Grants. Institutions would also have to match a portion of federal financial aid dollars with their own if their performance dips too low, and promise to not take that money away from Pell recipients.

Kelchen also proposes restructuring the funding formulas for certain campus-based aid programs – the Federal Work-Study (FWS) and Supplemental Educational Opportunity Grant (SEOG) programs – to reward schools for enrolling low-income students. Under this proposal, the funds would be distributed based solely on the percentage of Pell Grant-recipients at each institution, rather than a combination of financial need and cost of attendance.

To implement the risk-sharing portion of the proposal, several outcomes would be tracked. The retention rate, graduation rate, graduation plus transfer rate, and number of graduates for Pell Grant recipients would be used to determine how well colleges are performing. A college with a measure below the average of its peer group would pay the Department of Education (ED) a percentage of the Pell awards from the previous year, which would then be put toward the reward funds for institutions with above-average performance. For student loan borrowers, an institution’s cohort default rate five years after entering repayment, and the percentage of students current on payment one year after entering repayment (excluding loans in deferment or forbearance for non-economic hardship reasons), and the percentage of students making on-time payments of at least $1 of the loan’s principal balance would be considered to measure performance.

But the risk-sharing element for student loans comes with risks, Kelchen writes.

Colleges could seek to limit the amount of money a student can borrow (NASFAA has advocated giving administrators the authority to limit how much certain students can borrow) or potentially steer students toward PLUS or private loans to reduce the amount of federal loans they could be on the hook for.

Kelchen also notes that the system should be implemented over time and be developed with stakeholders from all higher education sectors, ED, states that have implemented performance-based funding systems, and the public.

“Given widespread concerns over the price of college and mounting amounts of student loan debt, the concept of tying some federal financial aid dollars to student performance has gained at least some measure of bipartisan support,” Kelchen writes. “The impending reauthorization of the Higher Education Act provides an opportunity to completely rethink how the substantial investment of federal funds is awarded to students through colleges and universities.”


Publication Date: 9/9/2015

David S | 9/9/2015 12:4:11 PM

OK, to use the "government is paying for it" rationale that some people defend "skin in the game" with, if a doctor is being paid with Medicare funds and the patient dies anyway, the doctor gets to keep the money, right? Or to use consumer debt parallels, if someone defaults on a car loan, is the dealer who talked the customer into the car on the hook? I asked the author of this report (via Twitter, so lengthy conversation wasn't possible) if his proposal was only for high-default is not. So unlike T4 participation requirements, the threshold here is 0%. A good-performing school's reward of a higher CB allocation may be wiped out by the proposed complete redistribution of those funds.

Where - where - is the evidence that *every* loan default is because the college has failed to prepare the student? Do people not realize that the result of this will be more private loans (assuming private lenders don't adopt a similar policy)? And if anyone thinks that levying financial liabilities on schools will result in lower tuition...hmm.

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