Making the Financial Aid System Sustainable
I'm pleased to be back at the FSA conference. And I'm excited to speak to you today for two reasons.
First, I want to celebrate the critically important but too often unrecognized work that financial aid officers do every day throughout our country.
And second, I want to encourage financial aid leaders to take an even larger role in helping to lead the nation to a better, sustainable system of financial aid.
Simply put, our current system of financial aid is unsustainable. As President Obama has said, our nation faces "a crisis . . . of college affordability and student debt." We can't regain our global leadership in college attainment, and enhance our economic competitiveness, when so many students are left with steep student loan debts but no degree.
President Obama has proposed an ambitious plan for transforming financial aid in America, which I'll talk about in more detail in a moment.
But our broad goals are that the financial aid system must become more transparent, simpler, and innovative. It must do much more to not only increase access and completion but to help people responsibly manage their debt.
In short, we envision a world with a much higher level of financial literacy about what it takes to complete college and the benefits and restrictions of student aid.
Improving financial literacy should be an institutional goal, driven in significant measure by financial aid administrators, in partnership with other leaders in higher education.
We urgently need your leadership and your innovative ideas to realize the American promise of education as the great equalizer. Higher education cannot become a luxury in America—every family in America should be able to afford it.
So let me start by just saying a huge thank you to the financial aid administrators gathered here today.
On many campuses, you do more than anyone to expand both college access and completion. Your leadership, hard work, and commitment mean a great deal to me personally.
It takes exceptional people skills to work with families of all backgrounds--who often arrive in your offices cowed, confused, and concerned about financial aid.
It is always rewarding when a student, parent, or colleague thanks a financial aid officer who has worked with a student to secure aid, or who finds a pathway to keep a student in school. But sadly, your work rarely receives the recognition it deserves.
Sometimes you have to apply complex rules that may not seem fair to students. And you have to say no to people more than you would like.
You have to master a demanding technical body of knowledge and a rigorous accounting system. Financial aid administrators are critical guardians against fraud and abuse--you help protect the integrity of our Title IV dollars. In many instances highlighted in recent IG reports, school aid officers first spotted, and took action, to stop fraud from happening and to help maintain the public's trust.
Now, as invaluable as financial aid officers are, the brutal truth is that you work in a system that is ultimately unsustainable.
Our financial aid system has three major challenges. First, its incentives are inadequate--and, in some cases, backwards. Second, today's system is fiscally unsustainable. And finally, our financial aid system is not transparent or efficient for too many students and their families.
The federal government today makes available over $150 billion in student aid every year in grants and loans. But our existing funding model essentially provides incentives only for enrollment growth—the more students you have, the more money you get.
The current system does not support excellence. It doesn't encourage people to stay in college and complete their degrees. It doesn't reward colleges for increasing grad rates for Pell grant recipients, or first-generation college-goers.
It provides too few long-term incentives to constrain college costs, reduce student debt, or improve productivity.
In sheer fiscal terms, the funding model for student aid cannot continue as it has over the long term.
Roughly three-fourths of all college students attend a community college or public university today. But during the recession, the vast majority of states slashed funding for higher education.
As a result—as you well know--public institutions raised tuitions and fees, with students and families largely picking up the added tab.
At the federal level, we expanded the number of Pell Grant recipients by about 50 percent during the administration's first term. We put an additional $40 billion into Pell grants—without going back to taxpayers for a nickel. It is one of the accomplishments which I am most proud of.
But the federal government doesn't have the funding to continue indefinitely making up for states that disinvest in higher education. This has to be about shared responsibility.
Over the next decade, the Pell Grant program faces a funding shortfall of about $50 billion. And we must sustain the historic investments in the Pell Grant program from the last four years, if America is to achieve the goal in 2020 of once again having the best, college-educated workforce in the world.
And finally, our current financial aid system is unsustainable because it lacks transparency and can be extraordinarily inefficient.
I know I am not telling you anything that you haven't lived and seen firsthand. But the difficulty families have trying to figure out basic things—like grants versus loans, or one-year costs versus four-year costs—is mind boggling.
The FAFSA form itself used to be a barrier to college entry. That drove me crazy—and I'm thrilled we were able to make it quicker and simpler to complete.
About 98 percent of FAFSA applicants now use the web-based version of the FAFSA. The incorporation of skip-logic, as well as the addition of the IRS Data Retrieval Tool, has helped propel a 50 percent increase in the number of students who have completed the FAFSA over the last four years.
Yet even with the improvements to the FAFSA, the financial aid system is still too complex and opaque. Someday, I hope students who qualify for financial aid based on their tax return will not have to complete a FAFSA at all.
The system's needless complexity is not an abstraction for President Obama and the First Lady. The President has never forgotten the challenge of paying off multiple loans with different terms to five different loan agencies, every month.
As you know, students with federal loans are required to complete both entrance and exit counseling. But too often the counseling they receive is not especially memorable—or effective in helping people manage their debt.
In fact, one survey last year found that more than 40 percent of students with federal loans believed they had not received any kind of counseling, either online or in person, about their loans.
And it's deeply troubling to me that so many academically-qualified high school graduates don't even attempt to apply to college because they simply assume they can't afford it, even though they know how valuable college is. We have to reach more high school students and their parents, earlier.
A survey by the Institute for Higher Education Policy found that over two-thirds of students who didn't go to college believed that—and I quote-- "A college education is necessary for me to have the things that I want, like a car and a comfortable home."
Yet only 12 percent of those academically-qualified, non-college going students applied for financial aid—88 percent did not. What a tragic loss of academic opportunity and human potential!
So, for these three reasons—warped incentives, fiscal instability, and a lack of transparency—our current financial aid system is not sustainable.
We must all think beyond the short-term, beyond tinkering with the status quo, about how to build a much better and sustainable financial aid system.
So I want to shift gears for a minute and tell you about President Obama's landmark plan to address our crisis of college affordability and student debt.
His plan would tackle that crisis on three fronts: By encouraging innovation and competition in higher education; by helping people responsibly manage their debt; and by empowering students and families to select schools that provide the best value and are the best fit for them.
Unfortunately, innovation is too rarely taken to scale in higher education--which is why President Obama has proposed both a $1 billion Race to the Top for Higher Education and a new $260 million First in the World Fund.
The President has also challenged our Department to develop a college ratings system for the start of the 2015 school year. Under his plan, the college ratings system would be used to transform the way federal student aid is awarded to students, starting in 2018, with this reform incorporated into the reauthorization of the Higher Education Act.
The President proposed a new approach that marks a big break from the past. It is an idea that has been talked about in Washington and across the nation for a long time. But no one has had the courage to act upon it.
President Obama said the federal government should "rate colleges based on opportunity: Are they helping students from all kinds of background succeed, and that [we should rate colleges] on outcomes—on their value to students and parents."
Over the course of the next year, we are going to solicit input on the ratings system from literally thousands of stakeholders, including financial aid administrators. We've already started those conversations--and learn something everywhere we go.
For financial aid officers, the development of a college ratings system cannot be an academic exercise. No one knows better than you the tough decisions people have to make about financial aid, and the difficult—and sometimes devastating—plight of students who do not complete their degree, fail to get a job, and cannot handle their loans.
No one knows more about the struggle that many students face figuring out what institution to attend, their ability to repay what they borrow, and the return on investment they can expect.
We'll be traveling across the country to engage with everyone who can help us design an effective ratings system that helps students make smarter decisions about financial aid and that is sensitive to the varying educational missions of schools.
Later in 2014, we plan to release a draft proposal for public comment and review. And no later than December of next year, we'll use the feedback we receive to finalize the college ratings system.
Now, while the college ratings system is still a work-in-progress, I can tell you we have a few guiding principles for thinking about its design.
First, though we don't know all the metrics, we do know the ratings system must rely on multiple measures—not one or two crude measures of college value.
We will be looking at three big performance buckets.
We'll be looking at access, such as the percentage of students receiving Pell grants.
We'll be looking at affordability, like average tuition, scholarships, and loan debt.
And we'll be looking at outcomes--such as graduation and transfer rates, alumni satisfaction surveys, graduate earnings, and the advanced degrees of graduates.
Second, we'll be seeking to make apples-to-apples comparison of like institutions.
The ratings, in other words, will compare colleges with similar missions, and identify colleges that do the most to help students from disadvantaged backgrounds and colleges that are improving their performance over time. We are interested in the progress schools are making.
We'll be looking, for example, at how successful colleges are at enrolling and graduating students who benefit from the Pell grant program.
As President Obama stated, his "firm principle [is] that our ratings have to be carefully designed to increase, not decrease, the opportunities in higher education for students who face economic or other disadvantages."
Lastly, here is what the ratings won't do. Unlike some published college rankings, we will offer a ratings system, not a rankings system.
The ratings system won't highlight trivial differences between elite institutions or heavily reward schools based on the number of students they turn away. Our goal is inclusion, not exclusion.
Those are the broad parameters for our college ratings system. And believe me, we are all aware that if this is not done well, it could create unintended consequences and allow gaming of the financial aid system. So we begin this work with a great sense of humility.
At the same time, I reject the idea that the value of a college education is so elusive, so inexpressible that no ratings system can ever meaningfully help consumers get a better sense of its value and make more informed choices.
The right question to ask here is not whether the ratings system will be perfect—I promise you, it won't be.
Instead, we should ask whether the ratings will constitute a big step forward in making college costs and outcomes more transparent for students and families—and whether they would better ensure that institutions reaping the benefit of federal student aid dollars provide good value.
Now, the last part of President Obama's plan entails helping people to manage their debt responsibly.
It flies in the face of our commitment to equal opportunity that so many students today leave college with staggering debts and no degree. Tragically, many middle-class families are starting to believe college is only for rich folks, and not for people like them.
So let me provide a brief update on where we are in our efforts to help people better manage student debt.
In July, Congress enacted a bipartisan compromise on student loan interest rates that saved a typical undergraduate $1,500 over the life of their loans.
President Obama has also proposed allowing all student borrowers to cap their federal student loan payments at 10 percent of their monthly income. Currently, students who first borrowed before 2008, or who have not borrowed since 2011, are not eligible for the President's Pay As You Earn plan.
We're also mounting an aggressive public awareness campaign to make sure borrowers who are eligible for income-driven repayment plans can take advantage of them if they so choose.
Over the last 18 months, the number of Direct Loan borrowers in IBR has quadrupled, from about 280,000 in June 2012 to almost 1.2 million today.
Just last month, FSA began sending emails to 3.5 million borrowers who might benefit from income-driven repayment plans. And that email campaign is scheduled to continue through mid-December.
Every institution of higher education should be seeking to make financial aid and institutional value more transparent. And every institution should have a default prevention plan in place.
If you don't already have an effective exit counseling program, please take advantage of the model exit counseling module that our Department added to StudentLoans.gov earlier this year.
Now, we have a long way to go to reach the goals of greater transparency and increased financial literacy. But I am glad to report we are making progress.
As of October 31, more than 1,900 schools have committed to adopting the new financial aid Shopping Sheet. I ask all postsecondary institutions to consider voluntarily adopting the Shopping Sheet as a model financial aid award letter that shows prospective students the true cost of their college education.
And today, I am pleased to announce that our Department has launched a new online, one-stop shop, or Financial Aid Toolkit, for guidance counselors, mentors, and college access professionals.
The toolkit consolidates FSA resources into a searchable database that covers the full span of the financial aid lifecycle, from applying for aid to repaying loans. It includes, for example, documents and links to financial aid-night presentations.
We are also launching a limited number of experimental sites where institutions will be allowed to waive certain HEA requirements of federal student aid to pursue responsible innovations to increase college value and affordability.
We're inviting input from a wide array of stakeholders who want to expand promising practices to enable students to receive financial aid based on how much they learn, instead of the amount of time spent in class. We believe the move from seat time to competency holds great promise.
And we'll be encouraging proposals that, among other things, that enable high school students to receive Pell Grants to take college courses early, or allow the use of student aid to pay for assessments when students seek academic credit for prior learning.
There are so many thoughtful, innovative ideas and strategies out there—we are challenging ourselves to support this creativity, instead of stifling it.
Despite these indicators of progress, empowering students to maximize their financial aid dollars and minimize their debt load can't be accomplished just by relying on individual loan servicers or by financial aid officers alone. Transformational change requires campus-wide and system-wide reforms.
The challenge of building a better, sustainable system of student aid can only be met through a shared partnership, with clear responsibilities, involving the federal government and each of the 50 states, local governments, institutions, secondary schools, parents, and students themselves. We must all be in this together—no one gets a pass.
I am absolutely convinced that financial aid officers must help lead the way toward that collective solution. And I have every faith that you can and will do just that.
In fact, innovative financial aid leaders are already showing the way to improving financial literacy, increasing transparency, boosting retention and college completion, and strengthening loan counseling.
We must take your best ideas to scale. I would like to see more institutions emulating financial literacy programs like Kansas State's Powercat Financial Counseling program and Ohio State's Scarlet and Gray Financial Program.
At Kansas State, the goal is for students to meet with Powercat Financial Counseling every semester to create and review their college financial plan, just as they would meet with an academic advisor to work on their academic plan.
At both Kansas State and Ohio State, these programs rely in part on peer educators, students from financial-related majors who spend a semester training to advise students and who serve as financial coaches. At a meeting with a group of college students just last week, I heard how much they appreciated peer mentoring and support programs.
At Ohio State, peer financial coaches have handled nearly 1,800 one-on-one appointments with students in the last five years. For students on regional campuses, peer coaches will even conduct appointments with students via Skype!
Since Kansas State began its program in August 2009, more than 1,200 students have received individual financial counseling, nearly 16,000 students and parents have received group financial education, and 60 students have served as peer financial educators. That is campus-wide change--not case-by-case change.
At Western Michigan University, financial aid leaders chose to intervene early to increase financial literacy, working in both middle schools and high schools.
Financial aid officers developed a program called Xtreme Reality that, like virtual life games, simulated future financial choices for students. Over the last 13 years, well over 5,000 students and more than 400 parents have participated.
In Xtreme Reality, each student is given a "life," complete with a description—did their education stop after high school, did they earn a college degree, are they married, and how much do they earn?
The game forces students to grapple with real-life financial choices—can they buy a house or should they rent? Should they buy a new car or take the bus to work? How much will day care cost for children?
I love the creativity of engaging teens in non-traditional ways to increase their financial literacy and to help them think long-term.
Last but not least, I would love to see more institutions of higher education expanding programs like Oregon University's Pathway Oregon program.
The Pathway Oregon program promises that academically-qualified, Pell-eligible Oregonians will have their University of Oregon tuition and fees paid with a combination of federal, state, and university funds.
Since it started in 2008, Pathway Oregon has enrolled about 1,500 Pell-eligible Oregonians, nearly half of whom are first-generation college goers. But Pathway Oregon isn't just another college scholarship program.
Once freshmen arrive on campus, they are required to attend academic advising sessions to identify potential obstacles to their success. Pathway Oregon runs degree audits each year for juniors and seniors, providing students with detailed analyses of their progress toward their degree requirements.
Despite the fact that so many Pathway Oregon participants are low-income, first-generation college students, they actually have a higher sophomore year retention rate—90 percent—than other University of Oregon students.
And the second cohort of Pathway Oregon students, who enrolled in 2009, was slightly more likely to graduate in four years than other UO students.
Think of how transformational more Pathway Oregon programs could be at universities across the country!
Now, in the end, we know that there are no silver bullets or easy solutions to remaking the financial aid system. But we also know we can't let the difficulty of reforming financial aid become a discussion-ending excuse for inaction or for defending the status quo.
We are better than that, smarter than that, more committed than that.
So I hope you will leave this conference with a commitment to redouble your efforts to build a better financial aid system for the good of our students, our institutions, and our country.
Our nation needs the benefit of your collective guidance, ideas, and wisdom. Please challenge us, and challenge each other. Challenge the thinking that somehow we can't do better—I know we can.
And please know that we remain extraordinarily grateful for the work you do, day in and day out, to make the precious prize of a college education a reality for millions of Americans.
You are the unsung heroes of higher education--and today it is your day to bask in a well-deserved spotlight.
I thank you for your service, and for your ongoing commitment to opening the doors of opportunity a little bit wider.