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8/17/2019 The Case for Federal Higher Education Affordability Standards
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The Case for Federal HigherEducation Affordability StandardsLessons from Other Sectors
By Ben Miller and Antoinette Flores May 2016
WWW.AMERICANPROGRESS.O
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The Case for FederalHigher EducationAffordability StandardsLessons from Other Sectors
By Ben Miller and Antoinette Flores May 2016
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1 Introduction and summary
5 The goal and structure of federal financial aid
7 Affordability lessons from other sectors
27 Potential downsides of affordability
33 Recommendations
36 Conclusion
38 Endnotes
Contents
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1 Center for American Progress | The Case for Federal Higher Education Affordability Standards
Introduction and summary
In 2010, Congress enaced wo major expansions o he social saey ne. Firs, i
passed he Paien Proecion and Affordable Care Ac, more commonly known
as he ACA.1 Tis bill brough sweeping changes o he American sysem o healh
care. In paricular, i provided new money or saes o expand healh care cover-
age o exremely low-income people and ax credis o help individuals purchase
insurance plans. A week laer, Presiden Barack Obama signed he Healh Care
and Educaion Reconciliaion Ac o 2010.2 Ta legislaion included more han
$36 billion in new money or he ederal Pell Gran program, which helps low-income sudens afford college.3 I also indexed he maximum Pell Gran award o
inflaion, guaraneeing benefis would increase each year.
Te ulimae goals o boh he healh care and educaion expansions were simi-
lar: make an imporan se o benefishealh insurance in one case, college in
he oheraffordable or vulnerable populaions. More han five years laer, he
effecs o boh changes are clear.
Tanks o he ACA, he share o Americans who lack healh insurance has
dropped by abou one-hird and is now a a hisoric low.4 Tis includes decreases
in he uninsured rae in every sae in he counry and he Disric o Columbia.5
Millions more sill need coverage, bu he numbers appear o be headed in he
righ direcion.
Te legislaion accomplished his by seting clear expecaions ha Americans
should have healh insurance and ha i should be affordable. I se a goal or
saes o expand Medicaidhe program ha provides coverage or low-income
amilieso everyone a or below a se hreshold ied o he povery level. I also
creaed a new se o ax credis ha esablished clear benchmarks or boh howmuch people should have o pay ou o pocke or healh care coverage and wha
ype o insurance hey should be able o afford. Tese benefi srucures provided
a degree o cerainy or amilies in wha had previously been a chaoic marke.
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2 Center for American Progress | The Case for Federal Higher Education Affordability Standards
Meanwhile, he invesmens made in Pell Grans significanly raised he maximum
award and number o recipiens. Tis year, sudens can receive up o $5,775
hrough he program, an increase rom $4,731 in 2008.6 Similarly, he number o
recipiens grew rom slighly more han 6 million o more han 8 million.7
While he Pell Gran increases have mean a lo or sudens, hey have only heldhe line on college affordabiliy or low-income individuals, no made i beter.
oday, he Pell Gran covers 30 percen o he oal cos o atending a our-year
public college.8 In 2008, i covered 32 percen.9 Similarly, he borrowing rae o
Pell Gran recipiens sayed unchanged a 70 percen rom 2008 o 2012.10
Te differing ederal approaches o affordabiliy parially explain why he
expansion o Pell Grans was less successul in helping low-income sudens
han he ACA was in raising he share o Americans wih healh care. Unlike
wih he ACA, he increase in Pell Grans did no come wih guaranees ha
recipiens would no pay more han a se percenage o heir income or borrowno more han a se amoun o money. Te increased Pell Gran benefis boosed
he maximum possible award by abou $1,000, giving sudens more money o
spend on college expenses.
Te resul o an expecaion-ligh approach o college affordabiliy is ha he
abiliy o ederal possecondary benefis o achieve heir desired aims is com-
pleely dependen upon he choices made by schools, governors, and legisla-
ures across he counry. In Caliornia communiy colleges, or example, where
prices are low or nonexisen or mos atendees, he ederal benefis are more
han enough o cover uiion and can also pu a den in living expenses. Bu
in a more expensive sae such as New Hampshire, ederal grans and loans
combined may no be enough o even pay or direc academic coss. And here
is no guaranee he places where ederal aid currenly is sufficien will say ha
waya ew lean years could easily resul in Caliornia communiy colleges
becoming much less affordable.
Such a siuaion is simply unsusainable. Te ederal governmen is making oo
large an invesmen in possecondary educaion o see is dollars no guaranee
affordabiliy, simpliciy, and cerainy or sudens. o comba his, we need oflip he concep o ederal possecondary assisance o ocus on wha i buys, no
how much i pays.
We need to flip
the concept
of federal
postsecondary
assistance to
focus on what
it buys, not how
much it pays.
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3 Center for American Progress | The Case for Federal Higher Education Affordability Standards
As his repor shows, changing ederal financial aid benefis o guaranee recipi-
ens can purchase a specific se o goods, no jus receive a se amoun o money,
will beter conorm hese programs o he res o he U.S. social saey ne.
Drawing on examples rom he healh care and housing secors, his repor ana-
lyzes how he ederal governmen addresses he quesion o affordabiliy hrough
he benefis provided o consumers. In paricular, i ocuses on wo programs wihin each area: Medicaid and he ACA in healh care and renal housing assis-
ance and ederally insured morgages in housing. Imporanly, his emphasis on
he benefis o consumers inenionally excludes oher quesions abou how he
ederal governmen could conain coss, such as hrough innovaion. Ta is an
imporan area or uure research.
Examining how he ederal governmen addresses affordabiliy in oher key policy
areas shows five lessons or how he governmen could rehink is higher educa-
ion benefis o beter mee is goals. Te mos imporan o hese findings is ha
benefis should be ied o specific purchasing goals or consumers. By benchmark-ing benefis o a saed end goalsuch as affording a possecondary educaion
ederal assisance would provide greaer assurance ha hose who are geting help
will be able o afford a leas a basic level o educaion.
Oher lessons rom healh care and housing provide imporan inormaion or
resrucuring ederal aid or possecondary educaion. Tese include:
• Minimizing expenses or he lowes-income individuals
• Seting limis or wha level o goods he ederal governmen will make
affordable
• Creaing separae affordabiliy sandards or deb
• Sharing he cos o achieving affordabiliy beyond he ederal governmen
While here is much o be learned abou college affordabiliy rom oher secors,
hese healh care and housing programs are no perec. Tey may no serve enough
eligible individuals; hey may use a benchmark ha does no eel sufficienly afford-
able o consumers; or hey may have oher challenges. o ha end, hese programs
highligh our oher lessons abou he challenges in addressing affordabiliy:
• Unavailabiliy undermines affordabiliy
• Affordabiliy mus ackle all cos elemens
• Benchmarks mus have ace validiy
• Providers ha mee affordabiliy sandards may change
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4 Center for American Progress | The Case for Federal Higher Education Affordability Standards
Based on hese lessons, his repor suggess a new ramework or possecondary
affordabiliy. I sars wih guaraneeing a low- o no-cos educaion or he mos vul-
nerable individuals. As sudens move higher up he income specrum, he guaranee
shifs o ensure hey can afford a leas an in-sae public opion wihou paying more
han a reasonable share o heir income. o make he mah work, saes and insiu-
ions would have o provide enough assisance o fill in any gaps ha exis beweenamily conribuions and ederal unds. Recognizing ha such clear-cu affordabiliy
aims may no be easible a privae insiuions, hese schools would insead have o
keep sudens’ debs below cerain levels ha are ied o posgraduae earnings.
Seting explici goals and guaranees or ederal suden aid recipiens highlighs ha
hese invesmens are he mos credible ools or addressing affordabiliy. As he larg-
es single under o college educaion in he counry, he ederal governmen could
and should use is aid o demand ha he beneficiaries o is assisance are guaraneed
access o affordable educaions. Tis vision o a suden aid program acively engaged
in requiring affordabiliy is also an explici rejecion o he heory firs ariculaed by ormer U.S. Secreary o Educaion William J. Bennet ha hese programs are o
blame or never-ending price increases.11 Raher han enabling colleges o raise prices
o capure more money, as he Bennet Hypohesis ariculaes, his vision allows he
ederal governmen o exer is leverage o keep prices affordable and in check.
While his paper represens is own vision or achieving possecondary affordabil-
iy hrough ederal acion, i builds upon oher hinking abou he need or greaer
clariy abou wha amilies should pay or college. In paricular, i draws on conceps
firs discussed by he Lumina Foundaiona under o he Cener or American
Progress Possecondary Educaion eamin is 2015 benchmark or higher educa-
ion affordabiliy.12 Tough nonbinding, he benchmark argues ha amilies should
be able o afford college hrough conribuions rom savings, income, and suden
work. Tis paper akes such a concep even urher by proposing how he ederal
governmen could creae a binding affordabiliy requiremen.
Te need or a new approach o higher educaion benefis is clear. oday, more han
41 million Americans currenly hold a combined $1.2 rillion in ederal suden
deb, including 7.5 million borrowers in deaul.13 Saes coninue o reduce spend-
ing on heir public insiuions o higher educaion, driving up uiion and deb. Addiionally, amily incomes simply canno keep up wih prices ha grow aser
han inflaion year afer year. And his does no even begin o address he persisen
access and compleion gaps by race and income. Only by aking a new approach o
hese benefisone ha builds on lessons learned rom oher policy areascan
he ederal governmen hope o guaranee ha all sudens, regardless o back-
ground, can access and afford possecondary educaion.
The federal
government cou
and should use
aid to demand t
the beneficiaries
of its assistance
are guaranteed
access to afforda
educations.
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5 Center for American Progress | The Case for Federal Higher Education Affordability Standards
The goal and structure
of federal financial aid
Federal financial aid is a long-erm invesmen ha, i effecive, should help
sudens move up he socioeconomic ladder over ime. Tis ime rame or suc-
cess is slighly differen rom oher ederal benefis, such as housing assisance or
healh insurance, which are designed o immediaely improve or sabilize he lives
o amilies. Tis difference also explains why ederal financial aid benefis differ
somewha rom hose provided or healh insurance and housing. Wih he excep-
ion o morgage assisance, he oher major benefi programs provide jus-in-ime
cash ransers or oher ypes o assisance ha do no have o be repaid. Federalcollege aid includes grans bu also relies heavily on suden loans. Te idea
behind hese debs is ha sudens borrow agains he uure increases in income
hey will receive rom earning a degree.
Bu even i he invesmen horizons and srucures are differen, he ederal gov-
ernmen’s college aid programs sill have he same ulimae goals as unds spen in
oher secors such as healh care and housing. Te governmen wans is suppor
or possecondary educaion o allow recipiens o afford a college educaion.
Tese unds should supplemen gaps in he financing landscape ha would oher-
wise preven sudens rom going o college. And or he lowes-income sudens,
ederal gran aid should minimize or obviae he need o borrow.
o accomplish hese goals, Congress ses a maximum level o grans and loans ha
a suden can receive each year. Tese amouns are no smallhis year, he larges
Pell Gran or low-income sudens is $5,775, and Safford Loans or firs-year su-
dens range rom $5,500 o $9,500. Te exac unds sudens are eligible o receive
vary depending on a number o acors, including sudens’ economic siuaion, he
number o credis hey atemp, heir year in college, and he cos o heir insiuion.
Noably, he major ederal financial aid programs operae as vouchers or sudens.
Dollars are disbursed o colleges on behal o sudens, meaning ha he amoun o
ederal suppor an insiuion receives is direcly relaed o he number o enrolled
sudens who are receiving his aid. Pell Grans and Safford Loans conain no
maching requiremens and no addiional unds or enrolling large numbers o
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6 Center for American Progress | The Case for Federal Higher Education Affordability Standards
sudens who receive hese orms o aid. Te oher effec o he voucher disribuion
model is ha sae governmens never receive any money rom he aid programs.
Sae governmens are no expeced o play any ormal operaional role in he sysem
beyond approving insiuions o operae wihin heir borders.
Despie heir size, he ederal financial aid programs’ purchasing power is decreas-ing over ime. oday, he maximum Pell Gran covers jus 30 percen o he oal
cos o atending a public our-year college versus 77 percen in 1980. 14 While
some o his drop is due o years when he maximum Pell Gran did no increase,
even indexing he award o inflaion rom is incepion in he 1970s would no be
enough o overcome he relenless increase in college prices.15 As a resul o his
decline in purchasing power in he 2011-12 academic year, 70 percen o Pell Gran
sudens a public our-year colleges also had o borrow o pay or heir educaion.16
Te reason behind he decline in ederal purchasing power also maters or under-
sanding wha can be done o address i. Federal benefis’ values all no becauseinsiuions are raising prices jus o capure more ederal money. Insead, saes are
inenionally reducing heir suppor or possecondary educaion. According o a
Cener or American Progress analysis, 38 saes cu heir unding per suden by a
leas 5 percen rom 2008 o 2012.17 When aced wih budgeary holes rom sae
cus, insiuions are orced o raise prices or sudens. Te resul is ha educaional
coss ha used o be borne by saes are now being passed on o sudens who hen
urn o ederal suden aid o pay hem. Absen he presence o ederal benefis, su-
dens and amilies would find hemselves wih compleely unatainable uiion bills.
Saes supplaning heir own unding or suden and ederal suppor is no a
good oucome. Tis is paricularly rue because a lo o he ederal benefis come
as loans ha mus be repaid by he sudensraising heir long-erm coss and
resuling in bad financial condiions i hey canno make heir loan paymens.
Reversing he decline in he purchasing power o ederal possecondary benefis
and improving affordabiliy canno be done wih simple weaks o he programs.
Nor will increasing benefis alone be enoughhe rae a which uiion rises is
simply oo grea. Insead, i he ederal governmen wans o ensure ha is higher
educaion programs ruly improve affordabiliy, i needs o look o he lessonslearned rom oher secors abou how o address hese problems. Invesigaing
how major ederal programs in areas such as healh care and housing ackle he
challenges o affordabiliy can highligh oher pracices ha would be good o
adop in higher educaion. I can also show he challenges o differen approaches
and give a sense o poenial pialls.
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7 Center for American Progress | The Case for Federal Higher Education Affordability Standards
Affordability lessons
from other sectors
Reviewing how he ederal governmen approaches affordabiliy in oher secors
reveals five posiive lessons ha could be applied o higher educaion financing:
• Many oher programs ie benefi amouns o defined benchmarks so recipiens
know hey will receive enough aid o purchase he goods hey need.
• Areas such as healh care se disinc affordabiliy policies or he mos vulnerable
individuals ha resul in minimal o no expecaions or ou-o-pocke spending.
• Te ederal governmen also limis which producs wihin a marke i will makeaffordable, reusing o subsidize he pricies opions.
• Relaed o his sense o limis, he ederal governmen also creaes affordabiliy
sandardsspecifically, when i deals wih deb in areas relaed o housingo
proec consumers rom unaffordable paymens.
• Finally, he ederal governmen does no always pursue affordabiliy on is
own. For crucial iems such as healh insurance, i enliss he help o saes and
employers o achieve is aims.
No all he lessons learned abou approaching affordabiliy are posiive. Many
o he programs profiled here have heir own challenges ha make hem less
effecive a promoing affordabiliy. In acknowledging hese limiaions, his
repor idenifies our problems in oher secors ha any effors o change ederal
suden aid benefis mus recognize:
• Available resources mus be sufficien o avoid raioning suppor or ying goals o
oudaed sandards ha do no reflec he amoun o help needed in oday’s world.
• Affordabiliy ofen maters on muliple dimensions in a given secor ha mus be
addressed. For example, making monhly premiums affordable in healh insurance
may no be enough i he copays are oo expensive or people o visi he docor.• Expecaions or ou-o-pocke spending mus eel reasonable o recipiens.
• One challenge in ataching benefis o specific levels o qualiy is he opions
ha mee his sandard migh change over ime. For insance, he ACA provides
ax credis or healh insurance plans ha mee cerain cos condiions. Bu he
plans ha qualiy or his benefi may change over ime.
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8 Center for American Progress | The Case for Federal Higher Education Affordability Standards
Te nex secions describe each o hese nine lessonsfive posiive and our nega-
ivein greaer deail, wih specific examples rom healh care and housing and
an explanaion o how hey migh relae o higher educaion benefis.
Lesson #1: Tying federal benefits to specific affordabilitybenchmarks helps guarantee purchasing power
In higher educaion, ederal benefis are calculaed in erms o dollars wih no con-
sideraion or wha hose unds can buy. By conras, ederal programs or healh
care and housing ocus on providing enough assisance o bridge he gap amilies
ace beween he price o he produc and wha he amilies can afford o pay. Tis
approach ensures ha ederal suppor heoreically gives amilies enough purchas-
ing power o buy wha hey need.
How federal financial aid calculates benefits
Here is how he aid awarding process works in higher educaion: When su-
dens complee he Free Applicaion or Federal Suden Aid, or FAFSA, hey
are presened wih a figure, known as an Expeced Family Conribuion, or EFC.
Teoreically, he EFC is a ballpark esimaion o wha a amily can be reasonably
expeced o pay or college. Tis number can range anywhere rom $0 o ens o
housands o dollars, depending on a amily’s income and asses.
Te EFC also drives how much ederal aid sudens receive. For insance, he
maximum Pell Gran sudens can receive in a given year is equal o he difference
beween he maximum award and heir EFC. In oher words, i he maximum award
is $5,915, hen a suden wih an EFC o $0 can receive up o $5,915, while someone
wih an EFC o $1,250 would qualiy or up o $4,665. Te EFC also maters or
receiving Subsidized Safford Loans. I is no, however, relevan or Unsubsidized
Safford Loans, which are available o anyone regardless o EFC or income.
Te use o he EFC in he aid awarding process suggess ha affordabiliy can
be accomplished by combining amily conribuions and any necessar y gran orloan aid. In ac, he Higher Educaion Ac isel esablishes his idea, noing in
Secion 401 ha he combinaion o a reasonable amily conribuion, he Pell
Gran, and oher small ederal assisance programs should cover 75 percen o
he cos o a higher educaion.18
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In pracice, he sum o EFC and oher aid rarely adds up o affordabiliy or
lower-income sudens. Te problem is ha he EFC is a nonbinding number.
Insiuions o higher educaion are under no obligaion o honor ha figure and
charge sudens anyhing close o i. A suden wih a $0 expeced conribuion
could end up sill paying ens o housands o dollars per year or college. In ac,
27 percen o hese individuals who atend ull ime pay $5,000 or more jus orheir uiion and ees, including 13 percen a public our-year colleges.19 Including
living expenses, 86 percen o ull-ime sudens wih a $0 EFC are paying a leas
$5,000 or collegeincluding 89 percen a public our-year insiuions.20
Wihou a binding EFC figure, ederal educaion benefis only ensure recipiens
will ge a specific dollar level o suppor. For insance, maximum Pell Gran
recipiens in heir firs year o college know ha hey will receive up o $5,915, and
hey can ge a loan o up o $5,500 i hey are sill suppored by heir amily.21 Bu
wha recipiens lack is any guaranee ha hose dollars will be sufficien o acually
purchase he possecondary educaion hey are supposed o afford.
Tus, how ar sudens’ ederal dollars srech depends on where hey live and
wha ype o school hey atend. For sudens who live in saes such as Florida or
Caliornia, which radiionally have reasonably priced higher educaion, ederal
suppor may cover all or mos o heir coss. By conras, someone wih he exac
same financial siuaion in New Hampshire or oher saes ha ypically have very
high college prices may have a much harder ime affording college.22 And in boh
cases, he ederal governmen allows saes and insiuions o choose wheher o
offer affordable possecondary opions.
Tis approach o benefis, solely in dollar erms and wihou considering wha he
unds should acually buy, is disinc rom how oher ederal programs consider
affordabiliy. In oher programs, such as he healh care ax credis auhorized
under he ACA or ederal renal assisance, benefis are atached o specific prices
consumers ace, ensuring ha dollars will be sufficien o mee heir inended
aims. Doing so provides cerainy or he recipienswho know hey will be able
o acually buy healh insurance or ren an aparmen wih he aid. I also helps he
ederal governmenwhich knows is aid can acually achieve is desired goals.
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10 Center for American Progress | The Case for Federal Higher Education Afford abil ity Standards
How the ACA calculates benefits
Te healh insurance ax credis creaed by he ACA illusrae a way o hinking
abou benefis in erms o being enough o specifically afford a produc insead
o jus being a se dollar amoun. Te goal o hese credis is o provide subsidies
or low- and moderae-income individuals who receive eiher no or insufficienemployer coverage o purchase healh insurance on he individual marke.23 Bu o
work, subsidies have o be large enough o bring he level o plans on he marke
down o a price people can acually afford. o accomplish his goal, he ederal
governmen ses he credi amoun a he difference beween he cos o a specific
ype o insurance plan and a se percenage o an individual’s income.24 I varies
his percenage based upon where a amily’s income alls beween 100 and 400
percen o he povery line. As amilies make more money, heir expeced conri-
buion o healh insurance increases. Te resul is ha he lowes-income individu-
als do no pay more han 2 percen o heir income, while hose a 400 percen o
he povery line do no pay more han 9.5 percen o heir income.
Te able below shows he premium ax credi’s expecaions or amily income
based upon heir earnings relaive o he ederal povery level.
TABLE 1
Share of family income for ACA tax credits
By percentage of the federal poverty level
Family income as a percentage
of the federal poverty level
Percentage of family income
paid for health care premiums(For the second-cheapest silver-level plan)
Starting income Ending income Starting premium Ending premium
0% 133% 2.01% 2.01%
133% 150% 3.02% 4.02%
150% 200% 4.02% 6.34%
200% 250% 6.34% 8.10%
250% 300% 8.10% 9.56%
300% 400% 9.56% 9.56%
Note: Tax credit calculations use a family’s modified adjusted gross income, a measure of annual earnings minus some deductions.Source: Bernadette Fernandez, “Health Insurance Premium Credits in the Patient Protection and Affordable Care Act (ACA) in 2015”(Washington: Congressional Research Service, 2015), p. 10, available at https://www.fas.org/sgp/crs/misc/R43945.pdf.
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Te use o income in he premium ax credis is similar o he idea behind he
EFC in ederal aid calculaions, only i is binding. Te amoun o he subsidy
sill declines as income increases, jus as Pell Grans phase ou. Bu he differ-
ence is people who qualiy or he credi know ha as long as hey can afford
he ou-o-pocke percenage o heir income, hey will be able o buy a plan. By
conras, even individuals who can afford heir EFC have no guaranee ha heycan afford o pay or college.
Te premium ax credis also se goals or wha a amily’s conribuion is sup-
posed o buy. Te ACA creaed a classificaion sysem ha grades healh insurance
plans as bronze, silver, gold, or plainum.25 A plan’s level is based upon is acuarial
valuea measure o he share o healh insurance expenses ha are paid by he
plan versus he paricipan on average.26 For example, a bronze plan is one wih
an acuarial value o 60 percen, meaning ha paricipans are expeced o cover
abou 40 percen o coss; he plan covers he res. Te oher classificaions rep-
resen increasingly generous opions in which he paricipan pays a smaller shareo coss. Silver, on average, covers 70 percen o a paien’s coss; gold covers 80
percen; and plainum covers 90 percen.27
While amilies receiving premium ax credis choose heir plan level, he ederal
governmen guaranees affordabiliy only o a cerain level o coverage. Te pre-
mium ax credi is atached o he cos o he second-cheapes silver plan available
o he recipien. Tis means ha a amily ha chooses ha plan receives a ax
credi equal o he difference beween heir amily conribuion and he cos o he
premium. So i he monhly premium is $100 and heir conribuion is $30, hen
he premium credi will be $70.
Tis connecion o he ax credi o a good o a specific ype is anoher key les-
son or higher educaion. By saing exacly wha he credi mus be able o buy,
i guaranees everyone can buy a silver plan, while leting he amoun a person
acually ges rom he ederal governmen vary. In conras, higher educaion
benefis fix he amoun a suden can obainso people who are in idenical
circumsances receive he same amoun o moneybu floa he value o wha
hose unds can buy. In oher words, wo ull-ime maximum Pell Gran recipiens
would likely receive he same amoun o money, bu hose dollars buy hem verydifferen percenages o heir oal educaion coss i one goes o a communiy col-
lege in Caliornia and he oher goes o a public our-year insiuion in Vermon.
Higher educatio
benefits fix the
amount a stude
can obtain—
so people who
are in identical
circumstances
receive the
same amount
of money—but
float the value
of what those
funds can buy.
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Tinking abou he ax credis in erms o he value o he good also allows plans o
develop benefi srucures in differen ways. For example, one plan could ge o a 70
percen acuarial value hrough low coinsurance bu high deducibles, while anoher
could ake he opposie approach. Nor are hese values deermined on an individual
basishey represen he general esimae o wha a ypical person would pay.28 Tis
provides insurers wih flexibiliy or how o manage oward a specific end value.
In some ways, he acuarial value concep mirrors wha saes and insiuions
already do on college pricing. Some saes aim or affordabiliy hrough a so-called
high cos, high aid model. In hese cases, colleges charge a high sicker price bu
hen provide generous gran aid o subsidize he price or lower-income sudens.
In oher places, he sae may provide a lo o operaing suppor o a college, allow-
ing i o charge a low upron price. Te end price paid by sudens could very well
be he same; i is he pah o ha number ha differs.
How federal housing assistance calculates benefits
Te concep o a srong connecion beween he benefi amouns and specific
purchasing goals is also a key elemen o he ederal renal assisance programs.
Tese programs use a se o benchmarks ha are based upon a amily’s income
and he price o housing in a given area. Te local renal marke ses he maxi-
mum subsidy a amily can receive, ensuring ha benefis are sufficien o afford
housing bu are no oo high. Families’ incomes dicaes heir chances o quali-
ying or suppor and wha hey are expeced o pay ou o pocke. Te number
o people in he household eniles hem o srucures o a cerain size. Tese
sraighorward rules help amilies clearly undersand he level o suppor hey
are eniled o receive i hey are able o ge ino he program while sill allowing
choice up o a reasonable poin o affordabiliy.
Te ederal governmen adminisers several renal assisance programs ha pro-
vide affordable housing o more han 5 million households in he Unied Saes.29
Te wo larges o hese programs are Secion 8 Projec-Based Renal Assisance
and Secion 8 Housing Choice Vouchers, or HCVs, which were creaed in 1974.30
Combined, hese wo programs serve approximaely 70 percen o all ederalrenal assisance recipiens.31
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Boh Secion 8 programs operae as voucher models in which he governmen
provides financial suppor or individuals o ren privaely owned and operaed
aparmens. Te big difference beween he wo is ha projec-based renal
assisance programs subsidize specific renal aparmens and buildings, while
HCVs cover properies o he recipiens’ choosing. Over ime, enan-based
vouchers have become he preerred mehod o providing renal assisance andcurrenly serve 2.1 million amiliesalmos double he 1.2 million served by
projec-based renal assisance.32
A he mos basic level, HCVs provide suppor or amilies so hey will be able o
pay no more han 30 percen o heir income oward ren. Tis benchmark is sup-
posed o guaranee ha paying or a place o live does no overwhelm a amily’s
budge so hey also can afford ood, clohing, and oher necessiies. Tis serves he
same purpose as he income percenage or he healh care ax credis. I is also he
same concep absen in he ederal aid programs.
Te amoun o a recipien’s HCV is based upon he acual coss o housing in a
given area. Secion 8 HCVs are capped a he air marke ren, or FMRhe ypi-
cal average ren in he local housing marke.33 In oher words, he ederal govern-
men will no provide a voucher or an amoun above he ypical ren in an area.
ying benefis o ren in an area conrols coss while providing a clear definiion
o wha amilies pay. Te vouchers also have sandards or how large a srucure a
amily can ren based upon is size and he ages o is members.34
Tough healh care and housing are wo very differen markes, hey boh show
he benefis o aking a more inenional approach o he benchmarks and levels
se or ederal assisance. By seting sandards or he income percenage a amily
should pay or a produc or service and guaraneeing ha level o paymen o be
enough o afford a minimum produc, hese programs ensure ha paricipans
receive suppor ha acually helps hem buy wha hey need. Tis is disinc rom
he ederal suden aid programs, which appear o se affordabiliy goals based
upon income bu simply disribue se amouns o dollars wih no consideraion
or wha hose dollars can buy.
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Lesson #2: The most vulnerable individuals
have minimal to no out-of-pocket costs
Improving affordabiliy or everyone is a laudable goal. Bu keeping expenses
reasonable is even more imporan or he mos a-risk individuals. Lower-income
people have ewer resources o cope wih high prices. Shocks such as sudden cosincreases may be more likely o cause hem o sop using a service. For example,
hey may drop ou o college or go wihou healh insurance. I is or hese reasons
ha any affordabiliy sysem mus pay paricular atenion o how i serves he
mos vulnerable o is beneficiaries.
Federal health benefits
One noable eaure o he healh insurance ax credis is ha individuals mus make
a leas 100 percen o he ederal povery level o receive assisance. Tis is no someconspiracy o exclude he poores individuals. Raher, i reflecs a heory o afford-
abiliy ha recognizes ha some people are so low income ha demanding any kind
o ou-o-pocke conribuion is ineasible. Insead, he expecaion o he ACA is
ha he poores people who all below he povery level will ge a differen orm o
coverage ha is less expensive or hem hrough he Medicaid program.
Te Medicaid program provides a differen way o hink abou how o serve he
lowes-income individuals. In higher educaion, he ederal governmen suppors
he poores sudens by giving hem he larges amoun o gran aid. I hen hopes
ha saes and insiuions will suppor hese individuals bu does no acually
require hem o do so. Medicaid ses much more explici assisance goals or who
mus be covered and wha ypes o services hey mus receive. I hen splis he
coss o meeing hese aims wih he saes. Tis creaes a sense o shared responsi-
biliy or helping he mos a-risk individuals.
Medicaid provides healh care coverage o more han 71 million Americans.35 I was
signed ino law in July 1965, predaing he Higher Educaion Ac’s November sign-
ing by a ew monhs.36 Medicaid operaes as a ederal-sae parnership, in which he
ederal governmen reimburses saes or a porion o unds spen. All saes and heDisric o Columbia paricipae in Medicaid. In exchange or his ederal assisance,
saes mus provide a leas a defined se o healh care benefis o some specific
populaions. Beyond hese parameers, saes have significan flexibiliy boh in
erms o oher benefis offered, groups covered, and even how o finance heir share
o expenses. As a resul, Medicaid varies a grea deal rom sae o sae.
Any affordability
system must pay
particular attent
to how it serves
most vulnerable
its beneficiaries.
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Te guaraneed benefis ha come wih Medicaid eligibiliy provide consumers
wih much more cerainy han he ederal suden aid programs. Sudens who
are eligible or a Pell Gran are no acually eniled o unding beyond he se
dollar sum hey receive. Tey are no guaraneed ha hey will be able o access or
afford a college o a cerain ype or level o qualiy.
Federal housing benefits
Federal renal assisance programs also build in conceps o greaer generosiy or he
lowes-income individuals hrough heir eligibiliy erms. For sarers, a amily mus
no earn more han 80 percen o he median income in heir ciy or couny o qual-
iy or aid. Income limis are deermined or meropolian areas and counies and
are adjused or amily size.45 Bu because hese programs are no enilemensa
low-income amily is no guaraneed o receive supporhey also arge benefis
urher. For insance, projec-based renal assisance requires ha a leas 40 perceno unis in each developmen go o amilies who are exremely low-incomemean-
ing hey make no more han 30 percen o he local median income.46 enan-based
HCVs are even more argeedexremely low-income amilies mus receive 75 per-
cen o all new vouchers each year.47 While his need or greaer argeing is mosly
a reflecion o he disappoining ac ha no enough suppor is available or renal
assisance, i does also show a similar commimen o providing as much generosiy
as possible o he lowes-income individuals.
Overall, boh he healh care and housing approaches o he mos vulnerable pop-
ulaions send a message ha here are some levels o income so low ha recipiens
canno be expeced o pay much, i anyhing.
Lesson #3: There are limits to what the federal
government will support for affordability
While he ederal governmen has a vesed ineres in making cerain goods and
benefis affordable, i does no need o mee his goal or every ype o a given
produc or service. Ensuring affordabiliy or every ype o insurance plan, hous-ing srucure, or insiuion o higher educaion would discourage effors a cos
conainmen and likely resul in he ederal governmen spending more money on
expensive opions wih idenical oucomes o cheaper alernaives.
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Currenly, he ederal governmen does no really consider he quesion o wha
should be affordable or where i should limi assisance in is higher educaion
assisance programs. On he firs issue, he governmen uses he same ormulas
o deermine sudens’ benefis regardless o wheher hey atend a higher- or
lower-priced insiuion. I is, hus, equally willing o subsidize he counry’s mos
expensive school as i is he cheapes. In ac, he aid awarding ormulas are se sosudens canno receive benefis above heir level o expenses. Tis means someone
who goes o an expensive college will receive more ederal assisance, even hough
he dollar amouns may be able o purchase a smaller share o a college educaion.48
By conras, oher secors have very differen approaches o affordabiliy limis.
In he case o healh insurance ax credis, his means ataching benefis only o
coverage o a cerain level and no increasing suppor beyond ha poin. In he
housing space, he ederal governmen addresses his issue by seting limis on
how much o is income a amily can spend and sill receive a subsidy.
In he healh care secor, he ederal governmen ses is affordabiliy limis in erms
o how generous a plan i will guaranee someone can afford. o do his, i ataches
he amoun o he ax credi o he difference beween he second-leas expensive
silver plan and a se percenage o a amily’s income. Only or plans o his ype and
below does he ederal governmen ensure ha a se percenage o income will pur-
chase a defined level o benefis. A amily can, however, choose a more expensive
gold or plainum plan, paying a larger share o heir income or premiums because
heir subsidy does no increase o reflec he higher plan’s cos. Te credi by no
means prevens such a choice, bu i does provide a clear undersanding ha he
governmen is no expeced o guaranee affordabiliy or hose opions.
Similar o healh insurance ax credis, ederal renal assisance programs atach
heir benefis o he median ren in an area o ensure housing opions will be
affordable. Tis oo allows amilies o choose more expensive housing. Bu regula-
ions allow hem o do his only o a poinamilies canno pay more han a
cerain percenage o heir income and sill receive assisance.
Federal renal assisance benefis provide amilies he difference beween he
air marke ren in heir area or he size o house or which hey qualiy minus30 percen o heir income. Families have he opion o choose housing ha
coss more han he FMR, bu hen hey pay he difference beween he amoun
over he benchmark plus 30 percen o heir income.49 For example, he FMR in
Washingon, D.C., or a amily o our in a hree-bedroom home is $1,951. Ta
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is he maximum subsidy a amily in he region could receive oward he cos o
housing. I he amily chooses housing ha coss more han $1,951, he amily
would pay more oward ren.
Families canno, however, use vouchers or any housing above he FMR where
hey would pay more han 40 percen o heir income in heir firs year o ren-ing.50 Tis ensures amilies choose a home ha is affordable or heir income and
ha subsidies do no cover overly expensive homes.
Te conceps described above could apply o higher educaion in several ways.
For insance, Congress could require ha benefis be sufficien o afford a se
percenage o he price o a public our-year college in each sae. Tis would allow
sudens who atend a communiy college o cover a larger percenage o heir
coss, while hose who choose privae colleges would no have any guaranees or
expecaions ha heir educaion would be affordable. Alernaively, affordabiliy
limiaions could be applied o he deb levels so ha insiuions canno loadsudens wih loans beyond a cerain poin o indebedness relaive o heir uure
income. As he nex lesson shows, his is jus one way o ackle he quesion o
affordabiliy in a deb-based financing mechanism.
Lesson #4: There are affordability standards for debt
Te ederal governmen ofen helps individuals afford producs and services
wih deb financing. In he case o higher educaion, i provides sudens wih
low-cos loans ha are repaid o he governmen. For housing, he governmen
provides insurance o encourage companies o issue morgages and ses san-
dards o proec borrowers rom some o he unscrupulous behavior observed
during he Grea Recession.
Te ederal governmen mus be very careul when i provides access o deb.
While leverage can help individuals access a home or an educaion ha hey migh
no oherwise be able o afford, i also adds risks. Tis is no a problem i hese
individuals easily repay heir loans, bu i maters a lo i hey all behind or deaul,
which can have disasrous financial consequences.
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Federal higher education debt
In higher educaion, he governmen limis access o loans sricly in dollar erms.
For undergraduae borrowers, i ses annual and lieime loan limis based on
a suden’s year in school. Tese cumulaive limis are $31,000 or dependen
sudens and $57,500 or independen sudens.51
Meanwhile, boh graduae andparen borrowers have largely unlimied access o deb. As long as hey can pass
a minimal consideraion o pas credi hisory, hey are allowed o borrow any
amoun up o an insiuion’s cos o atendance.
How federally guaranteed mortgages approach indebtedness
Te housing secor akes a much differen approach o deb. While i oo has
dollar-based limis, he housing secor also ses affordabiliy sandards in erms
o deb relaive o income in order o proec borrowers rom ending up wihmorgages hey are unlikely o repay. Neiher o hese seps prevens someone
rom finding a loan ha appears unaffordable, bu i limis how much he ederal
governmen will become involved in morgages ha appear o be overly risky.
Te Federal Housing Adminisraion, or FHA, is he bes example o how he
ederal governmen approaches affordabiliy in oher deb programs. Congress
creaed he FHA in 1934 afer he Grea Depression. Is goal is o improve housing
sandards, provide an adequae home financing sysem hrough insured home
morgage loans, and sabilize he housing marke.52 When FHA was creaed,
only 40 percen o households could afford o own heir home.53 Te majoriy o
amilies could no mee he sric morgage loan erms: down paymens equal o
50 percen o he propery’s marke value and repaymen schedules o only hree
o five years ending wih a balloon paymen.54
Te FHA atemps o increase homeownership by providing insurance or
privae lenders o issue morgages. Te insurance provides privae lenders
wih ull proecion agains losses i a buyer deauls on a loan. In mos cases,
i a borrower deauls, he FHA pays he lender he remaining principal owed.
Because he governmen provides insurance and lessens he risk o privae lend-ers, lenders can offer loans wih more accessible erms o buyers who would no
oherwise qualiy. Since is sar, he program has insured more han 34 million
homes, allowing he Unied Saes o achieve a homeownership rae o 68 per-
cenone o he highes raes in he world.55 oday, approximaely 4.8 million
single-amily morgages are FHA insured.56
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Wha makes FHA morgages ineresing rom an affordabiliy sandpoin is hey
are capped in absolue erms and relaive o a buyer’s income. Te exac amoun
ha can be len varies by localiy bu has a naional ceiling ha canno be sur-
passed. For high-cos areas such as Washingon, D.C., he cap is a he naional
maximum o $625,500; or he lowes-cos areas, he cap is $271,050.57 In addi-
ion o hese maximum limis, he FHA also limis morgage sizes based upon heamily’s deb-o-income raio. Tis es looks a all debno only he morgage
amoun. In general, FHA will no allow a morgage in which paymens exceed 31
percen o a amily’s income or where he combinaion o he morgage and oher
deb exceeds 43 percen o income.58
Te higher educaion marke recenly incorporaed a similar concep o deb-o-
earnings raes or loan eligibiliy hrough a regulaion known as gainul employmen.
Issued by he U.S. Deparmen o Educaion in 2014, i requires career-oriened
programs o ensure ha graduaes who received ederal aid have deb paymens
ha are equal o or less han 8 percen o heir annual income. Programs ha can-no mainain his hreshold risk losing access o ederal suden aid. Te difference
beween gainul employmen and he FHA’s morgage process, however, is ha gain-
ul employmen looks a he resuls afer he ac o ensure debs were no oo high,
while he FHA simply would no have insured he loan a he ouse.
Even ouside o he gainul employmen conex, he upron affordabiliy require-
mens considered by he FHA could be implemened in wo oher ways in he
suden loan programs. Firs, affordabiliy benchmarks could be used o esablish
risk-sharing requiremens, in which colleges would be on he hook or a larger
share o unaffordable deb burdens ha become delinquen, deaul, or are no
repaid. Second, or parens who ake ou ederal loans, affordabiliy requiremens
could be similar o hose used or housingparens would be unable o borrow
amouns or which heir monhly paymens would be greaer han a cerain share
o heir income. Regardless o srucure, adding hese requiremens would allow
sudens and parens o acquire some deb, while prevening colleges rom bur-
dening hem wih oo much deb wihou sharing he risk.
Imporanly, limiaions on deb based upon he suden would no work in higher
educaion. Te undergraduae loan limis already serve as a good check on preven-ing egregious deb levels in absolue erms. In addiion, mos sudens lack he credi
or income hisory o gauge proper limis. Unlike a morgage, where he purchaser’s
income is likely o say consan or grow a a relaively sable rae, someone who ges
a good college educaion should expec o see airly seep income increases in he
years afer graduaion. Te resul is ha he maximum amoun o reasonable deb
upron may end up being easily repaid afer a ew years in he workplace.
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Mortgage affordability after the financial crisis
Addiional new rules relaing o morgages provide anoher way o add affordabil-
iy proecions o suden loans. Tese rules esablish a qualified morgage, which
encourages lenders o offer loans wih cerain proecions and reasonable erms.
Te idea arose rom he morgage crisis, when i became clear lenders did no bearenough responsibiliy or offering unaffordable loans o homebuyers. o address
his issue, Congress passed he Dodd-Frank Wall Sree Reorm and Consumer
Proecion Ac in 2008. Te bill required all crediors o make a reasonable, good-
aih deerminaion o a consumer’s abiliy o repay a homeowners’ morgage.
In 2013, he Consumer Financial Proecion Bureau issued a rule urher imple-
mening abiliy-o-repay requiremens and esablished he concep o a qualified
morgage.59 Te basic idea is o creae greaer legal proecions or lenders ha
offer affordable producs wihou undesirable eaures, while raising he risk or
companies whose loans do no mee hese erms.
Te mos imporan requiremen or a loan o be a qualified morgage is ha i
akes ino consideraion a buyer’s abiliy o repay he loan.60 Tis analysis mus
consider no only he cos o he morgage bu also oher debs a buyer holds. o
be a qualified morgage, he paymens on he loan plus oher debs canno exceed
43 percen o he buyer’s preax income.61 Tis provision discourages lenders rom
offering excessive amouns o deb o people who likely canno afford hem. In
addiion, he loan isel canno have risky eaures associaed wih decepive prac-
ices, such as emporarily low ineres raes ha will rise over ime, hidden ees, or
mandaory arbiraion clauses.62
Wheher a lender offers a qualiying morgage maters or how a cour assesses
a company’s compliance wih abiliy-o-pay sandards. Offering a qualified
morgage gives a lender some proecion agains consumer lawsuis ha allege
he lender violaed abiliy-o-repay requiremens. Lenders ha offer low-cos
qualified morgages have a sae harbor. Tis means ha in he case o a lawsui,
he cour presumes he lender has complied wih abiliy-o-repay-requiremens,
providing he lender wih greaer leverage in he case.63 Tis does no mean ha
lenders canno issue nonqualified morgages, bu i does provide an encourage-men or offering hese debs.
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Applying he concep o qualified morgages o suden loans has ineresing
implicaions or higher educaion affordabiliy. In 2013, he Cener or American
Progress discussed his issue in he conex o privae suden loans.64 Bu he
idea could work or colleges, as well. For example, he ederal governmen could
esablish rules ha affec how much risk an insiuion has o bear based upon he
amoun o deb i offers cerain sudens or he raio o suden deb o poscollegeincome. Schools ha say below a se hreshold would have o share in litle o no
risk, while hose above he benchmark would bear more risk. Te basic idea would
be he sameinsiuions ha do well by sudens on specific clear merics would
have greaer proecions han hose or whom excessive deb is he norm.
Lesson #5: Make affordability a shared goal
Te ederal suden aid programs are unilaeral invesmens. Te ederal govern-
men covers he enire cos o he benefis i provides o sudens via insiuions.Operaionally, his makes he programs easier o adminiser because hey do no
require relaionships in every single sae. I also ensures ha sudens receive
equiable benefis regardless o where hey live.
A unilaeral approach o higher educaion affordabiliy also has significan draw-
backs or he ederal governmen. In paricular, i means he ederal governmen
canno leverage parnerships wih saes and insiuions o make hem do heir
par in keeping coss down. Insead, when saes and insiuions cu heir own
unding, he ederal governmen seps in as a saey ne or sudens. Te addi-
ional grans and loans he governmen provided when saes aggressively slashed
unding during he Grea Recession helped millions o sudens afford educaion
ha would oherwise likely have been oo cosly. Unorunaely, by placing no
requiremens on he saes and insiuions ha also benefi rom ederal aid, he
governmen pus isel in a posiion in which is programs can be aken advanage
o, allowing saes and schools o supplan heir own unding. When his occurs,
he coss o subsidizing higher educaion direcly ranser rom he sae and insi-
uion o he suden and he ederal governmen.
o be clear, he issue a sake here is disinc rom he argumen ha some makeabou how ederal suden aid direcly leads o uiion increases. Ta heory,
known as he Bennet Hypohesis, alleges ha insiuions inenionally raise prices
as a way o capuring increases in financial aid revenue. 65 Tis ormulaion is a mis-
undersanding o he dynamics behind higher educaion unding. For one, ederal
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suden aid has no risen nearly as much as uiion. Undergraduae ederal suden
loan limis have no increased since 2008. And beore ha, hey had no changed
since 1994 or anyone oher han firs-year sudens.66 Te Pell Gran does increase
each year by a ew dozen dollars, bu his is ar below he annual rise in uiion and
is no available or all sudens. While higher educaion ax benefis also increased
by abou $700 since 2008, his is sill well below he rise in uiions.67
Raher, he issue a play is a quesion o who should be responsible or subsidiz-
ing public higher educaion. For decades, he answer o his quesion was he
saes, wih he ederal governmen providing some suppor or he lowes-income
sudens, and everyone else paid ou o pocke. While sae subsidies sill exis
oday, hey are significanly diminished. In many ways, his is he same patern
ha repeas isel elsewhere in he social saey ne, where saes have decimaed
unding or goods and services such as suppor or low-income amilies.68 In he
case o higher educaion, however, he ederal governmen has done more o assis
sudens and fill he gap creaed by declines in sae unding. Te end resul o hisis a cos shif away rom saes and oward sudens and he ederal governmen.
Tus, raher han being he engine o sae cus, ederal suden aid has become he
saey ne ha so many oher pars o he social benefi srucure lack.
While having he ederal governmen fill in he unding gaps lef by sae cus is
no ideal, i is paricularly problemaic in higher educaion because much o he
backfilling is done wih deb. Paying or college wih loans raises he long-erm
price o college or sudens since hey mus repay wha hey borrow plus ineres.
Deb also increases he risk o atemp college. I sudens do no complee college
or atend a poor-qualiy program, hey may no receive he income gains necessary
o make he loan proposiion work. For hese people, deb can become unmanage-
able, leading o deaul and dire financial consequences such as wage garnishmen.
Forunaely, he significan size o he ederal invesmens in possecondary educa-
ion presens an opporuniy o change hese dynamics. Moving away rom ederal
financial aid as a unilaeral invesmen and oward a sysem ha creaes shared
requiremens beween saes, insiuions, and he ederal governmen presens
he bes opporuniy or guaraneeing possecondary affordabiliy. Raher han
reaing financial aid as a price driver, policymakers need o recognize is place ashe naion’s single bes ool or keeping coss reasonable.
Tere are several ways he ederal governmen could use is financial aid programs
o play a more acive role in affordabiliy. In paricular, wo examples rom he
healh care coverage and insurance space sand ou: Medicaid and he employer
mandae rom he ACA.
Rather than
treating financia
aid as a price dr
policymakers
need to recogn
its place as the
nation’s single b
tool for keeping
costs reasonable
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Shared affordability through Medicaid
As noed earlier, saes ha paricipae in Medicaid are required o cover cerain
populaions and share in he expense o coverage. Te way his cos sharing acu-
ally works is as an open-ended reimbursemen program. Te sae spends money
on allowable Medicaid expenses, and hen he ederal governmen reimburses paro he cos. Imporanly, here is no hard cap on spending. Saes ha are willing
o expand heir eligibiliy and hus provide beter benefis o more people receive
addiional ederal suppor o make i workable.
A sae’s reimbursemen rae under Medicaid is dicaed primarily by he Federal
Medical Assisance Percenage, or FMAP, rae, hough addiional ormulas may
apply under cerain excepions.69 Te FMAP ormula akes ino accoun he
relaionship beween a given sae’s per-capia income and naional per-capia
income.70 By law, he FMAP canno be lower han 50 percenmeaning ha
he ederal governmen evenly shares he cos o every expense wih a saeorhigher han 83 percenmeaning ha or every $1 he sae spends, i ges all
bu 17 cens back.71 Mississippi had he highes FMAP rae in 2015 a 73.58
percen, while 13 saes had a rae o 50 percen. 72
Te FMAP srucure shows a way o share he coss o affordabiliy across saes
ha have radically differen levels o affluence. Raher han holding every sae
o idenical sandards, he varying reimbursemen rae allows he ederal govern-
men o pick up a larger share o he coss or saes ha canno afford o pay, while
providing less assisance o hose wih more wealh. Tis is essenially he same
way he ederal governmen approaches benefis or individuals, wih he amoun
o help declining as wealh rises.
Te paymen srucures or Medicaid and ederal higher educaion benefis cre-
ae very differen incenives. By reimbursing saes or coss incurred, Medicaid
encourages saes o be more generous, bu i also makes hem share he burden
o addiional coss as a way o discouraging overly profligae spending. Tis ype
o unding model could be one way o ge saes o reinves in higher educaion. I
bears some similariy o an idea suggesed by he American Associaion o Sae
Colleges and Universiies, which would creae a new ederal unding sream harewards saes wih addiional dollars, depending on how much hey spend on a
per-suden basis.73 As saes spend more, hey would receive addiional dollars,
creaing a similar incenive or greaer generosiy.
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I is possible o incorporae similar principles rom he Medicaid program ino
ederal suden aid even wihou a new unding sream. Congress could change he
programs o inroduce a more ormal role and se o expecaions or saes. Under
his srucure, saes would have o commi o making higher educaion affordable
or Pell Gran recipiens and share in he cos o doing so. Similar o Medicaid, his
srucure would require saes o ocus effors on supporing he lowes-incomerecipiens hrough a shared unding model.
While he Medicaid model represens a collaboraive approach o ackling afford-
abiliy hrough increased unding, oher healh care examples sugges ways o
address he same challenge wih accounabiliy. Tis would be paricularly effecive
or hinking o ways o make insiuions play a greaer role in offering affordable
producs. Recognizing ha no all schools have heir own aid o use or se heir own
uiion, saring accounabiliy wih colleges could also be a way o spur sae acion.
ACA’s employer mandate
Te ACA’s employer requiremens or healh insurance coverage provide an
example o how accounabiliy can creae shared affordabiliy. Basically, he ACA
requires employers bigger han a cerain size o offer employees coverage o a
minimum benefi and cos level. Tese condiions apply only o companies ha
employ he equivalen o 50 or more ull-ime employees.74
Te shared responsibiliy provisions serve as a way o hold larger employers mon-
earily accounable or no offering accepable healh care coverage. o avoid hese
penalies, an employer’s plan mus provide minimum essenial coverage, a leas 60
percen o benefi coss.75 Employers mus also offer coverage o a leas 95 percen
o heir ull-ime employees and ensure he premiums do no exceed 9.5 percen o
an employee’s annual income.76 Meeing hese condiions is imporanhe penal-
ies are riggered i even one ull-ime employee receives a premium ax credi.77
Tis ramework esablishes a srong message ha employers have a responsibiliy
o keep heir coverage affordable and heir employees off he individual marke.
Failure o do so can have significan financial consequences. Employers ha dono offer coverage o enough employees are assessed a penaly equal o $2,000
muliplied by heir number o ull-ime employees. Addiionally, i an employer
offers unaffordable coverage ha resuls in an employee receiving a premium ax
credi, he fine increases o $3,000 per person. Tese fines are no based on he
number o employees geting a credi or no geting coverage; raher, a single unac-
cepable insance resuls in a cos based upon all ull-ime employees.78
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Te requiremens or employers o provide insurance coverage can be applied o
accounabiliy or colleges. Insiuions ha lead sudens ino unaffordable levels
o deb are ailing in heir responsibiliies he same way employers wih unac-
cepable insurance coverage do. Bu insead o fining colleges, insiuions wih
unaffordable deb levels could be prohibied rom paricipaing in he ederal aid
programs or required o share in more o he risk when borrowers wih excessiveloan balances sruggle. Te ormer case would be similar o expanding he exising
gainul employmen regulaion ha holds career raining programs accounable
or he debs o graduaes versus heir earnings. In he later, i would mean ha
he more unaffordable he deb levels become, he more an insiuion would pay
o he ederal governmen each ime a borrower sruggles.
Te benefi o he risk-sharing approach is ha insiuions would have o conrib-
ue unds only i elevaed deb levels became problemaic. Tis proecs insiu-
ions wih good oucomes rom acing sancions while sending a srong signal
abou he connecion beween deb and perormance. An iniial ocus on peror-mance also means penalies could be inensified over ime.
In esablishing a risk-sharing sysem, he ederal governmen should consider
he choices abou differeniaed accounabiliy ha are presen in he ACA. For
insance, a risk-sharing sysem should draw disincions in requiremens based
upon he size o he insiuion, including he number o borrowers and amoun o
deb received. Tis proecs he smalles insiuions because i may no be easible
o expec rom hem he same resuls as large universiies.
Regardless o wheher hrough a reimbursemen-syle reward or risk-sharing
accounabiliy, he lessons rom healh care demonsrae one srong lesson:
Affordabiliy is oo complex a problem o rely solely on soluions rom he
ederal governmen. I will be impossible o lower prices, increase value, and
keep deb levels in check wihou creaing incenives or everyone involved in
affecing hose resuls.
Affordability is
too complex a
problem to rely
solely on solutio
from the federal
government.
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Potential downsides of affordability
Te lessons illusrae five useul sraegies or ackling higher educaion affordabil-
iy. Tis includes relying on clear benchmarks or deermining how much assis-
ance o provide and creaing shared responsibiliy or keeping benefis in reach.
Tis does no, however, mean every social suppor program rom oher secors has
a perec srucure ha should be adoped in ederal aid programs. In ac, looking
closely a oher programs raises several concerns ha mus be hough hrough
beore making changes in he suden programs: ensuring benefi levels and und-
ing are sufficien o avoid raioning, addressing all coss ha migh be barriers oaffordabiliy, requiring amily conribuions ha recipiens believe are manage-
able, and acknowledging ha supporing only producs and services ha mee
cerain requiremens can be difficul i hey change over ime.
Concern #1: Unavailability undermines affordability
Achieving affordabiliy is no jus abou providing sufficien benefis or an
individuali requires providing sufficien suppor or everyone who needs i.
No assising enough qualified individuals can undermine he goals o a program
because i means recipiens will no be cerain o geting he help hey need.
Te Pell Gran ares exremely well in erms o availabiliy. Any suden who
applies or aid and mees he eligibiliy erms is guaraneed o receive suppor.
Tis is rue wheher he suden is he firs or he 8,000,000h person o apply.
Tis dependabiliy is crucial or building rus in he program and convincing
young amilies hey will receive help paying or college.
Tis concern o availabiliy wihin affordabiliy also relaes o where recipiens canacually use heir benefis. For insance, a program ha covers all eligible individuals
bu les hem paricipae only a sies ha are geographically disan is no really an
affordable program. Afer all, lower-income individuals may no be able o afford he
ime and money needed o ge o he places where heir benefis are acceped.
Achieving
affordability
requires providin
sufficient suppo
for everyone wh
needs it.
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Te issue o local availabiliy is a paricular concern in he Medicaid program.
While Medicaid requires saes o provide recipiens some reedom o choose
among differen healh care providers, beneficiaries can have rouble finding a
docor or denis willing o serve hem.79 Being unable o acually use Medicaid
benefis can weaken is goal o keeping individuals and amilies healhy.
Te ederal aid programs, however, excel a having opions or sudens.
Financial aid can be used a any o he more han 7,000 paricipaing colleges,
as long as he insiuion acceps he suden.80 Recipiens can use heir benefis
o atend colleges in oher saes, whereas Medicaid covers coss in oher saes
only under cerain circumsances.81
Ta said, he acual abiliy o sudens o choose among many insiuions may
be oversaed. In general, poorer sudens are much more likely o choose higher
educaion insiuions close o heir home, especially i hey atend a commu-
niy college.82 Similarly, adul or working sudens who already have esablishedproessional or amily lives are unlikely o pursue possecondary opions ha
are ar away. And even seting aside geographic concerns, insiuions ha cos
more han he available benefis may be so ou o reach ha hey are no acually
a viable college choice.
In oher cases, ederal benefi programs may no be unded well enough ha
hey are guaraneed o be available or everyone who needs hem. Tis is par-
icularly an issue in he ederal renal assisance programs. I is no uncommon
or a amily o spend monhs and even years on a wailis beore receiving help
hrough hese programs. While ederal renal assisance subsidies currenly help
more han 5 million households, i is esimaed ha figure represens only 25
percen o hose who could be eligible or such help.83 Once amilies ge off he
wailis, he housing where hey can use heir benefis may no be in neighbor-
hoods ha are bes or children.84
Problems wih renal assisance availabiliy will likely coninue o ge worse as
demand or low-income housing has grown while unding or hese programs
has salled in recen years.85 Budge cus semming rom sequesraion in 2013
resuled in millions o ewer dollars available or low-income housing pro-grams and a reducion in he number o amilies assised by he program. While
Congress resored some o he unding in 2014, he program sill does no have
enough money o provide or all amilies ha need affordable housing.86
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All o his suggess ha any rehinking o affordabiliy benefis needs o srike
a balance beween robus choice or he beneficiary and sufficiency o achieve
is inended aims. Te renal assisance programs have clear goals o make sure
benefis are sufficien bu do no pay enough atenion o choice and widespread
availabiliy. Medicaid alls in he middle, wih some hough paid o choice bu
gaps ha need o be filled. In he case o ederal suden aid, here is, arguably, oolarge a ocus enirely on choice wih no consideraion o sufficiency. While here
is no necessarily a perec answer o hese challenges, hey need greaer consider-
aion in he ederal aid programs.
Concern #2: Affordability has multiple elements
Mos discussions abou college affordabiliy are acually ocused on he price
sudens mus pay an insiuion o atend. Bu looking a only hese direc
coss misses a big porion o he affordabiliy challenge. Consider, or example,Caliornia communiy colleges: Tese insiuions are essenially ree or mos
sudens.87 Bu he sudens who go here sill mus find ways o cover heir hous-
ing, ransporaion, ood, and possibly child care o atend. Tese are housands
o dollars in coss and canno be ignored. Afer all, sudens who canno pay o fix
he broken car on which hey rely o ge o school may be a jus as high a risk o
dropping ou as sudens who sruggle academically.
Te ederal suden aid programs parially consider he addiional coss ha mus
be covered o make college affordable. On he posiive side, ederal benefis can
be used o pay or nondirec expenses, such as living coss. Tis allows sudens
who atend a less expensive college o poenially receive more assisance covering
hese necessiies. A he same ime, because ederal college benefis are no con-
neced o any affordabiliy meric, here is no guaranee a suden’s insiuion will
be cheap enough o have money lef over or living. As a resul, sudens’ abiliy o
afford all expenses associaed wih an educaional program varies a grea deal by
where hey happen o live and sudy.
The costs of using health insurance
Te challenge o addressing affordabiliy beyond he direc cos o he iem pur-
chased is paricularly presen in he healh care conex. In his area, he issue is ha
he monhly premiums are jus one healh-relaed cos consumers mus manage.
In the case of
federal student
aid, there is,
arguably, too
large a focus
entirely on
choice with
no consideratio
of sufficiency.
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Ou-o-pocke spending or prescripions or copays or docor visis also need o be
affordable because any plan or which someone can afford he premiums bu no he
per-visi coss proves o be insufficien or care excep caasrophic incidens.
Te ACA ried o address hese addiional affordabiliy challenges hrough wo
provisions. Firs, i capped he ou-o-pocke cos o consumers on he ACAexchange o $6,450 per year or services covered by heir plan; he amily cap is
$12,900.88 Families ha make beween 100 percen and 250 percen o he pov-
ery level have an even lower cap o $2,250 o $5,200.89
Te second provision gave addiional subsidies o increase he acuarial value o
silver plans or low-income people. I does his by increasing he acuarial value so
ha he lowes-income individuals will, on average, pay even less han 30 per-
cen o coss. Someone beween 100 and 150 percen o he povery level canno
be charged an acuarial value or a silver plan below 94 percenmeaning he
individual is responsible or 6 percen o coss. Families wih incomes beween150 percen and 200 percen o he povery level are guaraneed an acuarial value
o 87 percen, while hose beween 200 percen and 250 percen are promised 73
percen.90 Tese requiremens provide a way o urher decrease oher healh care
coss, such as deducibles, coinsurance, or oher paymens.
Tese cos-sharing requiremens also have implicaions or choice. Tey nudge
amilies o pick silver plans because hose who choose less generous opions
such as a bronze planor op-ier opionssuch as a plainum plando no ge
he increase in acuarial value. Tis change does no resric choice, bu i provides
greaer guidance or individuals who may be unsure which plan o choose. Tis
seup also involves danger. A amily ha does no undersand he nudge may end
up making a significan misake, choosing o pay a bi less each monh or a bronze
plan even hough he reduced cos sharing o a silver plan more han offses he
difference in premiums.
In Medicaid, he process o dealing wih addiional coss is more sraighorward.
Under program rules, only higher-income Medicaid paricipans can be charged
monhly premiums.91 And while saes can charge paricipans when hey access
healh care in he orm o copaymens, deducibles, ec., hese amouns mus bekep small, wih poorer individuals charged less. Overall, he paricipans’ share o
coss mus generally say below 5 percen o heir income.92
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Making nonacademic coss affordable in higher educaion is one o he mos
vexing problems acing he secor oday. I is increasingly suggesed ha living
coss canno be ignored when rying o address college affordabiliy and comple-
ion. Bu living coss are also quie high, and expanding benefis o cover all o
hese expenses would be unaffordable. Greaer sandardizaion or consisency in
esimaing he size o hese coss would be a good firs sep. Currenly, collegescan se heir own esimaes o living expenses, resuling in a lo o inconsisency:
Colleges locaed near each oher have come up wih radically differen numbers.93
aking a more raional and consisen approach o hese coss would a leas sar
he process o undersanding wha kind o gaps need o be filled and he possible
sraegies or addressing hem.
Concern #3: Spending requirements
for families must feel affordable
Esablishing affordabiliy benchmarks is imporan or giving amilies a sense o
cerainy abou wha hey will have o pay. I, however, hese hresholds are se oo
high, hey seem so unaffordable ha he cerainy value is los.
A poenial example o his problem already exiss in he ederal suden loan
programs. Righ now, sruggling borrowers are able o reduce heir loan paymens
o no more han 10 percen o heir discreionary income. As a percenage o heir
overall income, his proporion is much lower. Tis is because discreionary earn-
ings represen an individual’s income minus esimaes o necessary expenses such
as housing and ood. Bu i borrowers do no undersand he concep o discre-
ionary income, hen 10 percen may eel ar oo high as a repaymen expecaion.
Similarly, i he amoun o money a amily is expeced o pay ou o pocke is oo
high, hen a guaranee may no eel generous enough o be meaningul. Consider,
or example, a amily ha makes 300 percen o he povery level and receives an
ACA ax credi. Paying a litle more han 9.5 percen o he amily income may
seem affordable in he absrac, bu i ha amily has a lo o addiional deb, hen
i may no be a low enough figure o be workable.
Te challenge o seting hresholds ha seem affordable is urher complicaed by
he ac ha many o he numbers chosen are he resul o poliical calculaions o
wha Congress can afford based on available unds. Tis means a given benchmark
may be less a reflecion o an objecively deermined number and more a realiy o
he lowes ha could be agreed upon.
If the amount of
money a family
expected to pay
out of pocket is
too high, then a
guarantee may
not feel generou
enough to be
meaningful.
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All o his means ha any approach o hreshold seting in higher educaion mus
srive o find clear numbers based upon objecive assessmens o wha amilies can
pay. Missing he mark can weaken he effeciveness o any new benchmarks.
Concern #4: What meets affordability standards can change
Seting affordabiliy goals hrough benchmarks and subsidizing opions ha mee
cerain condiions is one way o ensure ha ederal programs mee heir inended
goals. Bu one challenge wih such an approach is ha opions are no saica
provider ha mees he benchmarks oday migh change and no longer mee he
benchmark omorrow. For insance, a college ha was affordable may raise is
prices, or a high-qualiy program may ge a new owner and no perorm as well.
Making i possible or he opions ha qualiy under cerain affordabiliy san-
dards o change can be good or producs and services ha need o be boughevery year, such as healh insurance. In healh care, because plan premiums gener-
ally change annually, here is no guaranee he previous year’s second-lowes-cos
silver plan will hold he same posiion he ollowing year. Te posiive resul is ha
consumers are encouraged o coninue shopping or affordable coverage, which
encourages greaer compeiion andi is hopedbeter producs or consum-
ers. On he downside, swiching plans could be inconvenien i he plans have
differen neworks o docors and hospials.
Effors a higher educaion affordabiliy would do well o avoid his problem o
changing eligibiliy i a all possible. Sudens atend college only or a ew years,
and ranserring can resul in los academic credis or oher adjusmens ha
make i difficul o graduae on ime. Given hese consideraions, he benefis o
comparison shopping ha come rom changing wha is eligible are more han
ouweighed by he coss o ranserring. Because o his, he bes way o handle
changes in eligibiliy over ime is by applying hem only o new sudens. Doing so
allows sudens o sick wih heir chosen school unil hey finish heir educaion.
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Recommendations
Te ederal invesmen in higher educaion is designed o correc a ailure in
he marke. Wihou governmen suppor, millions o low- and middle-income
amilies across he counry would be unable o access and afford a possecondary
educaion. Te resul would be lower levels o educaional atainmen, a less-
skilled workorce, and depressed economic growh.
A he same ime, he governmen canno ignore he reurn on is invesmens. As
sewards o axpayer dollars, i has a fiduciary responsibiliy o make sure money is well spen and achieves is desired aims. I canno simply spend an infinie amoun
o money o fix he marke ailure in higher educaion.
Unorunaely, he curren consrucion o he ederal aid sysem is insufficienly
concerned wih wha is dollars buy and how saes and insiuions use hem.
As a resul, i becomes ar oo easy or he purchasing power o ederal grans
and loans o be diminished by unabaed uiion increases brough on by reduc-
ions in sae unding.
o fix hese problems, he ederal governmen should build upon he sraegies
already developed o ackle hese same challenges in oher key areas. In paricular,
i should do he ollowing:
Create a guarantee of no- or low-cost
public education for Pell Grant recipients
Pell Gran recipiens are he lowes-income individuals in higher educaion.
Tey simply canno afford o be charged housands o dollars or college andshoulder massive deb burdens. Ye he curren Pell Gran program conains no
proecions o ensure ha even he absolue poores individualshose receiv-
ing he maximum awardhave an expecaion ha he colleges enrolling hem
will charge a reasonable price. Ta needs o change. Much like he ederal healh
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care benefis sysem ses sandards or wha low-income recipiens can pay ou
o pocke, he Pell Gran program should esablish similar requiremens. Tis
should sar wih guaraneeing Pell Gran recipiens can use heir unds o pur-
chase a public in-sae educaion or an amoun ha is equal or close o ree.
Create purchasing guarantees for middle-income students
Jus because someone is no a Pell Gran recipien does no mean hey should
lose any sor o guaranee abou affordabiliy. For hese individuals, heir guaran-
ee should be ramed in erms o knowing ha a reasonable amily conribuion
coupled wih small loans will be sufficien o cover he enire cos o an in-sae
public educaion. Such a sysem mirrors he srucure o he ACA ax credis
middle-income individuals are sill expeced o conribue ou o pocke, bu hey
know ha conribuion will be enough o buy wha hey need.
Require states to meet affordability targets
Te wo recommendaions above will work only i saes do heir par o keep he
gaps ha ederal aid fills a a reasonable size. Doing so means seting expecaions
ha are ied, no o per-pupil spending amouns, bu o he back-end price aced
by sudens afer subracing oher orms o nonederal financial aid and he amily
conribuion. Tis approach gives saes many pahs o meeing he goal. Tey
could increase operaing suppor o keep uiion low; raise financial aid o arge
subsidies o lower-income sudens; pursue innovaive sraegies ha reduce he
expense o providing an educaion; or some combinaion o hese approaches.
Tese requiremens would be concepually similar o he sae relaionship in
Medicaid, in which paricipaing saes would have o mee minimum expeca-
ions or which sudens receive wha kinds o assisance, wih flexibiliy or saes
o be more generous i hey desire.
Hold colleges accountable for excessive loan burdens
Boh he healh care and housing secors recognize he risk o high prices and/or
deb and ake seps o miigae hose challenges. In healh care, his means esablish-
ing penalies or large employers ha provide insufficien coverage. In housing, i
means no providing subsidies or properies ha would be oo expensive relaive o
a recipien’s income or holding lenders accounable or offering unaffordable loans.
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Higher educaion would benefi rom embracing similar conceps. Coll