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Paying for College Has to Be Easier Than This

The Honorable Sheila C. Bair

By Sheila Bair

(Wall Street Journal) – In 2004, I published a children’s book, “Rock, Brock, and the Savings Shock,” about the importance of saving at an early age. During one of my book events, a mother astonished me when she revealed that she had advised her son not to save because it would hurt his eligibility for student-loan programs.

Twelve years later, as the president of a small liberal-arts college, I more fully appreciate the upside-down government policies that precipitated that woman’s remarks. With federal student debt exceeding $1.2 trillion, I am dismayed at how government programs discourage families from saving for their children’s educations. The disincentives involve a complex web of federal-aid-eligibility requirements, consolidated into a mind-bending application process known as Fafsa, or Free Application for Federal Student Aid. The higher the family’s income or savings, the lower the amount of aid for which the student can qualify.

This might seem intuitive: Why should taxpayers support the college education of students if they have their own financial resources? The problem is that these rules penalize work and thrift—even a student’s paid internships reduce student-loan eligibility. And their complexity can discourage low-income families from even applying.

Schools like ours hire full-time financial counselors who help students and their families with the Fafsas, but we have seen more than a few students give up, even with our help. The Obama administration has tried to simplify the process, but Fafsa still contains more than 100 questions. Even if the form can be simplified (a Senate bill introduced in 2015 would replace the current Fafsa application with two questions), the complexity in income-eligibility requirements remains through multiple loan programs—subsidized, unsubsidized, PLUS—all with differing qualifications and caps.

The whole morass has created a culture favoring debt to finance college costs. This proliferating student debt has in turn contributed to a tuition “bubble,” making college more expensive but leading to no demonstrable change in the percentage of high-school graduates who go on to college. This is the same dynamic seen during the subprime-mortgage crisis, when ballooning home debt increased the price of housing but ultimately did little to improve homeownership rates.
Too little attention has been given this election season to the skewed economic incentives built into the current federal-loan programs. Some want to layer more expensive and complex aid options onto the system and make public colleges free for a large swath of the population.

But young people would still end up paying for these programs, as future taxpayers, if not as student borrowers. And they would undermine a core strength of our higher-education system—choice—by giving a heavy advantage to public schools over independent, private institutions. New government programs would also require more government regulation, making college even more expensive than it is today.

The U.S. should instead radically simplify the system. We need a federal-loan program in which all students can participate, with a common sense cap on total federally backed borrowing. Schools should be given incentives to make sure college financing is affordable to their students by requiring that they absorb some portion of taxpayer losses if their students have high default rates.

Unlike grant programs, our federal college-loan programs should be viewed not as instruments of income redistribution, but as investments in an educated workforce and the country’s economic future. Numerous studies show that a college education significantly increases the future earnings potential of young people.

All students should have access to a reasonable amount of federally backed lending, and all should be expected to give taxpayers a fair return. Eliminating disincentives to save, and broadening the loan pool—while capping overall borrowing and holding schools accountable for losses—should improve loan performance, prevent children from getting in over their heads in debt, and dramatically reduce the rate of default.

No institution illustrates the law of unintended consequences better than the federal government. A desire to concentrate taxpayer resources in the hands of those most in need has created perverse incentives among families not to save for their children’ educations.

At Washington College, we recognize not all families have the resources to save and are making more scholarships available to low-income families. In addition, we will soon announce a new Savers Scholarship to give families a dollar in scholarship aid for each dollar they contribute from a collage-savings plan, up to $2,500.

We want to reward prudence and responsibility, not penalize it. The federal government should do the same.

Ms. Bair is the president of Washington College in Chestertown, Md. She was chairwoman of the Federal Deposit Insurance Corp. from 2006 to 2011.

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