New Report Calls for More Grants to Low-Income Students, End to Federal Parent Loan Program

The federal government must double down on grants to low-income students and dramatically simplify the system of student loans, says a new report by the non-partisan New America Foundation.

The report, released on Jan. 29, lays out more than 30 recommendations for fixing the nation's increasingly strained system of paying for college, chief among them a more substantial and permanent investment in direct aid to students through Pell grants. The government should make the funding for the Pell program an entitlement in the federal budget, shielding it from annual wrangling, and should boost the maximum amount of individual grants, the report says.

It also proposes that the government create a system of incentives aimed at realigning how college use institutional aid dollars: Those with few low-income students and high tuition after discounts would be required to match a portion of Pell dollars with institutional aid; schools with many low-income students that meet a required graduation rate would get bonuses.

The New America Foundation's report was funded by the Bill & Melinda Gates Foundation as part of a larger initiative to explore policy recommendations on ways to restructure and reform the financial aid system.

Beyond its recommendations on grants, the report suggests a wholesale overhaul of programs for student loans.

We've reported on the federal Parent Plus loan program, and how the lack of loan limits allows families to borrow more than they can reasonably afford to cover ever-increasing college costs. The government should end the Plus program, the report argues, as it "can encourage families to over-borrow and provides colleges with a convenient source of funds if they wish to raise their prices."

The federal government should stick to one loan program – the main federal loan program known as the Stafford loan, the report suggests. It also suggests that the many different repayment plans currently available be replaced with one that bases monthly payments on a percentage of income – a modified version of some existing plans. 

The report also offers ideas to reform day-to-day handling of student loan payments. Errors in the servicing of student loans often frustrate borrowers and exacerbate the difficulties of repayment, especially for those whose loans were shuffled to a group of new nonprofit servicing companies.

As we've noted, these companies won a carve-out from Congress in 2010 that guaranteed them an opportunity to get in on servicing federal student loans. The report advocates ending this carve-out, arguing it "has made the federal student loan program more complicated and costly than it should be," and that all servicing contracts should be awarded through competitive bidding.

See the full report for more details.