Smarter Spending: Reforming Federal Financial Aid for Higher EducationReport as inadecuate

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Center for College Affordability and Productivity (NJ1)

In higher education, three generally recognized rationales for federal involvement in financial aid exist: (1) Promoting equality of opportunity: Those from poor households are less likely to attend college for a variety of reasons; (2) Credit market imperfections: Students may not have access to the credit needed to make profitable investments in their human capital; and (3) Social Benefits (Positive Externalities): A more educated person tends to make others more productive and/or create other social benefits. While there are a few other rationales, these three are routinely emphasized in the establishment and continuation of federal financial aid programs. To various degrees, virtually every federal financial aid program in the country is pushed to advance all three goals, and that is the problem. This paper proposes to remedy many of these problems by restructuring federal financial aid, establishing separate programs focused exclusively on each goal. The next three sections review in greater detail the backgrounds and current practices to promote each of the three goals of financial aid, and then offer specific recommendations. These recommendations include the continuation of the Pell grant program, a replacement of the student loan programs, and the creation of a new subsidy program that targets subsidies to those areas of higher education that create social benefits. (Contains 1 figure, 1 table, and 58 footnotes.)

Descriptors: Higher Education, Educational Finance, Educational Change, Money Management, Cost Effectiveness, Federal Aid, Student Financial Aid, Equal Education, Educational Opportunities, Access to Education, Credit (Finance), Human Capital, Educational Benefits, Outcomes of Education, Government School Relationship, Grants, Student Loan Programs

Center for College Affordability and Productivity. 1055 Thomas Jefferson Street NW Suite L 26, Washington, DC 20007. Tel: 202-621-0536; e-mail: ccap[at]; Web site:

Author: Gillen, Andrew


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