State and Federal Roles in Financing Higher Education
Task Force Perspectives on State Financing of Higher Education
The NCSL task force was formed to evaluate federal policy and its intersection with state policy. As state financing of higher education is a matter internal to states, the task force did not spend significant time on the matter. However, conversations around the topic of higher education finance revealed that a majority of the task force members were not satisfied with their state’s current funding strategy.
Aligning statewide goals to funding strategies is an ongoing process and necessitates periodic review of state funding methodologies. Given the complicated set of decisions each state faces when determining finance methodologies, the task force declines to suggest specific directions for states to take but acknowledges there is ongoing work for states to do.
Task Force Perspectives on Federal Financing of Higher Education
Rationale for Federal Student Lending
Task force members understand the necessity of student lending and the intentions that undergird the federal policy rationale for lending—that it puts all forms of higher education within reach of every American regardless of their income or wealth. States cannot afford to offer low tuition for every student at the most expensive public institutions or cover the full cost of living for every student attending community college. Federal lending ensures students are not denied the resources they need to pursue the higher education of their choice.
The longstanding rationale for student borrowing was that the well-documented economic returns of additional education would allow student borrowers to successfully pay back their debt over time. However, it has become clear, especially in recent years, that the assumption that federal student lending is a worthwhile endeavor, one that expands the benefits of higher education, does not always hold up.
The prevalence of student debt and the rate of students who struggle or are unable to pay back their loans are primary challenges for policymakers. Understanding and responding to the evolving costs and policies of the student loan program was a key motivation behind the formation of the task force.
Task force members expressed numerous and varied concerns with relying on federal student debt to finance a significant portion of higher education. Some members were concerned that reliance on lending diminishes the public imperative to financially support higher education so that it can be maintained as a public good. Other members said that widespread access to easy credit has created an unnaturally high demand for higher education and allowed a variety of institutions to justify operating at higher costs and charging higher prices.
Most urgently, the task force wanted to understand the causes and implications of an increasingly costly student loan program and how it might alter the parameters of the state-federal relationship.
Federal and State Roles in Supporting Student Borrowers
Federal policy has long recognized that while higher education pays off for most, its benefits may take years to be fully realized. And some students may never realize those benefits at all. As such, the federal government has introduced policies over several decades that have constructed a safety net for borrowers in the federal loan program.
The task force affirms the importance of federal policies that protect borrowers when circumstances beyond their control prevent them from successfully repaying their student debt. While institutions and policymakers must work together toward better student outcomes in higher education and ensure that students are always left better for attending, it is important that borrowers are not left financially debilitated by student loans because they sought a better life or career for themselves through higher education.
The task force calls on the federal government, and the loan servicing companies it partners with, to provide exceptional customer service to borrowers. Many of the challenges that borrowers have faced can be traced directly to poor administrative implementation, confusing terms and conditions, or inadequate borrower support. The task force acknowledges that some of the recent federal loan reforms were made to address past shortcomings. An effectively managed loan program should be the top priority for the Federal Student Aid Office under any administration. Every borrower should be able to take advantage of the benefits of federal lending with as little difficulty as possible.
Indeed, as discussed earlier, states have often stepped in to fill in the gaps in program administration and customer service where they had fallen short for borrowers. The task force affirms the states’ role in supporting student borrowers and believes this is an area where state and federal policy should work in concert. States have a general obligation to protect consumers, and the task force believes states can and should help borrowers to navigate the loan program. As elected representatives, state legislators know their constituents look to them for help, even for programs that are primarily managed by the federal government.
Growing Costs of the Student Loan Program
In their original conception, student loans were intended to function as traditional loans. The federal government provided up-front financing to students but expected to make back that investment, with interest. The costs to the federal government were expected to be minimal, and even produce positive revenue.
Taken as a whole, the loan program has become increasingly expensive, far exceeding policymakers’ expectations. This is the result of both the one-time relief programs and the ongoing features of the student loan safety net. The repayment pause during the pandemic was extended seven times over 42 months and likely cost over $200 billion, with an average cost of around $5 billion a month. Since 2021, the Department of Education has forgiven $168.5 billion in student debt for 4.75 million borrowers through reforms to existing forgiveness and repayment programs.
The Congressional Budget Office recently estimated that the federal government will spend $393 billion on student loans over the next decade. The CBO also estimates that the subsidy rate for all loans in FY 2024 was 20%—meaning the federal government got back 80 cents for every dollar it lent. The subsidy rate is higher for income-driven repayment programs, where the CBO estimates that between 30 and 48 cents for every dollar lent will not be repaid.
The president’s FY 2025 budget provides similar findings. It estimates the subsidy rate on all federal direct loans to be 30% over the next year. The subsidy rate is significantly higher for balances enrolled in income-driven repayment, where the budget estimates a 60% subsidy rate for the SAVE Plan.
Implications of a Costly Student Loan Program for Federal Policy Strategy
Task force members are concerned with the increasing costs of the student loan program and wonder if a more heavily subsidized program suggests a new direction for the federal role in financing higher education and promoting college affordability. While student lending was traditionally viewed as a policy strategy to promote access, an increasingly costly loan program could be characterized as an affordability strategy, lowering the ultimate price of college attendance after the fact, based on factors that include a borrower’s income, choice of employment, financial savvy, or experience of exceptional circumstances or hardship.
The Pell Grant has historically been the biggest direct investment the federal government makes in supporting students’ ability to afford higher education. However, federal spending on the student loan program has eclipsed spending on the Pell Grant, a trend that may hold for the foreseeable future. Recent federal estimates for FY 2025 show that spending on the Pell Grant ($34.5 billion) will be surpassed by the costs of the income-driven repayment plans alone ($42.3 billion). Over the next 10 years, the CBO projects the federal government will spend more on student loans ($393 million) than the Pell Grant ($355 million). Already, the combined cost of the loan repayment pause and recently enacted loan discharges is greater than the past decade of spending on the Pell Grant.
The task force wonders about the efficacy of a federal approach to funding and financing higher education that spends more on subsidizing student loans than on providing grant aid to students.
Pell Grant benefits are defined, targeted and finite. In contrast, student loan repayment assistance can be contingent, untargeted and open-ended. Access to student loans is largely not based on demonstrated financial need, with the exception of direct subsidized loans, which cover interest payments for undergraduate borrowers with qualifying incomes while in school.
Even as some of the benefits of student loan repayment assistance are targeted based on a student’s post-attendance earnings, they are also influenced by how much a student borrowed. While undergraduate borrowers face lifetime caps on annual borrowing, graduate school students can borrow up to the cost of attendance, which is often tens of thousands of dollars a semester. Borrowers with larger balances may stand to benefit greatly from federal repayment and assistance programs. In a recently forgiven tranche of loans, the average balance was nearly $74,000 per borrower.
The task force acknowledges that generous loan repayment assistance could fit within the spirit of the federal role of providing support to students with the greatest need. Black, Hispanic and American Indian students struggle to repay their loans compared with white and Asian students. This is especially true for Black borrowers, who borrow at far higher rates than their peers. Persistently high loan balances may indicate a lack of wealth or point to struggles to find remunerative career outcomes, which may be compounded by discrimination in the labor market.
At the same time, high loan balances commonly indicate that borrowers have more education, usually graduate-level education, and typically make higher incomes as a result. Given the increased volume of borrowing for graduate education and the higher average program costs, loan repayment assistance may result in more federal dollars spent on subsidizing graduate education. Indeed, nearly half of federal student debt is from graduate education, and its share has been growing steadily over the past decade. Although the SAVE program is not as generous to graduate borrowers as undergraduate borrowers, a substantial portion of graduate debt is enrolled in income-driven repayment plans and is subsidized at a relatively high rate.
While many borrowers, especially first-time collegegoers from low-income backgrounds, may be reluctant to take on loans, financially savvy, affluent students and families, especially those who choose to attend expensive institutions, could be well positioned to take advantage of more generous loan repayment programs. In fact, higher-income households borrow more than lower-income ones. It may often make financial sense to borrow through federal loans first before paying out of pocket, even for students and families who could otherwise afford to pay.
The task force is concerned that a heavily subsidized loan program runs the risk of putting upward pressure on college costs, which could blunt the effects of state investments in higher education. Alternatively, a more generous loan program could perversely discourage or even displace state investment in higher education. The task force is also concerned about what costly loans mean for the federal role in transparency and accountability, which will be detailed in the next section.
Task Force Guidance: Calling on Congress to Clarify the Role and Goals of the Loan Program
The task force recognizes that many of the recent developments in the loan program have been enacted through regulation. While there is a clear role for regulation in the student loan program, especially to respond to borrower issues that have emerged in program administration, the task force fears that federal regulation is inherently unstable. Many of the recent regulations have been challenged in courts and even overturned in part or in full. That was before the Supreme Court’s June 2024 decision in Loper Bright Enterprises v. Raimondo to overturn the so-called Chevron deference, which had directed courts to defer to federal agencies’ interpretations of ambiguous laws. Even when regulations survive court challenges, there has been a recent trend of new administrations rewriting or rescinding rulemaking from the previous administration. All of this instability creates confusion for borrowers and states.
Rather than rely on regulation to shape the student loan program, the task force urges Congress to clarify the student loan program’s goals and update its various polices to better serve those goals. The task force asks Congress to deeply consider the concerns it has raised in this report about the increasing costs of the loan program and the implications of federal policy strategy that invests more in subsidizing student loans than providing need-based grant aid.
The task force advises Congress to approach this discussion from the perspective of using federal policy to make good use of limited resources. Even with the potential for unlimited federal spending, simply responding to rising student debt with more federal spending will do little to address the growth in college costs and only add to our growing national debt. More important, spending more on the loan program does very little to proactively achieve the collective goals we have for our higher education system.
Congress must examine and update the design of loan terms and benefits for borrowers, including loan limits, repayment assistance, and forgiveness options. The task force is particularly concerned with the effectively unlimited borrowing permitted through the Graduate Plus and Parent Plus programs. Task force members felt they were not in a position at this time to make specific recommendations on these items but wish for Congress to find fair terms for borrowers and taxpayers alike.