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33–516 PDF 2008

S. HRG. 110–151

HIGHER EDUCATION, HIGHER COST AND HIGHER

DEBT: PAYING FOR COLLEGE IN THE FUTURE

HEARING

OF THE

COMMITTEE ON HEALTH, EDUCATION, 

LABOR, AND PENSIONS

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

ON

EXAMINING COLLEGE AFFORDABILITY, FOCUSING ON HIGHER EDUCATION, HIGHER COSTS AND HIGHER STUDENT DEBT, AND THE 

HIGHER EDUCATION ACT AND ITS AMENDMENTS

FEBRUARY 16, 2007

Printed for the use of the Committee on Health, Education, Labor, and Pensions

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/senate 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS 

EDWARD M. KENNEDY, Massachusetts, Chairman 

CHRISTOPHER J. DODD, Connecticut 

TOM HARKIN, Iowa 

BARBARA A. MIKULSKI, Maryland 

JEFF BINGAMAN, New Mexico 

PATTY MURRAY, Washington 

JACK REED, Rhode Island 

HILLARY RODHAM CLINTON, New York 

BARACK OBAMA, Illinois 

BERNARD SANDERS (I), Vermont 

SHERROD BROWN, Ohio 

MICHAEL B. ENZI, Wyoming 

JUDD GREGG, New Hampshire 

LAMAR ALEXANDER, Tennessee 

RICHARD BURR, North Carolina 

JOHNNY ISAKSON, Georgia 

LISA MURKOWSKI, Alaska 

ORRIN G. HATCH, Utah 

PAT ROBERTS, Kansas 

WAYNE ALLARD, Colorado 

TOM COBURN, M.D., Oklahoma 

J. MICHAEL MYERS, Staff Director and Chief Counsel 

KATHERINE BRUNETT MCGUIRE, Minority Staff Director 

(II) 

C O N T E N T S 

STATEMENTS

FRIDAY, FEBRUARY 16, 2007

Page 

Kennedy, Hon. Edward M., Chairman, Committee on Health, Education, 

Labor, and Pensions, opening statement ........................................................... 1

Prepared statement .......................................................................................... 3

Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, opening 

statement .............................................................................................................. 5

Prepared statement .......................................................................................... 14

Orman, Suze, Host, the Suze Orman Show, CNBC .............................................. 17

Prepared statement .......................................................................................... 18

Draut, Tamara, Author and Director of the Economic Opportunity Program, 

The Demos Institute, New York, NY .................................................................. 20

Prepared statement .......................................................................................... 22

Oberg, Ph.D., Jon, Former Researcher, U.S. Department of Education, Washington, DC ............................................................................................................. 31

Prepared statement .......................................................................................... 32

Baum, Ph.D., Sandy, Senior Policy Analyst, The College Board and Professor 

of Economics, Skidmore College, Saratoga Springs, NY ................................... 43

Prepared statement .......................................................................................... 45

Isakson, Hon. Johnny, a U.S. Senator from the State of Georgia ....................... 55

ADDITIONAL MATERIAL 

Statements, articles, publications, letters, etc.: 

Articles by Richard Vedder .............................................................................. 6

Alexander, Hon. Lamar, a U.S. Senator from the State of Tennessee ......... 66

Consumer Bankers Association ....................................................................... 67

Letter to Senator Kennedy and Senator Enzi from Nelnet .......................... 69

Questions of Senator Enzi to: 

Suze Orman ............................................................................................... 70

Tamara Draut ............................................................................................ 71

Jon Oberg ................................................................................................... 71

Sandy Baum .............................................................................................. 71

(III) 

(1)

HIGHER EDUCATION, HIGHER COST AND 

HIGHER DEBT: PAYING FOR COLLEGE IN 

THE FUTURE 

FRIDAY, FEBRUARY 16, 2007

U.S. SENATE, 

COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 10:07 a.m. in Room 

SD–430, Dirksen Senate Office Building, Hon. Edward Kennedy, 

chairman of the committee, presiding. 

Present: Senators Kennedy, Enzi, and Isakson. 

OPENING STATEMENT OF SENATOR KENNEDY

The CHAIRMAN. We’ll come to order. We thank all of our witnesses for coming this morning and it’s a pleasure again to be with 

my friend and my colleague, Senator Enzi, the Ranking Member 

and Senator Isakson and we’ll be joined by others as the morning 

goes along. We also have a number of students from George Washington University and the U.S. Students Association, the American 

Medical Student Association, even some young Democrats of America snuck in here this morning. So we want to welcome all of our 

students and a very interesting and worthwhile panel. 

Some 40 years ago, I was here when the Senate drafted the higher education legislation. It had been an issue that had been debated and discussed prior to the early 1960s and really, the issue 

was what is going to be the role of national policy towards the 

young people of our country. Are we going to recognize as a matter 

of national policy that we ought to provide some help and assistance to young, talented, creative, gifted students who are able to 

gain entrance into our fine schools and colleges across this country? 

Because they are limited in terms of their family’s income, their 

own income, are they to be denied that opportunity or is the United 

States of America going to say to the young people of this Nation, 

we’re going to find a path so any individual, any student in this 

country, young or old alike, that is able to gain entrance into any 

school that they choose, will be able to put together a financial 

package so that they would be able to go and also be able to come 

out of school without the heavy indebtedness, which is so often the 

case today? Assistance so that students during the time of their 

breaks between the various classes, are talking about their books 

rather than talking about the size of their student loans? 

With the Higher Education Act, after a long debate and discussion, an issue was whether we were going to provide help and asVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
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sistance to the students or help and assistance to the universities—

it was a very hotly contested debate. We made the judgment decision that we were going to provide help and assistance to the students. And at that time, 80 percent of the Federal help and assistance to the students was in the form of grants, 20 percent in terms 

of loans and that trend has completely reversed in the past several 

years. 

We hear political leaders talk about our youth. We hear them 

talk about the future. We hear how important it is to have an educated youth because we’re going to have to deal with the global 

economy and in order to be a leader in global economy, we’re going 

to have to have an economy of inventiveness—and where will the 

inventiveness come from if we don’t have the young and talented 

and creative students? We say that we’re going to need a national 

security force that’s going to be second to none to deal with the new 

kinds of threats. Where are we going to be able to get that unless 

we have the best and the brightest also be interested in protecting 

the Nation? 

We say we want our democracy to function and work so that 

we’re the model for the rest of the world in terms of our values and 

in terms of our respect for human dignity. Obviously, for democracy 

to be able to work, we need people that know the issues, understand the kinds of questions and are willing to work and pursue 

their views on these matters. All of this, I think, necessitates that 

we try and find out how we can move back to that day when we, 

as a nation, were making education affordable. 

What we’ve seen now in the recent times is that more than 

400,000 students who otherwise would not go to college because of 

financial reasons. It isn’t so much even about these students, or 

about their own obligations but they don’t want to bring indebtedness to their families. They respect their parents who have worked 

hard, played by the rules and now have a very small retirement 

income. They don’t want their parents to go out and have to borrow 

and indebt themselves even though many do. We have an application for financial aid that is mind-boggling in terms of its complexity and difficulty. Senator Enzi, who is by training and tradition, an accountant and an observer of the flow lines of resources, 

is helping the young people by making sure that we’re going to try 

and simplify that. 

Finally and most of all, a focus for today, we want a student loan 

program that is going to work for the students. I believe that too 

often, the student loan program is working for the banks. How can 

we turn that more towards the student? I think the good, old-fashioned way—by using competition. We found out that the student 

loan programs needed incentives to begin the program and it seems 

to me, we ought to be finding out how we can try and use the concepts of incentives and competition to try and move the costs, and 

the interest rates down, and the Pell Grants up for those young 

people, and to assist those who want to go into public service, we 

should put a cap on what they’re going to have to pay out of a limited salary as a school teacher, working in child care, working as 

a legal assistant in public service, a whole range of public service 

jobs. If they’re making $25,000, $28,000 in a career, and are trying 

to give something back into the community, give something back 

3

to their country, we’ll ensure they’re not going to be overwhelmed 

by student debt and that they will have their debt forgiven after 

a period of 10 years. 

So we have a plan but we are fortunate this morning to have 

people that have looked at these issues and studied them in depth 

and we’re very grateful for the opportunity to listen to them. I’ll 

put my full statement in the record and I’d ask Senator Enzi for 

whatever comments he’d like to make. 

[The prepared statement of Senator Kennedy follows:]

PREPARED STATEMENT OF SENATOR KENNEDY

I welcome our colleagues and witnesses for our hearing this 

morning on the increasingly serious problem of college access and 

affordability. It’s affecting countless young people’s basic life 

choices, from choosing a career to getting married, to buying a 

house and starting a family. 

I have a few charts that illustrate the challenges—it’s not too 

much to call it a crisis. 

It’s keeping 400,000 qualified students a year from attending a 

4-year college. 

It’s forcing many to rule out careers in public service—such as 

teaching, social work or law enforcement. They may be lower paying jobs, but many find them deeply rewarding in other ways, and 

they bring large rewards to our society. 

It’s contributing to the increasing economic inequality in today’s 

America, in which low-income and first-generation students are far 

less likely than others to earn a college degree, even though higher 

education is more important than ever to keep the doors of opportunity open in our modern society. 

In a word, it’s a crisis that’s tarnishing the American dream for 

millions, and we in Congress can’t ignore it any longer. Today, 60 

percent of new jobs require some postsecondary education compared to only 15 percent of new jobs half a century ago. 

A major cause of the problem is cost. The cost of college has more 

than tripled in the past 20 years, and Federal aid hasn’t kept up. 

Twenty years ago, the maximum Pell grant covered 55 percent 

of the cost of tuition, fees, room and board at a public 4-year college. Today it covers only 32 percent of those costs. As a result of 

rising costs and declining aid, more and more students are borrowing money to pay for college. 

In 1993, less than half of all graduates of 4-year colleges used 

student loans to finance their education. This year, it’s two-thirds. 

The average college student graduates today with $17,500 in 

Federal student loans on graduation day. At public universities, 

student loan debt has more than doubled since 1993. 

Last month, the House of Representatives passed the College 

Student Relief Act, which cuts interest rates on new subsidized student loans in half. Because the last Congress allowed interest rates 

to rise, typical student borrowers—already straining under $17,500 

in debt—have to pay an additional $5,800 for their college loans. 

The House bill would prevent this. That’s good news for millions 

of borrowers across the country, and I commend Chairman George 

Miller and Speaker Pelosi for their leadership in making this legisVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6601 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
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lation such a high priority at the beginning of this new Congress, 

and I hope the Senate will do the same. 

We also need to do more to increase grant aid. Pell grants have 

been a lifeline to college for many low-income and middle-income 

students for more than 30 years. But last year, the average Pell 

Grant fell for the first time in 6 years. In the recent funding resolution, Congress took a significant step forward with a modest increase in the maximum Pell Grant by $260, from $4,050 to $4,310. 

My hope is that we can raise it to $5,100 in this Congress. 

To prevent unreasonable debt burdens on students, we should 

cap student loan repayments at 15 percent of discretionary income, 

and offer loan forgiveness after 10 years to students who go into 

public service. 

It’s also long past time to reform the Federal student loan programs, so they work for students and families—not the banks. It’s 

a scandal that has allowed these student loan programs to become 

corporate welfare for big lenders. We pay enormous subsidies to 

lenders to take part in the Federal student loan programs, and we 

ignored the enormous growth of the student loan industry. 

Forty years ago, subsidies were needed to persuade lenders to 

take part. But today’s, Federal subsidies make student loans the 

second most profitable business for banks—after credit cards. 

Something’s obviously not right. 

Of the two basic programs, the Federal Direct Loan program 

costs taxpayers much less than the private loan guarantee program 

funded by the banks and heavily subsidized by the Treasury. We 

need real competition between the two programs, and we could use 

the obvious savings from such competition to increase need-based 

aid. 

The difference between the two Federal loan programs is obvious 

when you look at these charts prepared by the Government Accountability Office. Here is the program funded by the big lenders. 

It’s an incomprehensible maze of rules and responsibilities, involving organizations the Direct Loan program doesn’t need, and with 

money changing hands every which way. 

The Direct Loan program, by contrast, is much simpler. Instead 

of having lenders and guaranty agencies as middlemen, the government simply lends funds directly to the students—which is one reason why this program is less expensive for taxpayers than the one 

funded by the banks. Clearly, the Direct Loan program is the better alternative. 

In addition, the private student loan market has grown 

thirteenfold—thirteenfold!—in the last decade. Students deserve 

protection from such gouging. We also need to be the insight over 

the sweetheart deals that lenders and schools are increasingly 

making to offer these loans to students. No students should have 

to mortgage their future in order to pay for higher education today. 

All these issues will be addressed in this year’s reauthorization 

of the Higher Education Act. 

America can’t be America without an educated citizenry. It’s essential to the Nation’s strength. Congress rose to a similar challenge after World War II. For every dollar we invested in the G.I. 

bill of rights, The Greatest Generation produced $7 in economic 

5

growth, and we must do the same today, because the need is so 

great and the stakes for the future are so profound. 

So I look forward to the testimony of our witnesses today, and 

to working with my colleagues in the months ahead to get the job 

done. 

OPENING STATEMENT OF SENATOR ENZI

Senator ENZI. Thank you very much, Mr. Chairman. I thank you 

for holding this hearing and I am particularly pleased that we have 

college students here and I want to particularly welcome those 

from the George Washington University—that’s my alma mater. I 

did happen to notice this last week that the Board of Trustees 

changed the tuition slightly and it is now the most expensive university in the United States. So help is obviously needed. 

Now, we’ve built an important record of hearings and 

roundtables on these issues in the 109th Congress and I hope that 

when all is said and done, that we have the tools that students 

need to complete higher education and help them acquire the 

knowledge and skills to be competitive in the 21st century. 

The American system of higher education is renowned. We have 

more than 6,000 colleges and universities and they enroll over 14-

million students and provide access to all types of academic and 

skill-building programs. In Wyoming, we only have a handful. We 

have one 4-year university, public or private and seven community 

colleges. Our grand total of 10 accredited institutions of higher education in the State is the smallest of any State but Alaska. But 

that doesn’t mean that we’re any less concerned about a recent report by the Association of American Colleges and Universities that 

college graduates are less and less prepared to compete in the global economy. The American success story of higher education is at 

risk of losing those qualities that made it great; that’s competition, 

innovation, access for all. Higher education will continue to be the 

on-ramp to success in the global economy and it’s our responsibility 

to make sure that our young adults are able to access that opportunity and reach their goals. 

The Federal Government does have a role to play in increasing 

affordability, which is why I support increasing the maximum Pell 

grant award and why this committee is working on a broader higher education re-authorization bill that will promote innovation and 

new technologies to keep costs down, to expand the availability of 

information, and to help students and parents make more informed 

decisions and to improve the financial literacy across the board, so 

that students have a better understanding of how they can manage 

their loans and monthly loan payments. Schools and colleges also 

have a role to play. They can and must do more to increase accountability and seek efficiencies to bring down the cost of education. 

Also we need to explore innovative solutions to the complexity of 

the Federal student aid system. As Senator Kennedy said, we’re 

trying to revise that free application for Federal student aid. I’ve 

looked into some of the reasons why it’s so complicated and again, 

it has something to do with action that Congress has taken. 

Now concern for spiraling costs of college is not new. I plan to 

submit for the record several articles by Dr. Richard Vedder that 

6

provide us insight into the perfect storm that is confronting our institutions of higher education. 

Declining State support, stagnant productivity and students that 

are left without the tools they need to make informed choices about 

their college education. Over the last 20 years, tuition has grown 

at rates double the increase in family income. At the same time, 

productivity at our universities is declining, while more students 

find themselves having to take remedial classes in order to succeed 

in college-level coursework. 

Reauthorization of the Higher Education Act is needed to address these challenges and improve transparencies in ways that 

will combat these hidden costs of college. Institutions must better 

communicate the differences between sticker price and net price of 

a college education and there are many students that transfer from 

one school to another, only to discover that their hard-earned fully 

paid credits will not count toward their degrees. Other students 

enter college without the knowledge and skills they need, requiring 

them to take remedial courses just to catch up and we’ll be doing 

some things in No Child Left Behind to try and end the wasted 

senior year of high school. This costs students money and time and 

adds to the taxpayers’ cost. The result is that students graduate 

with greater debt. It also contributes to higher attrition rates, particularly for low-income students who find themselves no better off 

economically but likely to be facing monthly student loan payments. 

I also want to highlight an issue that I’ve been championing and 

see as a critical factor in discussing, which is student financial literacy. We must improve the financial literacy of students so they 

can weigh the costs and benefits of their college education options. 

And we can no longer assume that only 18- to 20-year-olds are at 

issue. We are seeing more working adults, people with college degrees and mid-career Americans pursuing additional education in 

order to acquire increasing knowledge and skills they need to be 

successful in the world economy. The choice of whether to pursue 

a postsecondary education is confronting millions of Americans and 

they need good tools by which to make those decisions. 

I’ve been a strong advocate for financial literacy because I believe 

that it gives individuals the tools to understand and shape their future. Senator Sarbanes and I were the authors of legislation enabling the Financial Literacy and Education Commission to develop 

a national strategy on financial literacy. I should note that next 

week, the Department of Treasury and Education will be holding 

the summit on K–postsecondary education—overcoming challenges 

to help develop the national strategy. In addition, the summit will 

highlight the challenges to teaching young people about money and 

saving for college and the rest of their lives. We have members of 

the panel that have some expertise in that and I look forward to 

hearing from today’s witnesses as we tackle these issues and get 

ready for that reauthorization of the Higher Education Act. 

Thank you, Mr. Chairman. 

[The articles by Mr. Richard Vedder follow:]

7

ATTACHMENT 1.—A FORTUNE IN TUITION

Tuition fees at the typical American State university rose ‘‘only’’ 9 percent this 

year, USA Today tells us, down from 14 percent last year. For every single year for 

over 20 years, average tuition hikes have exceeded the inflation rate. When I entered Northwestern University in the late 1950s, it took a median-income family 

less than 2 months’ income to pay the annual tuition; today it takes over 6 months’ 

income to pay it, at a typical selective private school. 

Why is tuition soaring? According to conventional campus wisdom, it’s because of 

declining external funding: lagging State subsidies to public universities, inadequate 

contributions and investment income at private ones. Schools also sometimes argue 

that higher tuition is funding qualitative improvements. 

My own research—published in a new book, Going Broke by Degree: Why College 

Costs Too Much (AEI Press, 2004)—suggests that the conventional wisdom is wrong. 

Tuition has been growing for decades—during periods of rapidly rising as well as 

falling State and private funding. As to qualitative improvements, it is true facilities 

are nicer these days and some new academic offerings have been introduced, but 

at the same time the average score on the Graduate Record Exam is lower today 

than in 1965; it is highly questionable whether college kids are learning any more 

than they were decades ago. 

The real reason for soaring college costs is higher demand for colleges, largely resulting from well-intended but dubious governmental policies. When demand rises 

relative to supply, prices (in this case, tuition fees) go up. Demand is rising partly 

for non-governmental reasons, such as higher incomes and a growing earnings differential between high school and college graduates. But it is also rising rapidly because of the huge growth in government loan and grant programs as well as tuition 

tax credits. Pell grants, Stafford and Perkins loans, tax-sheltered college-saving 

schemes (‘‘529 plans’’), work-study programs, etc.: All serve to increase the number 

of students wanting a college education at any given price. Kids without money for 

college simply borrow it. 

ROMAN GENN

Rising tuition and enrollments have meant surging college revenues. Real perstudent spending rose about 70 percent over the past 20 years. How have the universities used this extra money? Financial data provided to the Federal Government 

suggest that remarkably little of the higher spending has gone toward instruction: 

perhaps 21 cents for each new dollar per student since 1976. Teaching and learning 

are becoming almost secondary activities at some universities. Research has grown, 

but so has spending on myriad other things. Administrative staffs, for example, 

have soared. In 1976, it took the typical university about three ‘‘non-faculty professionals’’ to service each 100 students; today, it takes nearly six. My fairly typical 

university spends over $10 million a year subsidizing intercollegiate athletics. 

Awash with funds, university personnel have taken good care of themselves too. 

Over the 1980s and 1990s, real average faculty compensation (including fringe benefits) probably rose about 45 percent, and near-mid-six-digit salaries are commonplace for top administrators and superstar faculty. A large proportion of tuition increases has gone not for qualitative learning improvements, but to making life better for the permanent paid members of the academy—lower teaching loads, more 

travel, higher salaries, etc. University presidents beg legislatures and big donors for 

more funds ‘‘to improve student access and academic quality,’’ but use most of the 

money for fancy facilities, athletics subsidies, administrative-staff increases, and 

other things peripheral to the main mission of the institutions. 

How can universities get away with it? Unlike the private for-profit sector, which 

faces strict financial discipline imposed by competition and markets, the not-forprofit modern American university is largely (although not completely) shielded 

from these forces. How is IBM doing? You can get real-time changing assessments 

of its fortunes by following its stock price, and at least quarterly estimates of its 

profits in press releases and stockholder reports. But how did Stanford do last year? 

Who knows? There is no bottom line in higher education. The closest thing to a bottom line for most high-quality schools is privately issued rankings of universities. 

The most influential, that of U.S. News & World Report, evaluates partly on the 

basis of the amount spent on inputs (e.g., faculty resources): The more the school 

spends, the higher the ranking. 

Not only is there little financial discipline, but political or institutional accountability is lacking as well. Unlike most governmental agencies, State universities 

typically are largely operationally independent of their funding source, with relatively little legislative or executive oversight to ensure accountability. Boards of 

trustees nominally run most not-for-profit institutions of higher education (both 

8

public and private), but they are usually dominated by part-time volunteers with 

little time for independent exploration of campus issues, and are usually co-opted 

by the administration they supposedly oversee. 

The sharp rise in the cost of student education suggests that productivity in 

American higher education is falling, certainly relative to the private sector, but 

probably in an absolute sense as well. While productivity is hard to measure (how 

do you evaluate research?), under any reasonable assumption universities are becoming relatively more costly and inefficient. 

As the cost of conventional higher education rises, people seek out other options. 

For-profit institutions such as the Apollo Group’s University of Phoenix use about 

one-third the resources of the typical not-for-profit to educate a student, and are 

both rapidly growing and extremely profitable (with pre-tax profit margins approaching 30 percent in some cases). Owing to their relative efficiency, their tuition 

costs are not much greater than those of some highly governmentally subsidized 

State universities. 

There are other options. Computer whizzes are sometimes foregoing degrees in 

computer science to become certified in major computer tasks by Oracle, Microsoft, 

or Novell. Some kids are heading overseas for college, or to the relatively lower-cost 

community colleges instead of the more expensive State universities. In time, universities may grudgingly get serious about cost-cutting, raising teaching loads, ending tenure, slashing administrative bureaucracies, and leaving peripheral businesses (such as food and lodging operations or sports teams). But it has not happened yet—because the incentives to do so are still largely missing. 

A compelling case can be made that government should get out of the higher-education business. Two arguments are used to defend public subsidies: Universities 

have positive externalities (spillover effects that benefit non-attendees as well as 

those getting degrees), and public funding expands access for lower-income students. 

As to the positive-externality argument, I have actually observed a negative correlation between State-government spending on universities and economic growth, controlling for other factors. Universities literally lower the incomes of non-participating citizens. And in the case of the second argument, there is only the very weakest of positive correlations between government spending on universities and the 

proportion of students either attending or graduating from college. (Another scandal: 

Over 30 percent of entering 4-year-university students do not graduate within 6 

years.) The recent reduction, in some States, in government support for universities 

is thus sensible public policy. 

One worthwhile approach is Colorado’s: Allocate more money directly to students, 

rather than to institutions. Give scholarships (vouchers) to students who are poor, 

to increase their access to education—but limit the funding to those with decent academic performance (in other words, stop subsidizing party-loving mediocre students). As for the rest, let them pay their own way: They are the ones who benefit, 

so they should pay the bill. 

Mr. Vedder teaches economics at Ohio University and is an adjunct scholar at the 

American Enterprise Institute.

ATTACHMENT 2.—COLLEGE IS A BAD INVESTMENT

Pouring more taxpayer money into universities doesn’t lead to prosperity. 

When university presidents plead for government money, they often make an argument for social investment. Pump funds into higher education and the economy 

will grow, they claim. After all, this is an information- and skill-based age in which 

college graduates are far more productive than their less-educated peers. 

True. But the evidence suggests that increased public funding for universities 

doesn’t lead to greater prosperity and may even reduce the chances of it. Compare 

the growth in real per capita income in States that spend a lot on higher education 

with that of States that spend less and a few surprises show up. Over the past 50 

years low-support New Hampshire out-distanced neighboring Vermont on nearly 

any economic measure, though Vermont spent more than twice as much of its population’s personal income on higher education (2.37 percent versus 1.15 percent in 

New Hampshire). Missouri, with modest State university appropriations (1.32 percent of personal income), grew faster than its neighbor to the north, Iowa (at 2.41 

percent). 

Similar examples abound. Using data for all 50 States from 1977 and 2002, I compared the 10 States with the highest State funding for universities against the 10 

States with the lowest. The result: The low-spending States had far better growth 

in real income per capita, a median growth of 46 percent compared with 32 percent 

for the States with the highest university spending. In 2000 the median per capita 

9

income level for the low-spending States was $32,777, 27 percent higher than the 

median for the 10 States where higher education got the most State money. 

The results were the same when controlling for a State’s oilfields or other energy 

sources, the age distribution of its population, the prevalence of labor unions, the 

tax climate and other factors that could affect growth—even the proportion of college graduates. This despite the fact that the States that were growing most quickly 

tended to have a high proportion of college graduates. 

How could this be? Colleges have devoted relatively little new funding over the 

past generation to the core mission of instruction (spending only 21 cents of each 

new inflation-adjusted dollar per student on it), preferring instead to assist research, hire more nonacademic staff, give generous pay increases, support athletics 

and build luxurious facilities. And while in the private sector, companies have 

learned to get more work out of fewer employees, the opposite appears to have happened in higher education. In 1976 American education employed three nonfaculty 

professional workers (administrators, counselors, librarians, computer experts) for 

every 100 students; by 2001 that number had doubled. 

Another piece of the puzzle: Only the weakest of positive correlations links funding level and enrollment. Even if students enroll, they don’t necessarily finish 

school. Nearly 40 percent fail to graduate within 5 or even 6 years, suggesting that 

many who attend universities don’t much benefit from them. 

Yet another explanation is one Forbes readers know all too well. Taxes reduce private-sector activity. People who must pay high taxes tend to work and invest less 

and also tend to migrate to lower-tax areas. In other words, increasing funding to 

universities means transferring resources from the relatively productive private sector to higher education, which tends to be less productive and efficient. 

So what should we do? College is still a decent individual investment, certifying 

that the graduate meets minimum standards (often missing in high school) for competence, intelligence, maturity and literacy. But we should rethink the nature and 

magnitude of public support for universities. State governments, facing rising Medicaid bills and demands for primary and secondary education funding, are already 

slashing their support. I hope and expect this trend to continue. Big changes are 

coming to higher education. They are overdue.

ATTACHMENT 3.—LET’S NOT BE 3.4 PERCENTERS

The new Democratic congressional majority is voting Wednesday to lower the interest rate of some subsidized student loans from 6.8 to 3.4 percent. On the face 

of it, this appears as a welcome move to reduce the rising burden of student debt. 

Various student groups have been quick to endorse the idea. 

Though I’ve written much about how high tuition costs have imposed increased 

financial burdens on college students, I oppose the new Democratic proposal. There 

is, of course, the legitimate Republican procedural objection that decisions of this 

sort should be made only after experts are consulted, evidence is gathered and presented, and reasoned debate concluded. 

My concerns are different: the Federal student-loan program is already Byzantine 

in its complexity, and has even been harmful to some students. The Democrats’ new 

move will do nothing to address these old problems. 

A historical perspective is useful. The great growth in college participation in the 

United States occurred before Federal financial aid was a reality. With the single, 

but important, exception of the GI Bill, there were no large Federal student-aid programs before 1970. 

In that year, total Federal student assistance amounted to $1.6 billion. About 

$1,000 per student in 2007 dollars, this was less than one-fifth the commitment 

today, even adjusting for inflation and the higher cost of tuition. Yet the number 

of college students per 1,000 Americans aged 18 to 24 grew from 23 in 1900 to 324 

in 1970. 

The explosion in aid began in the 1990s. From 1990 to 2000, Federal student assistance more than tripled, going from $19 billion to $63 billion, but the proportion 

of the population in the 18 to 24 age group going to college rose only modestly (from 

506 to 545 in a thousand). Among some groups, including males, there was no 

growth at all over this period. 

The explosion in aid has actually accompanied a slowdown in the growth in college participation. There is little evidence that the aid epidemic has increased the 

proportion of adult Americans who are college graduates. 

Why? First, much of the increased student aid has gone to students who would 

have gone to college without the aid (e.g., recipients of Federal tuition tax credits, 

who could afford tuition in the first place). 

10

Second, and relevant to the current debate, more Federal money increased the demand for higher education, raising sticker prices. The greater demand was not offset 

by supply increases, partly because prestigious colleges have put limits on undergraduate admissions. 

Third, as the Education Trust showed convincingly recently, institutional financial 

assistance shifted sharply away from need to merit-based aid in recent times. The 

result? Higher tuition costs often more than offset higher aid for poorer students, 

so the burden of college attendance has risen, not fallen. 

The real problem is not high interest rates on student loans, but exploding college 

costs. There are easily a dozen causes for this, but a few especially stand out. 

Third parties (e.g., the Federal or State Governments, private philanthropists) 

pay a large chunk of the bills, rendering the customers relatively insensitive to 

prices (health care revisited). 

Universities are mostly nonprofit institutions with few incentives to cut costs. The 

lack of a well-defined ‘‘bottom line’’ makes universities strive to improve their US 

News & World Report rankings, which are perversely enhanced by spending more 

money and restricting access. 

A lack of well-defined property rights (who owns and controls universities) means 

the faculty is able to promote its own interests over those of relatively 

disenfranchised students and parents. For example, a drop in teaching loads has occurred not because of any nationally articulated research imperative, but because 

faculties have simply done it, with the approval of nominal bosses who politically 

need faculty support. 

Why have universities raised tuition fees dramatically, creating the current brouhaha over student aid? Because they can get away with it. The solution to the problem is not reducing interest rates on loans, but getting the rise in college costs to 

remain below the income curve. 

It would be far preferable simply to give students money in the form of an educational voucher and to let them use it in whatever fashion they wish than to try 

to artificially change the price of one of many cost items that determine the financial burden of college. 

The method that the Democrats seek to pay for these new lower interest rates 

is predictable and problematic. The fees paid to private loan programs are to be cut, 

and the guaranteed reimbursement provided in cases of default are also to be reduced. 

This is the strategy used in health care (cut fees to doctors and drug companies, 

lower costs to consumers), a move that has not stemmed the rise of health care 

costs, but rather threatens its quality in the long run. A similar outcome is likely 

if followed through in higher education. 

In an ideal world, the Government would get out of the financial-aid business. Excepting the GI Bill, it has not improved access to college. Financial markets, capable 

of handling small loans for home repairs and car purchases as well as billion-dollar 

loans to giant corporations, can meet borrowing needs of individuals wanting to go 

to college. 

And still, there is growing evidence that governmental higher education support 

does not promote economic growth, the rhetoric those ‘‘educrats’’ who benefit mightily from rising subsidies notwithstanding. Why, then, shouldn’t the Federal Government limit its involvement at most to a Pell Grant program for truly low-income 

students, or perhaps get out of the aid business altogether? 

Our great hope in stopping this express train is President Bush. One hopes he 

is beginning to realize that his role in history would be enhanced, not retarded, by 

just saying no to something. Vetoing an interest-rate subsidy bill would be a good 

place to start.

DEALING WITH AFFORDABILITY THOUGHTS FOR THE AFFORDABILITY TASK FORCE

FUTURE OF HIGHER EDUCATION COMMISSION

THE QUESTIONS

Are American universities becoming less affordable, and, if so, what should we do 

about it? Before even attempting to answer those questions, we must ask the question: affordable for whom? The students (and their parents) who are attending college? For the Nation as a whole? For the colleges and universities themselves—are 

some forms of education more ‘‘affordable’’ to the institutions than others? 

11

AFFORDABILITY TO STUDENTS

The Stylized Facts 

Starting with the question of affordability to students, it is indisputable that the 

costs of college have risen faster than overall inflation and, in recent years, even 

faster than the rise in family incomes. Thus the financial burden of college has 

grown. The evidence also is that this increased burden impacts more on relatively 

less affluent students who are more sensitive to price, thus raising the issue of the 

impact of reduced affordability on educational access. 

Even with higher costs, however, college ‘‘investments’’ are good ones for the student from a strictly financial perspective, as rising tuition charges have been roughly offset by an increase in the ratio of college to high school graduate earnings differential. Moreover, the ‘‘sticker prices’’ of colleges are increasingly discounted 

through scholarships, and student loan programs help students borrow the money 

to get through school. Yet even these ‘‘loans,’’ although subsidized to some extent, 

represent a financial obligation to students. Also, the evidence shows that, even if 

one looks at the net tuition—gross tuition minus discounts in the form of scholarships—real costs have risen significantly faster than the rate of inflation. So even 

if college is a decent, even good, investment, for some there are significant cash flow 

problems involved in financing this investment, aggravated by the fact that close 

to half of the students entering 4-year programs fail to graduate within even 5 years 

(and for whom, consequently, the investment on balance probably does not have a 

high rate of return). 

In addition, with respect to scholarships, it is a demonstrated fact that an increasing proportion of student financial aid has been awarded on criteria other than financial need. Income-specific data shows that, even if one controls for student academic ability, the burden of attending college is much greater for large segments 

of the population with below average incomes, lowering participation. 

Reasons for Rising Prices 

When the price of something goes up, it is either because the demand for that 

something has risen, or the supply has fallen (or a combination of both). The simultaneous increase in both tuition fees and enrollments over time suggest that the increase in demand is the dominant factor. Yet the increase in demand could have 

been offset by an increase in supply. In less technical English, colleges and universities could have used incremental funds to greatly expand capacity. Yet large portions of American higher education have not done this, including virtually all the 

prestigious private research universities and liberal arts colleges, and most flagship 

State universities as well. 

When Amherst College, Northwestern University, or the University of Michigan 

receives an infusion of new funds from private donors or legislative appropriations, 

they do not use these funds to expand enrollments—the evidence is crystal clear on 

that. It is nearly as true of numerous less prestigious institutions as well. Indeed, 

institutional prestige is enhanced by increasing the proportion of students denied admission, and enrollment expansion potentially lowers perceived institutional reputation. Thus the incentives to expand enrollment are outweighed often by disincentives associated with that move. These factors, along with falling or stagnant university productivity and institutional emphasis on matters other than undergraduate instruction help explain the rise in college costs. 

On the demand side, well-intended government financial assistance programs 

have been largely self-defeating. Suppose the Federal Government increases student 

financial aid in a year by 10 percent (actually, below the average for the years since 

1994); typically within a year, the colleges raise fees by 7 or 8 percent. Since students receiving large assistance payments or loans are relatively insensitive to price, 

and since the supply of ‘‘slots’’ available is also relatively inelastic because of selective admission policies at many schools, the increase in demand induced by increased student assistance has aggravated tuition increases. Moreover, limits on assistance popular with low-income families (e.g., Pell Grants) have risen relatively 

modestly compared with loans to more affluent students. The student loan program 

is increasingly an upper middle class entitlement (students from truly affluent families have also benefited significantly from the sharp increase in nonmerit-based 

scholarship aid, and tuition tax credits). 

Looking again at the supply side, the increase in the amount of expensive labor 

used to educate any given number of students (perhaps 25 percent over the past 

30 years) has aggravated the problem. For example, there are six ‘‘non-faculty professional’’ workers for every 100 students today in American higher education, double the number three decades ago. Within the academy, there has been some shift 

of resources away from undergraduate instruction, some of it externally funded (e.g., 

12

Federal grant research), but some of it not. For example, average teaching loads for 

full professors at major research universities have fallen from perhaps 8–9 hours 

a week in the middle of the last century to about 5 hours today. Similar load reductions have occurred at schools with less research distinction. Institutions are using 

their own resources (some of them financed by tuition) to fund research via lower 

teaching loads. Again the incentive system is skewed. Professors are rewarded 

mainly for research (where the results are measurable to some extent, and thus subject to national recognition), rather than for teaching (where results are harder to 

measure and excellence less easy to identify and to parlay into a national reputation). For reasons of money and prestige, on average professors strive to minimize 

their teaching responsibilities, particularly at the research-oriented institutions. 

Thus universities have a lot of expensive faculty members doing modest amounts 

of teaching. 

AFFORDABILITY TO INSTITUTIONS

The above discussion points out that many institutions find it costly to emphasize 

undergraduate instruction. The most student-oriented of institutions—2-year community colleges—have lost ground financially relative to 4-year schools. For example, salaries of faculty in real terms have stagnated and even fallen, while those for 

senior professors at leading research institutions have risen substantially. Incentives systems generally have favored an increase on emphasis on non-undergraduate 

activities such as funded grant research. Research garners national reputation when 

it is high quality, via scholarly publications and even media dissemination. Stories 

about effective undergraduate instruction tend to be localized in nature, and do little to enhance national prestige as measured by the US News & World Report survey or other rankings. It is a sad but true fact that at most American universities, 

faculty prestige runs inversely with faculty teaching loads. Research universities 

use more and more relatively cheap adjunct professors and teaching assistants to 

instruct lower division undergraduates at relatively low cost, while showering resources on advanced graduate students and research, not to mention a burgeoning 

administrative bureaucracy. 

AFFORDABILITY TO SOCIETY

A greater proportion of our national resources are going to higher education, by 

far, than in, say 1960. That is to be expected given rising educational aspirations 

and increased college participation, and even today only about 3 cents of every dollar of output goes to higher education. So by most ways of looking at things, America can afford the costs. At the same time, however, higher education does not exist 

in a vacuum. State governments have significantly reduced institutional subsidies 

for a variety of reasons. The astronomical rise in Medicaid costs makes it unlikely 

that this trend will reverse anytime soon. Huge Federal budget deficits and what 

many regard as excessive spending growth over the past few years produces a climate where there will be strong resistance to radically expanding Federal aid. 

The enrollment share of private schools, counting the for-profits, is growing, and 

the public enrollment share is declining. Moreover, many schools that are ‘‘public’’ 

are increasingly moving in the direction of privatization, with some flagship American State universities receiving only 10 or 15 percent of their budget from State 

appropriations. The fiscal history of the United States for a third of a century suggests that a political equilibrium is reached in the typical State when State and 

local taxes are at 10 percent of personal income—less than that, the political forces 

demanding increased governmental services often prevail, but beyond that the forces 

demanding relief from high taxation often are politically successful. The aggregate 

State and local tax burden has remained remarkably stable (around 10 percent of 

income) since at least 1970. It is probably unrealistic to expect voters agreeing to 

higher taxes to fund higher education, regardless of the entreaties of the university 

community. 

This raises the question, ‘‘who should pay for the universities?’’ That answer may 

vary somewhat by type of institution—for example, it is probably unreasonable to 

ask current students to subsidize to any major degree long-run basic research efforts 

at the major research universities. But should the government or philanthropic institutions substantially subsidize the education of, say, students from relatively affluent homes that do a mediocre job in school, lingering around at partial public expense for 5 or 6 years? I question whether that is a luxury that we can afford. 

This gets to the critical underlying issue: are the services of universities and colleges public or private goods? Do the benefits accrue to the students in attendance, 

or to society at large? The question is complicated by the fact universities perform 

multiple tasks—disseminating knowledge to students, expanding the frontiers of 

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knowledge through research, not to mention such non-academic functions as providing food, lodging and entertainment (e.g., college athletics, theater). It is at least 

plausible that it may be that positive spillover effects justifying public funding are 

more prevalent in some activities, e.g., scientific research, than in others, e.g., student instruction, research in the social sciences and humanities, intercollegiate athletics. 

Universities claim, with only minimal solid evidence, that they are important in 

promoting economic development. It is unquestionably true that advanced economies need lots of ‘‘human capital’’ and that a basic intellectual infrastructure is necessary for major technological innovation. That does NOT prove, however, that 

spending NEW or incremental dollars on higher education will have a high payoff. 

My own research with respect to State government appropriations suggests that it 

does not, and hints that the positive externalities or spillover effects present in public goods may not be present in higher education today at its current level of funding 

and with the current system of delivering educational services. I may be wrong, but 

the empirical basis for claims to the contrary is pretty slim. 

One factor in declining governmental support at the State level for higher education is a growing sense that the independence of universities, granted to insulate 

them from political pressures and allow academic freedom, may have bred a decline 

in institutional accountability. Who watches the universities? How do you even 

evaluate how they are doing? Often it seems universities embark on missions on 

their own and expect society to pay the bills. They do not require either legislative 

action or stockholder approval for most of the things they do. Thus teaching loads 

fell over time not because of a conscious national policy decision to lower them to 

support research, but because universities simply did so, almost by stealth, over a 

period of decades. Undergraduate instruction received less attention not because of 

public policy decisions, but because of institutional actions favoring more prestigious 

graduate programs, research, intercollegiate athletics, etc. 

GROPING FOR SOLUTIONS: SOME IDEAS

It is mathematically impossible for the costs of education for students to rise faster than family income on a sustained basis (costs can rise faster than inflation almost indefinitely and have in some areas of the fine arts, as William Baumol has 

argued). Therefore, even without Commission action, some move towards lowering 

the tuition cost explosion is inevitable. 

I think a sharp slowdown in the growth in Federal aid programs would help reduce the growth in tuition costs. I think also that institutional efforts to increase 

merit-based assistance relative to need-based aid has added to the access problem, 

although it must be acknowledged that many underrepresented groups are largely 

underrepresented because of poorer academic performance at the K–12 level rather 

than economic access barriers. 

A revamping of Federal student loan programs seems warranted. Loan eligibility 

should be restricted more. Students from higher income families should not receive 

federally subsidized assistance. Poorly performing students should be subject to loss 

of aid. Also, just as we now put time limits on welfare payments, we should do so 

on loan eligibility—perhaps 4 years for full-time baccalaureate students. At the 

same time we should increase assistance for lower income students to minimize access problems. One approach would simply be to increase the amounts available for 

Pell Grants. An alternative, perhaps more promising approach would be to convert 

Pell Grants into Equal Opportunity Scholarships working like vouchers, where 

awards are made to students usable at any accredited institution of higher education. Encouragement should be given to States to convert more of their higher 

education support into grants to students rather than to institutions. This should 

increase somewhat competition for students, perhaps reverse the relative neglect of 

undergraduate instruction, and simply make explicit what is already happening: the 

move towards privatization of State-supported institutions. Vouchers could be both 

performance-based and progressive—more to low-income kids, more for good students than bad. 

It may be possible to restructure Federal tax policy in a revenue-neutral way that 

would better support national educational objectives. People take tax deductions for 

contributions to non-academic enterprises at universities, like athletic facilities. 

Rich schools with predominantly affluent students and annual endowment income 

exceeding $50,000 per student, such as Harvard and Princeton, receive gifts treated 

the same for tax purposes as schools with almost no endowments serving predominantly lower or middle income students. Perhaps deductions to ‘‘rich’’ schools should 

be restricted, and donations to poorer schools (public or private) be encouraged, possibly by the use of tax credits. Perhaps a National Scholarship Foundation should 

14

be created funded by tax credits financed partly by restrictions in tax write-offs for 

gifts to extremely affluent schools or for non-academic purposes such as stadium 

renovations. Along the same lines, to improve access perhaps we should restructure 

governmental assistance to aid lower cost schools that clearly use incremental funds 

to increase capacity. Per-student costs can be reduced significantly simply by shifting the mix of students more to lower cost institutions. 

Barriers to entry into offering education services should be scrutinized. Recently, 

for-profit schools have begun buying up small not-for-profit schools mainly to obtain 

accreditation. Accreditation is costly and excessively input rather than outcomes 

based. Admittedly there are trade-offs here: loosing accreditation rules increases 

risks of non-legitimate diploma mills not only existing, but obtaining Federal funds 

for their students. 

More radically, perhaps we should encourage (require?) universities to separate 

their teaching and research functions. Professors would work for the University of 

Michigan for instruction, and for the University of Michigan Research Institute for 

their research. This might lead to improvements in the transparency of university 

finances, and could ultimately lead to a new research model. Perhaps we should also 

revamp Federal research grants, making them more purely competitive instead of 

grants given to monopolists (the sole proposes of a research project) based on some 

sense of merit. A standardized and simplified national overhead policy for research 

also makes great sense. 

The Academic Arms Race of spending more and more to obtain higher rankings 

on the US News & World Report and similar surveys should be discouraged. How? 

One approach is to offer new ways of evaluating university quality. For example, 

administer an entrance and exit general education test at all schools accepting federally assisted students, similar to the NAEP examination used at the K–12 level. 

One possibility is the new Collegiate Learning Assessment test developed by the 

Rand Corporation and already used at over 120 colleges. The Federal Government 

would then publish the ‘‘value added’’ at each school. Accreditation could be more 

tied to this outcomes-based measure. This examination, depending on the nature of 

test used, might also have the secondary benefit of dealing with an abysmal decline 

in knowledge of basic facts about our heritage, encouraging schools to beef up their 

general education curricula and take seriously a U.S. Senate resolution to require 

some study of history in college. To deal with another national higher education 

malady, Federal assistance could be barred to schools where the average student 

grade for the total student population is above, say, a ‘‘B’’ average. Grade inflation 

has contributed to declining standards and needs to be addressed. 

Some rewards should exist for schools that hold the line on costs, and take costcutting seriously, for example by using technology more intelligently to reduce costs. 

What would happen, for example, if the Federal Government awarded $1 billion annually to schools in the top 10 percent of institutions in terms of meeting efficiency 

criteria (e.g., changes in expenditures per student, most incremental value-added 

per dollar spent, etc.), with the stipulation that 10 percent of the funds would go 

to efficiency bonuses to key employees? At the moment, the pressures are intense 

from tenured faculty and powerful deans for university presidents to recommend big 

budget increases. Those pressures should be counteracted by incentives to economize. 

These are just a few suggestions to ‘‘wet the appetite’’ for discussion of serious 

reform.

[The prepared statement of Senator Enzi follows:] 

PREPARED STATEMENT OF SENATOR ENZI

Thank you Senator Kennedy for holding this hearing and continuing our work on the reauthorization of the Higher Education 

Act. We built an important record of hearings and roundtables on 

these issues in the 109th Congress. I hope when all is said and 

done, students will have the tools they need to complete higher 

education and help them acquire the knowledge and skills to become competitive in a 21st century economy. 

The American system of higher education is renowned throughout the world. Our more than 6,000 colleges and universities enroll 

over 14 million students and provide access to all types of academic 

and skill building programs. In Wyoming we only have a handful 

15

of the total—one 4-year university, and seven community colleges. 

Our grand total of 10 accredited institutions of higher education in 

the State is the smallest of any State but Alaska. 

However, we are no less concerned about a recent report from 

the Association of American Colleges and Universities that college 

graduates are less and less prepared to compete in the global economy. The American success story of higher education is at risk of 

losing the qualities that made it great—competition, innovation, 

and access for all. Higher education will continue to be the on-ramp 

to success in the global economy, and it is our responsibility to 

make sure that our young adults are able to access that opportunity and reach their goals. 

The Federal Government has a role to play in increasing affordability, which is why I support increasing the maximum Pell Grant 

award, and why this committee is working on a broad higher education reauthorization bill that will promote innovation and new 

technologies to keep costs down, expand availability of information 

to help students and parents make more informed decisions, and 

improve financial literacy across the board so that students have 

a better understanding of how they can manage their loans and 

monthly payments. Schools and colleges also have a role to play. 

They can and must do more to increase accountability and seek efficiencies that bring down the cost of education. 

Also, we need to explore further innovative solutions to the complexity of the Federal student aid system. Right now filling out the 

Free Application for Federal Student Aid (FAFSA) prevents many 

students from even considering college. That was never our intent 

and it is time to make the FAFSA less complicated than filling out 

our tax forms—and for an accountant to say that, is really something. One interesting solution I’ve heard, and I hope to hear other 

suggestions today, is the possibility of rolling the financial aid process into the existing tax system. We need to explore this and other 

approaches to making sure that we improve the FAFSA to help 

students get timely and useful information about what resources 

they have available to pursue higher education. 

Concern for spiraling costs of college is not new. I plan to submit 

for the record several articles by Dr. Richard Vedder that provide 

us insight into the perfect storm that is confronting our institutions 

of higher education: declining State support, stagnant productivity, 

and students that are left without the tools they need to make informed choices about their college education. 

Over the last 20 years tuition has grown at rates double the increases in family income. At the same time productivity at our universities is declining, while more students find themselves having 

to take remedial classes in order to succeed in college-level 

coursework. Reauthorization of the Higher Education Act is needed 

to address these challenges and improve transparency in ways that 

will combat these hidden costs of college. 

Institutions must better communicate the difference between the 

‘‘sticker price’’ and ‘‘net price’’ of a college education. And there are 

many students that transfer from one school to another only to discover their hard-earned, fully-paid credits will not count toward 

their degrees. Other students enter college without the knowledge 

and skills they need requiring them to take remedial coursework 

16

just to catch up. This costs students money and time, and adds to 

taxpayers’ costs, too. The result is that students graduate with 

greater debt. It also contributes to higher attrition rates, particularly for low-income students, who find themselves no better off 

economically, but likely to be facing monthly student loan payments. 

I also want to highlight an issue that I have been championing 

and see as a critical factor in this discussion—student financial literacy. We must improve the financial literacy of students so they 

can weigh the costs and benefits of their college education options. 

And we can no longer assume that only 18–22 year olds are the 

students being served by these programs. We are seeing more 

working adults, people with college degrees and mid-career Americans pursuing additional education in order to acquire the increasing knowledge and skills they need to be successful. The choice of 

whether to pursue a postsecondary education is confronting millions of Americans, and they need good tools with which to make 

those decisions. 

I have been a strong advocate for financial literacy because I believe that we must give individuals the tools to understand and 

shape their future. Senator Sarbanes and I were the authors of the 

legislation establishing the Financial Literacy and Education Commission to develop a national strategy on financial literacy. I 

should note that next week the Departments of Treasury and Education will be holding the ‘‘Summit on K–Postsecondary Education—Overcoming Challenges’’ to help develop the national strategy. In addition the Summit will highlight the challenges to teaching young people about money and saving for college and the rest 

of their lives. 

I look forward to hearing from today’s witnesses as we tackle 

these issues in the reauthorization of the Higher Education Act.

The CHAIRMAN. Thank you very much. We are very fortunate 

with our panel this morning. Suze Orman is a two-time Emmy 

Award winner, television host and a New York Times best-seller 

author, magazine and online columnist, writer/producer, motivational speaker, one of America’s most recognized experts on personal finance. Ms. Orman has written five consecutive New York 

Times best sellers and lectured widely and is a certified financial 

planner and Director of the Suze Orman Financial Group and VicePresident of Investments at Prudential Based Securities and was 

an account executive at Merrill Lynch. Prior to that, she was a 

waitress at Buttercup Bakery in Berkeley, California, from 1973 to 

1980. 

Tamara Draut oversees Demos’ research policy advocacy work on 

issues related to economic security and mobility and is the author 

of Strapped: Why American’s 20- and 30-Somethings Can’t Get 

Ahead, published by Doubleday in 2006. Her research focus is on 

the growing debt burdens facing low- and middle-income households, and more broadly, the challenges confronting households trying to educate their way into the middle class. She is the author 

of a number of superb books. Her research has been covered extensively by the Times and Washington Post and television networks. 

Jon Oberg is a former staff member who worked for years at the 

Department of Education. He has four decades of experience in 

17

higher education finance at the institutional, State, Federal, and 

international levels. His experience includes that of Chief Financial 

Officer in his home State of Nebraska; staff on the U.S. Senate 

Budget Committee; President of an Association of Colleges and 

Universities; and legislative liaison to Congress in 1998 for the 

U.S. Department of Education, during the reauthorization of the 

Higher Ed Act. He holds a Master’s degree from the University of 

Nebraska and earned a Doctorate from Free University of Berlin. 

Sandy Baum is a Professor of Economics at Skidmore College, 

and Senior Policy Analyst at the College Board. Dr. Baum earned 

a BA in Sociology at Bryn Mawr College, Ph.D. in Economics at Columbia, and has written extensively on issues relating to college access, college pricing, student aid policies, student debt, affordability 

and other aspects of higher education. Dr. Baum is the co-author 

of Trends in Student Aid, Trends in College Pricing, and Education 

Pays, the Benefits of Higher Education for Individuals and Society, 

for the College Board. 

So we have a very good panel here and we’ll start off with Ms. 

Orman. Thank you very, very much for being here and I look forward to hearing from you. 

STATEMENT OF SUZE ORMAN, HOST, THE SUZE ORMAN

SHOW, CNBC 

Ms. ORMAN. Thank you very much for inviting me to be here. I 

was listening to what all of you were saying in terms of how this 

is a problem that affects our students. I’m here to say it doesn’t 

just affect our students. This is the perfect storm that is going to 

affect, in my opinion, the entire economic environment of the 

United States of America and let me tell you why. 

With the convergence of obviously, student education rising, we 

have also had the increase of real estate, the increase of gasoline 

prices, the increase of utilities, the increase of property taxes, the 

increase of simply being able to just live every single day. What 

that has done to the parents of these students, it has put them in 

a situation where there is no extra income whatsoever. They are 

barely making it. Most of them have extreme credit card debt. 

None of them have money put towards a savings or a retirement 

account of their own and what are they doing? They are trying to 

help their children obtain an education, become something. They 

are raiding their own coffers at a time when they do not have the 

ability to save any more because costs are too expensive. So we 

now are creating an economic family that is failing on every single 

level. 

The number one call now into my show is this: it is from a student who is worried about two things. How are they going to repay 

their student loan and what can they tell their parents because 

their parents are out of a job, their parents aren’t making it and 

they are worried to death about their parents. So the burden on the 

shoulders of these students is greater than I’ve ever seen in my 

life. 

They aren’t going to school. They don’t want to go to school or 

if they do go to school, they come out with such horrific debt that 

they feel that they cannot take a job in the career that they would 

like to pursue, possibly a career that they were educated in because 

18

they have got to take any job that will allow them to live, pay their 

bills and just get by. 

So as I just briefly said, this is a perfect storm that is brewing 

out there, that is going to affect every single person in the United 

States of America. Shame on the colleges for what they charging, 

truthfully. Shame on the big business behind these students loans 

and what they are charging and how much money they are making 

off of our children’s future. Shame on all of them. I see it every 

day. I am sure there is not one person in the entire world that 

speaks to as many people, one on one, as I do about their own personal financial situation. Henceforth, I wrote my last book called, 

The Money Book for the Young, Fabulous and Broke. I should have 

written it, the Young, Fabulous, Depressed and Broke. They are depressed because they are graduating school and college at a time 

when student loan debt is more than their grandparents paid and 

parents paid for all the real estate they ever purchased, when gasoline, as I said, is exorbitant. Many of these jobs are being shipped 

offshore. They don’t know what to do and really, they are depressed 

and when they are depressed, they don’t even try. So this is a 

grave, grave situation that we are facing here and again, in my 

opinion, it will become the reason that the United States of America loses all economic strength, power and everything in the future 

and what is so sad is we are doing it to ourselves. 

[The prepared statement of Ms. Orman follows:]

PREPARED STATEMENT OF SUZE ORMAN

Chairman Kennedy, I am so grateful for the opportunity to address this committee today on the need to increase the affordability of student loans for our country. 

I say for our country, not just for prospective college students, because I fervently 

believe that this issue has an enormous impact on every American. Our ability to 

educate our citizens so they not only can compete in a global economy, but can be 

leaders in a global economy is, for my money, one of the most important priorities 

we can set for our country. Our future rests on the success of postsecondary education. The move last year to cut $12.7 billion in Federal student aid funding was 

a dangerous step in the wrong direction. If we do not take the steps today to make 

college more accessible and affordable, we are mortgaging our future as economic 

leaders.

• The increasing cost of college is a barrier to obtaining a 4-year degree. 

As you have detailed, each year 400,000 low-income students do not seek a 4-year 

college education because of cost issues. Those are 400,000 potential leaders that are 

not getting the opportunity they deserve, and that we as a nation need them to 

have. • The increasing cost of college saddles recent graduates with a high 

level of debt that is both a financial and career impediment. The average undergrad leaves school with about $20,000 in student loan debt—that is a 25 percent increase since 2000.* Dare to seek an advanced degree and that sum triples. 

It is easy to see how those large sums are a costly burden for our young adults.

I hear from thousands of young adults each year—on my television show, at 

speaking engagements and through my Web site—about how defeated they feel before their career even starts, given the huge student loan debt they have to pay off. 

I am the first to say student loans are ‘‘good debt’’; we have all seen the studies 

that show a college degree can produce an extra $1 million in lifetime earnings. But 

when you are in your early twenties, with $20,000 or $60,000 or more in student 

loan debt and a starting job that doesn’t pay too much, you aren’t in a position to 

feel good about the potential lifetime payoff for your degree. Your reality is that you 

have a lot of debt that you feel pressured to pay off. And that debt load affects your 

entire financial life. 

Young adults with big student loans to pay off tell me they feel tremendous pressure to ‘‘just get a job that pays’’ when they graduate, rather than pursue a career 

that they are passionate about. A work force of 20-somethings that feels they can’t 

19

afford to pursue careers that aren’t highly compensated does not bode well for our 

Nation. 

And the student loan burden has a snowball affect on their broader financial life: 

The rapidly increasing price in home values across the Nation over the past 5 years 

or so has made buying a first home a struggle for so many young Americans. When 

you add in the fact that they are already loaded down with student loans, the prospect of adding on mortgage debt either becomes unthinkable, or pushes them into 

making dangerous decisions, such as buying a home with a negative amortization 

loan because they feel that’s all they can afford . . . only to learn later on what 

a big mistake they have made. 

But the biggest mistake I see young adults make is to ignore them altogether. 

They are so overwhelmed by what they owe and can’t fathom how they will ever 

be able to dig out from their debt hole that they make the horrible decision to ignore 

the loan. And then they come to me absolutely depressed when they find out that 

their loan has kept mushrooming as the interest payments are added onto the principal, and their personal credit scores are a mess because of their failure to make 

timely payments on their student loans. Irresponsible? Of course it is. But there is 

blame to go around. The fact is we are doing a lousy job of educating our children 

about finances. About how money works, about how loans work, and most importantly about being fiscally responsible. I applaud the proposals put forth by this 

committee to address ways to financially ease the burden of student loan debt, but 

I encourage you to also address the need for more and better education on how to 

handle student loans in the repayment period. It is a failure on our part when we 

hand money to young adults—be it credit cards or student loans—without truly 

making sure they understand the mechanics of how these agreements work, and 

give those young adults the information they need to act responsibly. 

Moreover, young adults are absolutely clueless that how they handle their student 

loans will have a tremendous impact on their future finances. They are shocked 

when I explain to them that their loan repayment history plays a major role in determining their credit score. When I explain to them that failure to keep up with 

timely student loan payments is going to lead to getting offered lousy rates on home 

mortgages and car loans, or could even impact their ability to land a job or rent 

an apartment, their financial depression just deepens. 

Another major education black hole is the issue of loan consolidation. Far too 

many young adults eligible for loan consolidation missed the boat on this valuable 

financial move when interest rates were so low in 2005. When I hear from young 

adults in a financial mess and I find out they have unconsolidated student loans, 

they invariably tell me they don’t understand how consolidation works and are just 

too afraid or overwhelmed to figure it out. 

I have no easy answers when young adults weighed down with student debt come 

to me for help. There are no magic moves for someone who owes hundreds of dollars 

a month on their student loan, but they can’t even afford the rent on their apartment, food, and other basics because starting salaries these days—high quality jobs 

with a promising career path—are harder and harder to come by. Two years ago 

I wrote The Money Book for the Young, Fabulous & Broke; it tackles all the financial 

challenges today’s young adults face. But I made a mistake. It should have been titled, The Money Book for the Young, Fabulous, Broke and Depressed. So many 

young adults want to do the right thing, to be financially responsible. But they are 

justifiably depressed at how to pull it off. Just consider the scope of what they face: 

The cost of their student loans exceeds what their grandparents probably paid for 

all their homes. I challenge anyone on this committee to contemplate how they 

would have handled tens of thousands of dollars in student loan debt right out of 

school, when they are lucky to land a job with an annual salary that is but a fraction of their student debt. 

Yet I have not changed my mind: student loan debt is indeed the best kind of 

debt; it is an investment toward building a better future. But we need to do more 

to make that debt manageable for young Americans. And to demystify how it all 

works, so they can make the right moves right out of the starting gate when they 

graduate. We need to help financially and educationally.

• The student loan crunch is financially destabilizing for parents as well 

as students. One of the most overlooked aspects of our Nation’s current student 

loan approach is how it affects the parents of these children. Once again, I come 

to you with real life experience: no matter the venue, every day I hear from parents 

who have literally mortgaged everything to be able to send their kids to college. 

They have used a home equity line of credit, or they have made saving up for their 

kids’ college funds a priority at the expense of not setting money aside for their own 

retirement. Or they raid their 401(k) savings to pay for college. Noble you say? I 

beg to differ. As well-intentioned as every parent is, this is going to potentially lead 

20

to a huge national problem down the line: without the necessary retirement assets, 

how do we expect today’s parents to take care of themselves when they stop working? And don’t tell me they will have great home equity to fall back on . . . not 

when they took out a $50,000 or $100,000 home equity line of credit to pay for each 

child’s college education.

I wish you all could hear the frustration and sadness so many young adults share 

with me when they learn exactly what their parents did to help them go to college. 

Unfortunately they learn too late: after they are out of college and just starting out, 

Mom and Dad tell them they have little money to retire on, and the house is mortgaged to the hilt. 

I hope all members of this committee and all Members of Congress will keep in 

mind the inter-generational impact of our student loan policy. The more accessible 

and affordable the loans are for students, the less debt parents—and grandparents—will have to take on to help their loved ones get a college degree. That is 

not just good for those families; it is sound national economic policy. Do we really 

want an elderly population that is not prepared to support themselves in retirement 

because they chose to send their kids to college rather than fund their 401(k)s and 

IRAs? 

Revamping the current Federal student loan program to be both more affordable 

and more accessible will enhance our Nation’s financial strength. It will produce a 

workforce that can lead a global economy. It will lead to a more stable economy 

where young adults are not buried with so much debt they can never see their way 

out, and it will allow their parents to focus on what we as a country need them 

to focus on: building the necessary savings to support themselves in retirement. 

I fully support recent proposals put forth by members of this committee:

• Reducing student loan interest rates. Yes, this is a subsidy. Why are we 

so afraid to use that term? We should be proud to state that we are subsidizing education. It is an investment in our collective future. The current fixed 6.8 percent 

rate on Stafford loans should at the very least be reduced for college students that 

qualify for subsidized loans; we owe it to them and our Nation to help them receive 

an affordable education. Ideally we can also find a way to extend lower interest 

rates to those students with unsubsidized Stafford loans. • Increase the Pell grant limits. Raising the current $4,050 limit to above $5,000 will go a long way to easing the financial stress of so many families. • Consider increasing the income limits for deductibility of student loan 

interest. • Make sure loan repayment rules are not too onerous. We need to help 

young adults juggle a daunting array of financial obligations. Yes, they need to pay 

off their student loans. But they also need to pay the rent and I think we all agree 

that it would be beneficial to them and for us as a nation if they also started funding a Roth IRA and contributing to a 401(k). That’s a lot to handle all at once. I 

think one way this committee can help out is to review the required repayment 

rules for student loans. By capping the maximum annual repayment required at a 

reasonable percentage of income and by offering extended repayment schedules, you 

can make it easier for young adults to tackle multiple financial goals simultaneously. I know these issues are already on the table. But I also want to suggest 

one additional way to help young adults pay off their student loans: make it possible 

to refinance consolidated student loans. As you know, consolidation whereby a debtor locks in one fixed interest rate for the life of the loan is currently a one-time deal. 

I can not tell you how many adults in their late 20s and early 30s who consolidated 

when rates were much higher are now so frustrated to still be paying high interest 

rates on their old debt.

The CHAIRMAN. Thank you. 

Dr. Draut. 

STATEMENT OF TAMARA DRAUT, AUTHOR AND DIRECTOR

OF THE ECONOMIC OPPORTUNITY PROGRAM, THE DEMOS 

INSTITUTE, NEW YORK, NY 

Ms. DRAUT. Thank you for the opportunity to testify here today. 

You know, going to college represents more than simply trying to 

make more money. For parents themselves who didn’t go to college, 

it is their best option of ensuring that their children have a better 

life than they had and that their children’s children have a better 

life than they had. 

21

As our Nation’s primary lever to economic opportunity and social 

mobility, ensuring that students have the ability to go to college is 

an important tenant of the American Dream and of our social contract and is the Federal financial aid system that should be and 

serve as the primary gateway to this opportunity. 

Today, I believe the Federal financial aid system is failing on its 

basic premise, which is that if anyone wants to go to college and 

is capable of doing the work, they will be able to do so regardless 

of their family income. We all know that tuitions have skyrocketed, 

Federal financial aid, particularly grants, has grown anemic. These 

two forces combined have created what I call a debt-for-diploma 

system. 

I want to focus today on two aspects of the debt-for-diploma system. One is the impact it has on whether low-income or first generation students will enroll or complete college and also the unrealistic assumption that today’s average student loan debt is something reasonable for young people to assume. 

Today, two out of three undergrads leave school with about $19,000 in student loan debt. It’s about $17,000 for those who go 

to public colleges and universities. Even community college students are no longer immune from relying on loans to help pay for 

college. They are leaving with about $8,700 in average student loan 

debt. Now, in many ways, these statistics about student loan debt 

represent the fortunate individuals. After all, they went to school 

and they graduated. Left out of these are the people who forego college altogether or drop out because the cost has become too high 

and the Federal financial aid package too low. 

Rising tuitions and anemic Federal aid have gotten us to a perverse reality today, where the highest achieving poor kids go to 

school at the same rates as the lowest achieving rich kids. According to the Advisory Committee on Student Financial Assistance, financial barriers prevent 48 percent of low-income families from 

going to a 4-year university. Financial barriers prevent 22 percent 

from enrolling in any college at all and unmet financial need is a 

major reason why college remains out of reach for these young people. 

Now I want to step back to those who do enroll in college. These 

students are taking on student loan debt by the thousands, the 

overwhelming majority who attend our public colleges have about 

$17,000 in debt. That’s a figure that has more than doubled in the 

last decade. But not all students borrow at the same amounts and 

indeed, this is where low-income students are hit with another 

punch. In 2004, 88 percent of Pell grant recipients had student 

loans, compared to just over half of those who did not have Pell 

grants. Pell grant recipients also carried about 12 percent higher 

debt than those without Pell grants. 

So why should we care that the Federal financial aid system is 

now what I call a debt-for-diploma system. 

The CHAIRMAN. Just on that point about the indebtedness of 

those that are the lowest income. What’s the significance? Could 

you expand on that, the significance of that again, for me? 

Ms. DRAUT. Absolutely. The impact is that these are students 

who come from households where when they graduate from college, 

they will not be able to fall back on parents if they are having trouVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6601 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
22

ble making the rent or they’re having trouble making a car payment. These are, by and large, first generation college students, so 

their average student loan debt burden that is now higher than 

those without Pell grants means they are going to have an enormous time trying to make those payments and they don’t have a 

safety net in the form of parental resources, which is one of the 

reasons why it is so difficult to draw a line in the sand about what 

is reasonable student loan debt today and I’m going to touch on 

that. 

Indeed, I don’t think we should be trying to draw a line in the 

sand. We should be trying to figure out what is the best way to 

make it possible for people to afford college and I submit to you 

that it is not a debt-for-diploma system, that in order to sort of 

right this ship, we need to get back to a system that is much more 

based on grants than on debt. 

In the written testimony, I’ve put forth what Demos—the proposal that Demos has put forth, called the Contract for College. Basically, it’s a contract because it says to students as early as seventh grade, if you want to go to college, you can and here’s how 

much financial aid you will qualify for, based on the IRS returns 

of your parents last year. We need to let students know earlier the 

types and the amount of financial aid available for them and I believe we have the technology to do that. 

The second thing it would do is provide a sliding scale of grants 

so that if you have lower income, you can get a grant that will 

cover, for the lowest income students, three quarters of the cost of 

going to college. 

I hope that we will get into some particulars about how we can 

make the system, the higher education, more affordable and accessible without requiring the ordinary student to take on inordinate 

amounts of student loan debt. 

[The prepared statement of Ms. Draut follows:]

PREPARED STATEMENT OF TAMARA DRAUT

Chairman Kennedy and Ranking Member Enzi, thank you for the opportunity to 

testify today on issues of access and affordability in higher education. In my role 

as the director of the economic opportunity program at De ̃mos, a nonprofit, nonpartisan research and public policy organization, I have studied and written critically about the decaying access and affordability crisis that now characterizes our 

higher education system. 

As the primary lever for economic and social mobility, access to higher education 

is vital to this country’s ability to make good on its promise of equal opportunity 

and upward mobility. The Federal financial aid system is fundamental to fulfilling 

the promise of providing a college education to anyone who desires self-improvement 

and is committed to the work necessary for advanced study. As the primary source 

of financial aid for most students, the effectiveness of the Federal panoply of grants 

and loans is paramount to ensuring college remains accessible and affordable to all 

students, regardless of their economic background. 

Today, rising tuition and anemic Federal financial aid has created what I call a 

‘‘debt-for-diploma system.’’ The debt-for-diploma system affects young adults’ choices 

about college, including where they enroll and whether or not they complete their 

degree. The debt-for-diploma system also exerts powerful influence on young adults 

even after they leave college. With two out of three undergraduates leaving school 

with student loan debts averaging $19,300 ($17,500 for those attending 4-year public universities), the debt-for-diploma system continues to exert its influence in 

young adult’s lives—impacting their financial stability long after they’ve accepted 

their diploma. 

During my testimony, I will focus on the intertwined issues of access and affordability by discussing the following:

23

1. Trends in access, enrollment and completion in higher education by income and 

race/ethnicity; 

2. Trends in State funding of higher education and its impact on tuition costs at 

2- and 4-year colleges and universities; 

3. Trends in student loan debt and Federal financial aid, including the purchasing 

power of the Pell Grant and shifts in the composition of aid; 

4. The larger economic context facing young adults; and 

5. A proposal De ̃mos has developed to strengthen the Federal financial aid system 

so it again delivers on the promise of ensuring access regardless of family income. 

TRENDS IN ACCESS ENROLLMENT AND COMPLETION

Today, thousands of students are being denied access to postsecondary education 

simply because it is unaffordable. Thousands more enroll but drop out before obtaining a degree. In the 2001–2 school year, over 400,000 college-qualified high school 

graduates from low- and moderate-income families (those with incomes below 

$50,000) did not enroll in a 4-year college, and 168,000 did not enroll in any college 

at all.1 Unless immediate steps are taken to reverse this trend, over the decade 4.4 

million qualified students will not attend a 4-year college and 2 million will not attend any college at all. The wide disparities in access to higher education run 

counter to our values of fairness, equal opportunity and upward mobility. In 1965, 

with the creation of the Higher Education Act, our Nation set out to ensure that 

any student who wanted to pursue a college education should have the opportunity, 

regardless of family income. While we’ve never fully delivered on that promise, we 

are now losing ground. 

According to an analysis of data from the Department of Education, low- and middle-income households face high levels of unmet need.2 Unmet need equals the cost 

of attending college, including tuition and living expenses, minus expected family 

contribution and financial aid. According to the report, the average public college 

student from a family with an annual household income of $62,240 or less will have 

an average of $3,600 in annual unmet need. Public college students from families 

with an annual household income of $34,288 or less will experience an average annual unmet need of $4,689. Students who face unmet need compensate by working 

longer hours and/or by taking out private student loans. These calculations of unmet 

need only apply to those students who are enrolled, not the 168,000 who do not enroll at all due to financial barriers. 

As a result of unmet need, the highest achieving students from poor backgrounds 

attend college at the same rate as the lowest achieving students from wealthy backgrounds.3 Or to put it more coarsely: the least bright wealthy kids attend college 

at the same rate as the smartest poor kids.

• Gaps in enrollment between low-income families (below $25,000) and high-income families (above $75,000) are as wide as they were three decades ago.4

• Although roughly three-quarters of high school seniors continue their studies, 

only half receive a degree 5 years after studying, and only a quarter receive a bachelor’s degree or higher. Students from low-income families complete degrees at a 

much lower rate than their wealthy counterparts: only 21 percent of low-income students who enroll in college will complete a bachelor’s degree—compared to 62 percent of high-income students who enroll.5

• The degree completion rate is much more disparate as a percentage of all students, not just those who enroll. Forty percent of students in the top quartile graduate with a 4-year degree, compared to only 6 percent of students in the lowest 

quartile.6

• One third of college entrants drop out before their second year. First generation 

college students are about twice as likely as students with college-educated parents 

to leave a 4-year college before their second year.7

• The gap between college enrollment among whites, blacks and Hispanic students has widened over the last 30 years:

• In 2000, the enrollment gap between white and black students was 11 percentage points, up from only 5 percentage points in 1972.8

• The enrollment gap between white and Hispanic students was 13 percentage points in 2000, up from a 5 percentage point gap in 1972.

• Financial barriers prevent 48 percent of college-qualified high school graduates 

from low-income families from attending a 4-year college; 22 percent will not attend 

any college at all. The percentages are similar for students in moderate-income families with household incomes less than $50,000.9

Academic preparation is also critical to ensuring that lower income students enroll and complete college degrees. But the growing disparity between enrollments 

24

and degree completion is occurring during a time when academic preparation for 

college has steadily risen among low-income students. More than half of high school 

seniors in households with incomes below $36,000 have completed college preparatory courses—up from just over one-third in 1987. Nonetheless, racial and class 

disparities continue to result in fewer low-income and students of color who are prepared for higher education. 

The current access problem will be further strained as the largest generation 

since the Baby Boomers begins to age out of high school. The traditional collegeage population is projected to grow by 16 percent between 2000 and 2015.10 This 

generation will be more ethnically diverse, better prepared for college, and more 

likely to have financial need for college. By 2015, 80 percent of the college-age population will be non-white, and almost 50 percent will be Hispanic. Left unchecked, 

the disparities in educational opportunity could severely threaten our social cohesion, dividing the country into a well-educated, white minority and an undereducated non-white majority. 

Impact on Economic Growth 

Having fewer highly trained and educated workers dampens the economic productivity and growth of the Nation. It’s estimated that narrowing the gap in the college 

participation rate would add $250 billion in gross domestic product and $85 billion 

in tax revenue.11

Ensuring that all qualified students can pursue education beyond high school is 

critical for maintaining the vitality of the American labor force. Nearly 60 percent 

of jobs today require some college.12 Over the next decade, 6 of the 10 fastest growing occupations require an associate or bachelor’s degree.13 At the same time, job 

growth predictions also show that the largest growth in jobs over the next decade 

will be in the low-wage sector—those not requiring any post-secondary training. 

Still other studies show that the looming retirement of the Baby Boomers will result in a major shortage of skilled workers.14 The reason is simple: unlike the 

Boomers, who achieved higher levels of education than their parents and grandparents, successive generations have gotten about the same amount of education as 

their parents.15 As the labor force is expected to grow far less in the next 20 years 

than it did in the last two decades, there may be a shortage of workers with at least 

some college education.16

The current growth in outsourcing of service sector jobs may threaten the potential for young, educated workers to find jobs to match their skill set. At this time, 

however, the scope of the effects on economic growth and job creation caused by 

outsourcing is unclear and widely debated. 

Whether or not the economy will generate enough jobs for college graduates is up 

for debate—and is something of a red herring in the debate over access to higher 

education. What’s important—and what needs to be fixed—is who gets to compete 

for the best jobs in America. Currently, young adults from modest backgrounds, as 

well as young adults of color, are much less likely to enroll and complete degrees 

at 4-year universities. As a result, the playing field is far from level. 

TRENDS IN COLLEGE COSTS

Over the last three decades, tuition at both 2- and 4-year public college and universities has been rising, with rapid increases in the last two decades. Since 1980, 

tuition at public 4-year universities has more than doubled, after adjusting for inflation (see Chart 1). In 2006, the average tuition at a public 4-year college was $5,836, 

up from $3,856 in 1996 and $2,628 in 1986 (2006 dollars). In the last 5 years alone, 

tuition has increased 35 percent, higher than any other 5-year increase from 1976 

to the present.17 Tuition at community colleges has risen, though not as steeply. In 

2006, the cost of tuition at 2-year colleges was $2,272, up from $1,899 in 1996 and 

$1,227 in 1986.

25

Tuition costs are just one aspect of the cost of attending college. Research has 

demonstrated that the most successful strategy for completing a college degree is 

full-time, on-campus study. Add in room and board charges for 4-year colleges, and 

the total cost of attending in 2006 was $12,796, up from $9,258 in 1996 and $7,528 

in 1986. 

There is much debate over why tuition prices have risen so dramatically in the 

last decade, and certainly several factors have contributed to the rise in college 

costs. One contributor which is relatively undisputed is the decline in State funding 

of higher education. Public universities receive the majority of their operational support from State appropriations, so when States flat-line or cut appropriations, public 

universities make up the deficit in operational revenue by raising tuition. Over the 

last two decades, the level of State support has been declining. In fact, per-pupilspending is at a 25-year low. As a result, the percent of public higher education revenues from tuition has steadily increased, from 21.5 percent in 1981 to around 31 

percent through the mid-1990s. After declining in the late 1990s, tuition revenues 

grew rapidly from 30 percent in 2001 to 36.7 percent in 2005.18 While the absolute 

dollar amounts States spend on higher education have increased over the last decade, the increase has not kept pace with either inflation or enrollments, resulting 

in per-pupil spending at a historic low. 

STUDENT LOAN DEBT AND TRENDS IN FEDERAL FINANCIAL AID

While increases in the published price of college have risen much faster than increases in the net price (what students actually pay after aid), student loan debt 

has more than doubled from $9,250 in 1993 to $19,200 in 2004.19 The amount of 

student loan debt for those students graduating from public universities has also 

grown substantially, from $8,000 to $17,250. 

Not only has the amount of debt among graduating students increased, the percentage of students who rely on student loans to finance their education has also 

risen. In 1993, less than half of all 4-year graduates had student loans; today, nearly two-thirds graduate with debt. 

Low-income students, particularly those who receive Pell grants, are much more 

likely to have student debt than other students. Among Pell grant recipients who 

earned their degree in 2004, 88.5 percent had student loans, compared to just over 

half (51.7 percent) of non-Pell recipients.20 Pell grant recipients also carried 12 percent higher debt, carrying on average $20,735 in student loan debt versus $18,420 

for non-Pell recipients. 

Our Nation’s Federal financial aid system has become a debt-for-diploma system. 

Over the last two to three decades, the composition of Federal financial aid has 

shifted from a grant-based system to a debt-based system (see Chart 2). Of the $91 

billion spent on Federal financial aid in school year 2003–4, only $19 billion was 

spent on grant aid, while loan-based aid comprised $65 billion.


33516-2.eps
26

Not only does grant aid comprise a smaller share of the overall Federal financial 

aid pie, its purchasing power has declined precipitously, failing to keep pace with 

the cost of tuition and the surge in eligible students. As a result, what grant aid 

is available gets spread more thinly across a greater number of students. 

Today the maximum Pell Grant award—the Nation’s premier program for helping 

low-income students pay for college—covers about one-third of the costs of a 4-year 

college today. It covered nearly three-quarters in the 1970s.21 But only 22 percent 

of Pell grant recipients received the maximum award of $4,050 in 2003.22 The average award was $2,473, which covered about one-fifth of the costs of a 4-year public 

college.23

As the Federal Government was shifting resources away from need-based grant 

aid toward tax credits and debt-based aid, State governments and institutions were 

also shifting their aid dollars away from need-based aid (see Chart 3). Between 1994 

and 2004, spending by the States on need-based scholarships for undergraduates increased by 95 percent, while spending on merit-based aid increased by 350 percent. 

The proportion of State grants awarded based on merit, rather than need, has risen 

from 13 percent to 27 percent during this period.24 Similarly, universities have also 

begun using more of their financial aid resources to attract the best and brightest 

students—throwing increasingly percentages of aid dollars to students who could afford the cost of college without any aid. For example, in 1995, the average student 

from a family with an income below $20,000 received $836 in institutional grant aid, 

while students from families above $100,000 received an average of $239 in grant 

aid. In 2003, the average award to low-income students had increased 50 percent 

to $1,251 while the average award to students from families earning above $100,000 

had grown 227 percent to $781.25


33516-3.eps
27

PUTTING STUDENT LOAN DEBT IN CONTEXT

As the first generation to shoulder the responsibility of paying for college primarily by taking out loans, it’s important to consider the larger economic context 

in which this new debt burden is unfolding. Some argue that the rise in student 

loan debt seems justified, or reasonable, given the economic benefit a college degree 

commands in the labor market. While it is true that someone with a bachelor’s degree will earn approximately $1 million more in earnings over their lifetime than 

someone without a college degree, it is also true that the earnings for college graduates have remained flat for three decades (see table below). Earnings for young 

workers with ‘‘some college’’ have declined, with the typical young male worker with 

‘‘some college,’’ earning 17 percent less than the previous generation. It’s important 

to remember that among this ‘‘some college’’ population are young adults who 

dropped out of college before completing their studies. One out of five borrowers 

drop out of college before finishing, leaving them with debt, but no diploma. The 

percentage of indebted non-completers is even higher among community college students, with one out of four borrowers dropping out without a degree. 

The economic outcome of getting a bachelor degree has not risen for this generation; indeed the typical college grad is earning about the same as the previous generation. Rather, the college wage premium, as it is often called, is due to the precipitous decline in earnings power for workers with only high school degrees (see Table 

below).

Males Females 

High School 

Diploma 

Some

College 

Bachelor’s 

Degree or 

Higher 

High School 

Diploma 

Some

College 

Bachelor’s 

Degree or 

Higher 

1974 ....................................................... $42,697 $44,257 $51,223 $25,913 $29,556 $35,674

1984 ....................................................... $36,773 $39,806 $46,775 $24,449 $28,263 $35,030

1994 ....................................................... $29,996 $33,650 $45,629 $22,604 $26,938 $37,363

2004 ....................................................... $30,400 $36,400 $50,700 $24,400 $28,800 $40,300

Source: National Center for Education Statistics, based on data from U.S. Department of Commerce, Bureau of the Census, Current Population Survey, March Supplement, 1972–2003. 

In addition to stagnant or falling incomes, today’s young adults face substantially 

higher costs for housing and health care than the previous generation experienced 

during their 20s and early 30s—yet median earnings have failed to grow to accommodate either the rise in basic costs, or to accommodate the new student loan debt 

burden.26


33516-4.eps
28

MAKING COLLEGE AFFORDABLE: THE CONTRACT FOR COLLEGE

The debt-for-diploma system is a failure. 

The fundamental problem is rooted in the reality that our government no longer 

really helps people pay for college—it helps them go into debt for college. The question we need to be asking is not ‘‘how much student loan debt is reasonable,’’ but 

‘‘what is the best way to help students afford college?’’ Given the enrollment gaps 

by income and race, in addition to the serious social consequences reported by borrowers, there is solid evidence that a debt-based aid system is not the best method 

for making college affordable. This is especially true when it comes to achieving the 

goal of making college affordable to low-income young people, for whom grant aid 

is the difference between enrolling or foregoing college altogether. 

The last two decades have greatly heightened the demand for a highly educated 

workforce—and the earnings differential between those with and without college degrees has widened substantially. A college degree has become what the high school 

diploma was 30 years ago—the surest pathway to the middle-class. Two years of 

post-secondary education is now considered the minimum level of education necessary for success in this economy. A worker with a bachelor’s degree now earns 

about 70 percent more than a worker with only a high school diploma. Over a lifetime, that wage gap will add up to over $1,000,000. Those with ‘‘some college’’ earn 

more than those who only complete high school. 

And yet, our financial aid system has become less responsive to the needs of 

young people, particularly those from low- to middle-income families. At a time 

when getting a college degree has become a near necessity for entry into the middleclass, our Nation’s primary ladder of opportunity is broken. 

In a De ̃mos report, Millions to the Middle: Three Strategies to Grow the Middle 

Class, we proposed creating a new system called the Contract for College. The Contract for College is based on a simple premise: if you study hard and are academically ready for college, money will not be an obstacle course to fulfilling your potential. The Contract is similar to a set of proposals made by the bi-partisan National 

Commission on Responsibilities for Financing Post-Secondary Education, a body 

mandated by Congress in 1991 through legislation sponsored by Senator James Jeffords of Vermont, then Republican.27 The Commission’s recommendations, which 

were never implemented by Congress, were released in a final report in February 

1993. 

The Contract would unify the existing three strands of Federal financial aid—

grants, loans and work-study—into a coherent, guaranteed financial aid package for 

students. The Contract would shift Federal financial aid funding toward more grantaid for students. Students from households with incomes below $25,000 would be 

eligible for an annual grant to cover 75 percent of the costs of attending a 4-year 

university or $9,000, while a student from a household with income between 

$75,000 and $100,000 would be eligible for an annual grant to cover 40 percent of 

the costs, or $4,800. Part of the Contract for every student would include some 

amount of student loan aid and/or work-study requirement. But by providing grant 

aid for low- to middle-income students, it would end the five-figure student loan 

debt that stunts the progress of young adults. The table below provides an example 

of different Contract for College estimates based on family income.

The Contract for College 

[Based on the average cost of annual enrollment at 4-year public colleges (approx. $12,000)] 

Household Income below 

$25,000

Household Income between 

$25,000–$49,000

Household Income between 

$50,000–74,999

Household Income between 

$75,000–99,000

Household Income above 

$100,000

Grant to cover 75 percent of costs: $9,000.Grant to cover 65 percent of costs: $7,800.Grant to cover 55 percent of costs: $6,600.Grant to cover 40 percent 

of costs: $4,800.

Unsubsidized 

loan: 

$10,000

Work-study: $1,500 ......... Work-study: $1,500 ....... Work-study: $1,500 ....... Work-study: $1,500 ..........

Subsidized loan: $1,500 .. Subsidized loan: $2,700 Subsidized loan: $3,900 Subsidized loan: $2,350

Unsubsidized loan: 2,350

The model above is for illustrative purposes. An actual plan would include more gradual phase-outs between each successive income level. 

An important component in designing the program would be to ensure that families have early knowledge of the financial resources available for their children to 

attend college. One of the weaknesses of the current financial aid system is that 

parents and students do not have adequate information about the amount of aid 

available to them until several months before enrollment. And aid amounts tend to 

29

change from year to year. The Contract could allow all households with students in 

the 8th grade and above to receive an estimate for aid based on the average cost 

of attendance at public 4-year institutions. For example, low-income families would 

be informed that they can receive a Pell grant that covers 75 percent of the cost 

of college, with subsidized loans and work-study to finance the rest. 

In addition, the Contract would provide Federal student loans through the Direct 

Loan Program, ending the Federal Family Educational Loan Program (FFELP)—the 

government guaranteed loan program in which the Federal Government acts as an 

intermediary between students and banks, providing massive subsidies to ensure a 

guaranteed rate of return to lenders. Back in 1992, Congress tried to create an alternative plan to the subsidy-rich deal for private lenders. Instead of using private 

lenders, the government would put up the capital for student loans and disburse the 

money directly to the college. The program, called the Direct Loan Program, started 

as a pilot program in 1992 and was made an option for all colleges in 1993. Unlike 

federally guaranteed student loans, which cost taxpayers 7 cents on every dollar, the 

Direct Loan program costs less than 4 cents per dollar lent.28 By switching all Federal loans to the Direct Loan Program, the Congressional Budget Office estimates 

that the Federal Government would save billions of dollars over 10 years due to the 

reduction in subsidies and administrative costs associated with the FFELP system.29 Several pieces of legislation, with bipartisan sponsorship, have been introduced to encourage schools to participate in the Direct Loan Program.30 Based on 

enrollment projections, including increases due to the availability of enhanced financial aid, the rudimentary estimate of the cost of the Contract is approximately $48 

billion per year.31 We estimate the cost of expanded Pell grants to be $39 billion, 

$9 billion for work-study, and some administrative costs associated with the direct 

loan program. 

Existing revenue for the Contract includes current spending on Pell grants of 

$12.7 billion. We also propose eliminating the higher education tax credits which 

currently cost $5.9 billion and redirecting that money to the more need-based aid 

system of the Contract. Additional savings would be found by switching to the Direct Loan Program. In addition there are a variety of subsidies on existing loans 

in the FFELP system that if reduced could generate savings. For example, the special allowance payment to lenders on existing Stafford loans could be reduced by 50 

basis points, as the President proposed in his budget, in addition to those on PLUS 

and consolidation loans. After reallocating money from existing spending on higher 

education programs, our cost estimates show an additional $30 billion will need to 

be raised. 

In exchange for the Federal Government picking up more of the tab for college, 

States need to do their part to keep tuition prices under control. That means increasing, rather than decreasing, State appropriations to higher education. Over the 

last 5 years, States have consistently slashed their support for higher education as 

a way to deal with budget deficits. Back in the late 1990s, when States were flush 

with extra money, instead of stockpiling those revenues for a rainy day, most States 

enacted tax cuts. When the tech bubble burst, States were left with no reserves and 

the political non-starter option of raising taxes. State governments need to be more 

fiscally responsible about providing stable support for higher education, which is the 

biggest source of operating funds for State colleges. 

Colleges too have an important role to play in keeping costs under check. The 

State university system in this Nation is the envy of the world. But far too often, 

State colleges are racing against each other to be the best in everything, instead 

of concentrating on developing core academic strengths. In any given State, public 

universities could save the system money by eliminating duplicative programs, coordinating research expertise and collaboratively reaching agreements for each university to home in on core academic fields. 

CONCLUSION

Congress has recently enacted legislation that would lower the interest paid on 

certain Federal student loans. Last year, the House passed legislation that raised 

the maximum Pell grant. In addition, the President has proposed in his 2008 budget 

increasing the maximum amount of the Pell grant by $550, to a maximum of $4,600. 

However, neither of these reforms is adequate to address the scale of the problem 

that exists. In a country where higher education serves as the primary lever of economic and social mobility, the debt-for-diploma system represents a major failure. 

It’s predicted that over the next decade more than 6 million college-ready students 

will fall through the cracks of the current financial aid system. Their aspirations 

and our future hinge on whether or not bold action is taken now to restore the ladder of opportunity, and to end the failing debt-for-diploma system. 

30

ENDNOTES

1 ‘‘College qualified’’ refers to the index of college qualification designed by the 

U.S. Department of Education’s National Center for Education Statistics (NCES). 

The index evaluates high school seniors on cumulative academic coursework GPA, 

senior class rank, NELS test scores, and SAT and ACT college entrance examination 

scores. ‘‘Low-income families’’ refer to households with incomes below $25,000. 

‘‘Moderate-income families’’ refer to households with incomes between $25,000 and 

$49,999. 2Postsecondary Education OPPORTUNITY, Unmet Financial Need, Student 

Work/Loan Burden and Net Price to Family for Dependent and Independent Undergraduate Students by Institutional Type/Control and Parental/Family Income Quartiles, 2004, October 2005. 3 Access Denied: Restoring the Nation’s Commitment to Equal Educational Opportunity, (Washington, DC.: Advisory Committee on Student Financial Aid Assistance, 

February 2001). 4 Ibid. 

5 Ibid. 

6 Richard D. Kahlenberg, ed., America’s Untapped Resource: Low-Income Students 

in Higher Education (New York: Century Foundation Press, 2004), p. 22. 7 Nancy Hoffman. ‘‘College Credit in High School: Increasing College Attainment 

Rates for Underrepresented Students.’’ Change, July/August 2003. 8Thomas R. Wolanin, ed. Reauthorizing the Higher Education Act: Issues and Options. (Washington, DC.: Institute for Higher Education Policy), 2003. 9 Empty Promises: The Myth of College Access in America (Washington, DC.: Advisory Committee on Student Financial Assistance, June 2002). 10 Ibid. 11 Access Denied: Restoring the Nation’s Commitment to Equal Educational Opportunity. 12 Ibid. 13 Bureau of Labor Statistics Employment Projections. February 2004. 14 Anthony P. Carnevale and Donna M. Desrochers, Standards for What? The Economic Roots of K–16 Reform. Educational Testing Service, 2003. 15 ‘‘Grow Fast Together. Or Grow Slowly Apart,’’ The Aspen Institute, September 

2002. 16 Carnevale and Desrochers, Standards for What? The Economic Roots of K–16 

Reform. 17The College Board, Trends in College Pricing, 2006. 18State Higher Education Executive Officers, State Higher Education Finance FY 

2005. 19Project on Student Debt, ‘‘Quick Facts About Student Debt.’’ 20 Ibid. 21Gladieux, p. 29. 22 ‘‘2003–2004 Federal Pell Grant Program End-of-Year Report.’’ U.S. Department 

of Education, Office of Post-Secondary Education. Table 3A. Available online at 

http://www.ed.gov/finaid/prof/resources/data/pell0304.pdf. 23 Ibid. 24Kati Haycock, ‘‘Promises Abandoned: How Policy Choices and Institutional 

Practices Restrict College Opportunities,’’ The Education Trust. Available online at 

http://www2.edtrust.org/NR/rdonlyres/B6772F1A–116D–4827–A326–

F8CFAD33975A/0/PromiseAbandonedHigherEd.pdf. 25 Ibid. 26Tamara Draut, Strapped: Why America’s 20- and 30-Somethings Can’t Get 

Ahead (Doubleday: 2006). 27The Commission’s final report Making College Affordable Again was released in 

February 1993. The report identified specific policy concerns, which led to the formulation of policy recommendations, including the Student’s Total Education Package (STEP). The Commission’s full report is available online at http://

www.ihep.org/Pubs/PDF/makingcollegeaffordable.pdf. 28Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 

2008 Appendix. Available online at http://origin.www.gpoaccess.gov/usbudget/

fy08/browse.html. 29 Committee on Education and the Workforce, ‘‘Bipartisan Student Loan Bill 

Would Boost Funding For College Scholarships by $12 Billion Without Costing Taxpayers a Dime, Says CBO,’’ January 12, 2005. Available at http://

edworkforce.house.gov/democrats/releases/rel11205b.html. 30See Sharkey, 2005. According to Sharkey, Rep. Thomas Petri (R-WI) and Rep. 

George Miller (D-CA) have introduced the Direct Loan Reward Act, which would esVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6621 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
31

tablish incentives for colleges to switch to the Direct Loan program by offering to 

let them keep half of the savings for their use in financial aid programs. The bipartisan Student Aid Reward Act, introduced by Rep. Petri, Rep. Miller, Sen. Edward 

Kennedy (D-MA) and Sen. Gordon Smith (R-OR), asks the Secretary of Education 

to determine which student loan program is less expensive, and then provides additional scholarship money to schools that adopt the cheaper loan program. 31David Callahan, Tamara Draut and Javier Silva. Millions to the Middle: Three 

Strategies to Grow the Middle Class. (New York: De ̃mos), 2004. Available at http:/

/www.demos-usa.org/pubs/millionslweb.pdf.

The CHAIRMAN. Thank you. 

Dr. Oberg. 

STATEMENT OF JON OBERG, PH.D., FORMER RESEARCHER,

U.S. DEPARTMENT OF EDUCATION, WASHINGTON, DC 

Mr. OBERG. Thank you, Mr. Chairman, Senator Enzi, Senator 

Isakson. I’d like to request first that my written testimony be made 

a part of the record. 

The CHAIRMAN. All of the written testimony will be part of the 

record. 

Mr. OBERG. Thank you, Mr. Chairman. I’d also like to invite attention to my written testimony. It’s far more than I say in 5 minutes here. I have 17 specific recommendations in the written testimony on the subject and I’d particularly like to invite attention to 

the footnotes in the testimony. Sometimes the footnotes are more 

interesting than the text and among these 17 recommendations, 

they don’t all come from me and I have appropriately cited the authorities and the literature and so on, on which the recommendations are based. I’m negligent in a couple of cases, of not having 

that in there and let me say that here, on my recommendations, 

on the Fair Payment Awareness Program, which is a part of your 

bill, Mr. Chairman, S. 359 and also part of my recommendations. 

I’m indebted to the work of the Project on Student Debt for that. 

Also, one of my recommendations deals with auctions, the potential auctions of student loans in order to bring more competitiveness into the system and for that, I’m indebted to the New America 

Foundation, which has been doing work on this. 

My testimony was written about the first of January, about 6 

weeks ago, when I first heard about this hearing coming up and 

I thought some of my ideas and some of those recommendations 

would be leading-edge at that time. I since discovered that they are 

much more mainstream than I had thought they would be. The 

idea of taking subsidies out of the loan programs and moving them 

to the grant programs of the Federal Government, which are 

under-funded and doing that through a process of entitlement 

spending, is an idea that is already embodied in your bill, Mr. 

Chairman and I was also very pleased to see that this is an idea 

that is in the President’s budget as well. 

Another idea I thought might be on the leading edge was to open 

up for public view, many of the processes that are evident in the 

selection of lenders, how student’s financial aid packages are put 

together and so on and I find that, indeed, there is already a Student Loan Sunshine Act that has been introduced, bipartisan, bicameral. There is one in the House as well. 

Let me, instead of going over those ideas, go over a couple of 

ideas where my recommendations are not already mainstream. I 

32

hope someday they will be but first let me say that when I was invited to testify, I asked your staff if I was expected to testify on 

the 9.5 guaranteed loan scandal. I was told that that was not the 

reason I was here particularly, because I had been the legislative 

liaison from the Department of Education for the reauthorization 

of the Higher Education Act in 1998 and then I might have views 

on some of the legislation that came out of that, such as the Europe 

Program, the VFAs, the Voluntary Flexible Agreements and other 

items but let me say a couple of quick words about the 9.5 problems. 

As one of my attachments to my written testimony, I suggested 

back in 2003, that one solution to this would be simply for the Secretary to call the loans. I still think that is a good recommendation. 

That was put in as a bill last year by Senator Murray and Senator 

Kennedy and I commend that to you again and that is one of my 

recommendations. 

There is also—I thought this might also be leading edge but I see 

that—and that is the recovery of the forgiveness of these illegal 

payments that has been done in the past month. I see the two 

House Republicans have already introduced or have a circulating 

letter asking the Secretary of Education to recall these funds, specifically about $322 million at Nelnet. My recommendation to the 

committee would be that I think it would be appropriate for your 

committee to advise the Department of Justice that before it acts 

on approving these illegal payment forgiveness’s, that the Congress 

have an opportunity to exercise oversight on it. 

Let me quickly turn to two items that are extremely important, 

I think. One is reform the student aid process. If anything is important in my testimony, it is reform of the process. Our process 

is a disgrace that is the Nelnet scandal times 100. One particular 

disgrace is what is called enrollment management. Enrollment 

management has been called by prominent researchers the ruin of 

American higher education. Let me simply say this. If you want the 

Pell increases to reduce student debt, you will have to end enrollment management as it is currently practiced. 

Finally—my time has expired but let me say a couple points 

about private loans. The loan industry is restructuring around private loans. Congress needs to respond and shape how the industry 

will be restructured for the benefit of students. 

Especially for Senator Enzi, I am a State and local person as he 

is. I believe that as this is restructured, we should have a role for 

the State agencies and that is embodied in one of my recommendations. So thank you, Mr. Chairman and Senator Enzi, for your time 

and I’d be happy to answer any questions. 

[The prepared statement of Mr. Oberg follows:]

PREPARED STATEMENT OF JON H. OBERG, PH.D. 

Mr. Chairman, members, thank you. This is a homecoming for me. Although I am 

here today as a political scientist and public finance researcher, I have worked 

many long hours in this building over three decades, first as staff to the Senate 

Budget Committee when it was led in a bipartisan manner by Senators Muskie and 

Bellmon, later as president of a college association working with Congress for the 

interests of institutions, and finally as legislative liaison for the Department of Education during the reauthorization of the Higher Education Act in 1998. 

I am pleased to be back to recommend 17 changes in our student financial aid 

system. I will testify first on loans, then grants, then process, and lastly research. 

33

1 Estimates may be on the low side; OMB assumes future legislated efficiencies. See http:/

/www.whitehouse.gov/omb/budget/fy2007/pdf/appendix/edu.pdf. 2Lawrence E. Gladieux, ‘‘Federal Student Aid Policy: A History and Assessment,’’ http://

www.ed.gov/offices/OPE/PPI/FinPostSecEd/gladieux.html; Steven Brooks, ‘‘NASFAA History: 

1966–1985,’’ http://www.nasfaa.org/Publications/2001/Nhistory66–85.html. 3 Increases in Direct Loan costs would marginally reduce the savings from eliminating FFEL, 

in the 5 percent to 10 percent range, based on OMB cost figures. (The Direct Loan program 

is less costly according to several government and independent studies, using various methods 

and assumptions. I am not aware of any studies to the contrary, save those paid for by the loan 

industry. Typically the latter use cash accounting or other methods the industry does not use 

on itself.) 4Private loans have been the fastest growing source of student aid in recent years and are 

now firmly established as components in many institutions’ student financial aid packages. It 

is impractical for reasons of cost for the Federal Government to try to reduce the reliance on 

private loans by greatly increasing FFEL loan limits. A practical way for Congress to deal with 

private loan issues is to require disclosure and sunshine whenever such loans are mixed with 

Federal programs in students’ financial aid packages. For the most part, private loan providers 

are the same as those that participate in the FFEL program. If no new FFEL loans were guaranteed, there would still be Federal outlays for many subsequent years to such loan holders for 

existing guaranteed loans. In this environment, these subsidies would be used to make private 

loan products (already highly profitable) more competitive, benefiting students rather than simply adding to bottom lines that make the student loan industry such a Wall Street favorite for 

high profits and low risks. The industry should not be underestimated in its ability to compete, 

if it must. 5 At a December 2006, Senate Finance Committee hearing, Susan Dynarski proposed elimination of the Pell grant program and putting the savings into refundable tax benefits. This is 

the scale of thinking appropriate to the need for major changes in the way we try to provide 

college access, but it would make more sense to wind down the FFEL program, for which there 

are alternatives, and put the savings into Pell grants. Ironically, Congress established the guaranteed loan program in part as an alternative to tax benefit programs; having failed in that 

role, FFEL should be terminated, not Pell. 6 Bethany McLean, ‘‘Dems: Make Student Loans Student Friendly,’’ Fortune, November 13 

2006. 

LOANS

The HEA needs a major overhaul of its loan programs. Before I list reforms that 

would make the FFEL guaranteed loan program more efficient and effective, let me 

advance an idea whose time may have come: simply eliminating or phasing down 

the FFEL guarantee on new loans and moving the net savings to under-funded Federal grant programs.

Here’s why:

• The Federal guaranteed student loan program, FFEL, costs Federal taxpayers billions of dollars annually, somewhat over $6 billion in 2007 according to OMB’s 

estimates.1 Moving net savings from ending FFEL guarantees to the Pell grant program, for example, could put Pell funding back relatively soon near the levels it 

started with when first fully implemented in the 1970s. • The guaranteed loan program was not originally intended to draw heavily from 

the Federal treasury, but to fill a cash-flow gap for middle-income families not eligible for assistance under the Federal Government’s loan and grant programs.2 This 

is now 2007, but discussions surrounding the program sound like debates from more 

than three decades ago, when there was a lack of student access to capital. That 

time has long since passed. • There are established alternatives. The Direct Loan program, by most credible 

accounts, is less costly as a vehicle to deliver Stafford and PLUS loans 3; private 

loans for higher education, despite their troublesome rates, fees, and marketing 

practices, are now widely available and here to stay 4; higher education tax benefits 

subsidize the higher education of the middle class.5

• Excess student loan debt burden is a real problem; students often must take 

out loans because of a paucity of grants for those with financial need. A logical response would be to move loan subsidy expenditures to support of grant programs. 

As important as it is to keep loan interest rates low for students, it is also important 

to consider loan principal; that is, how to keep principal down or eliminate it entirely for many students through better grant funding. 

• The student loan industry that has grown up around the FFEL program has 

become the tail that wags the dog. Recent HEA reauthorizations have focused on 

loan industry subsidies to the neglect of the needs of students and families; Big 

Education now rivals Big Oil and Big Pharm in political contributions, with commensurate effects on the legislative process.6

• The loan industry’s consulting services have abetted the shift of college and university resources away from the financially needy, with the unsurprising result of 

34

7See Kati Haycock, ‘‘Promise Abandoned: How Policy Choices and Institutional Practices Restrict College Opportunities,’’ The Education Trust, August 2006. Economist Gordon Winston 

has said, ‘‘Enrollment managers are ruining American higher education.’’ See Matthew Quirk, 

‘‘The Best Class Money Can Buy,’’ The Atlantic, November 2005. The ruinous practice singled 

out by both Haycock and Winston, ‘‘enrollment management,’’ is marketed to institutions by a 

Sallie Mae subsidiary, Noel Levitz, to name one example. Professor Elizabeth Warren famously 

said on the CBS News Program 60 Minutes, ‘‘It shouldn’t be the case that Sallie Mae gets to 

play every hand at the poker table while the government is the one that keeps anteing up the 

money.’’ But that’s not the half of it, as the Sallie Mae business model plays every hand with 

families’ tuition money as well: Sallie Mae subsidiary UPromise helps families save for higher 

education, while Sallie Mae subsidiary Noel Levitz consults with institutions about how to take 

the savings away. 8Office of Inspector General, U.S. Department of Education, ‘‘Review of Financial Partners’ 

Monitoring and Oversight of Guaranty Agencies, Lenders, and Servicers,’’ Final Audit Report, 

ED–OIG/A04E0009 September 2006. 9See Attachment A. In February 2004, I also shared this memorandum with the Government 

Accountability Office, which confirmed in its September 2004, report (GAO–04–1070) that the 

Department could have acted at any time to shut off 9.5 growth for a savings of billions of dollars. I likewise shared this and other analyses with the Office of Inspector General, which has 

subsequently found that the illegal payment scheme at Nelnet alone amounted to $1.2 billion. 10The student loan industry has at least the following subsidies available to its private (alternative) loans: (1) capital from State agencies; (2) non-dischargability of private student loans in 

bankruptcy; (3) bundling of private loans with federally guaranteed loans in securitization 

trusts; (4) powerful loan collection tools and collection of private loans prior to federally guaranteed loans; (5) student loan interest tax deductibility; (6) Federal administration of institutional 

eligibility; (7) potential revenue from sales of federally guaranteed loan assets. While these subsidies do not spread default risk in the manner of the current Federal guaranteed program, 

spreading private loan risk is not an insurmountable problem. Private student loans are typically guaranteed by a 3 percent to 8 percent fee capitalized to borrowers’ loan balances, and 

some have third party insurers. Note that a 3 percent guarantee fee is the same as the 3 percent 

sum of fees in the Stafford loan program. Note also that industry leader Sallie Mae’s spread 

for private loans in the last quarter of 2006 was 5.28 percent (and increasing over 2005), while 

the spread for FFEL loans was 1.20 percent, suggesting that private loans are very profitable 

and that lenders could assume more risk and could lower private loan fees if necessary to compete. 

higher loan burdens among low- and middle-income students and families. These industry-provided ‘‘enrollment management’’ services customarily countervail the mission of Federal programs to assist the financially needy populations.7

• There is a great deal of waste, abuse, and mismanagement 8 in the FFEL program, and perhaps outright corruption. The 9.5 percent guaranteed return scandal 

alone (in which several secondary markets in 2002–4 increased the volume of student loans paying a 9.5 percent guaranteed return, despite Congress’s action in 1993 

to phase out such loans) has cost Federal taxpayers untold sums, perhaps billions 

of dollars. In 2003, I wrote an internal memorandum to the Department of Education’s chain of command identifying how the abuse of the 9.5 guarantee was being 

perpetrated. Had the Department acted on my analysis and recommendations at 

that time (or on those of GAO, a year later), billions of dollars of growth in these 

loans and subsequent payments of hundreds of millions to loan holders could have 

been avoided.9 As matters now stand, the Secretary of Education has determined 

that this was an illegal scheme, but one secondary market, Nelnet, has been forgiven $322 million and an unknown number of others are also being forgiven, before 

they have even been audited. Inasmuch as this is now undergoing Department of 

Justice review, I recommend that the committee ask DOJ to delay any decisions 

until Congress has an oversight opportunity to review forgiveness of these illegal 

payments. 

Here are nine reforms that, taken either independently or together, could 

phase down the FFEL program (my recommendation) or at least make the 

program more efficient:

Loan Reform 1: Gradually reduce the Federal guarantee on student loans until 

it is phased out. Congress should not beggar the Pell grant program for the sake 

of keeping an anachronistic guaranteed loan program afloat, the need for which existed 30 years ago but now is hardly compelling at a time when the student loan 

industry is several thousand lenders strong and is quickly restructuring around private loan programs that already receive significant State and Federal subsidies.10

Loan Reform 2: Use competitive bidding or auctions to set lender subsidies, rather 

than paying lenders a special allowance set by a lobbying process in Congress. One 

of the reasons the Direct Loan program is less costly than the FFEL program is not

that it is run by the government, but that it is run by private industry through competitive bidding. Ironically, it is the government’s hand in setting subsidies that 

makes the FFEL program an inefficient program compared to the one that is contracted out competitively to private industry. (Milton Friedman advocated the Direct 

35

11 ‘‘Alternative Market Mechanisms for the Student Loan Program,’’ GAO 02–84SP, December 

18, 2001; http://www.gao.gov/new.items/d0284sp.pdf. Economist Robert Archibald has advocated institution-level competitive bids in an all-private loan system. 12 ‘‘Federal Student Loans: Flexible Agreements with Guaranty Agencies Warrant Careful 

Evaluation,’’ January 2002, GAO–02–254. 13The Secretary may already have this authority under Section 432 of the HEA, Legal Powers 

and Responsibilities, but it is not a requirement. The most obvious use of such authority would 

be to ‘‘call’’ billions of dollars of loans requiring taxpayers to guarantee loan holders a 9.5 percent return, for savings to taxpayers in the hundreds of millions. 

Loan program with income-contingent repayment; perhaps such loans should be 

called ‘‘Friedman Loans.’’) GAO has already done an extensive study of competitive 

bidding and auction mechanisms appropriate to the FFEL program.11 For example, 

one of the market mechanisms identified in the GAO report was a competitive bid 

sale of contractor-originated student loans, with or without a guarantee. Since that 

report, loan holders such as the Illinois Student Assistance Commission have undertaken loan sales through competitive bidding, to the benefit of students. On the 

other hand, establishment of some market mechanisms could be complicated to 

enact, and are less desirable than simply phasing out FFEL. 

Loan Reform 3: Reform the student loan guaranty agencies by building on the lessons of the Voluntary Flexible Agreement provisions of HEA 98. Previously, guaranty agencies actually had financial incentives to let borrowers go into default and 

then collect, rather than keeping the borrowers in repayment. The VFA provisions 

enabled the Department of Education to work with guaranty agencies to implement 

alternative payment systems so as to reverse these perverse incentives. Essential 

to this reform effort must be cost neutrality, if not cost savings, with the GAO report of 2002 on VFAs as a starting point.12

Loan Reform 4: Reinstate the former provisions of the HEA that guaranty agencies and secondary markets must operate under the explicit approval of their respective State governments and within the mission of the HEA. Some student loan entities exist in a nether land that, they have argued, allows them to avoid open meetings, ignore freedom of information requests, award their executives golden parachutes with ‘‘hush-money’’ clauses, and sell off assets for non-HEA purposes. Without reform, these agencies should not be permitted to issue tax-exempt bonds. 

Loan Reform 5: Prohibit the conversion of more not-for-profit student loan entities 

to for-profit corporations. There is ample evidence that when conversion occurs, 

shareholder bottom lines override fidelity to the mission of the HEA. As the restructuring of the student loan industry develops around private loans, consider putting 

State not-for-profit agencies operating under close supervision of their governors 

and legislatures in an advantaged position so that they become the primary conduit 

through which private loans are subsidized and default risk is spread, rather than 

large for-profit corporations like Sallie Mae, which are more attuned to their stockholders than to students and families. Consider putting State agencies in a position 

of assisting colleges and universities in their respective States with choosing private 

lenders, perhaps by arranging competitive bids. 

Loan Reform 6: Reallocate default risk among taxpayers and loan holders from 

its current 97 percent insurance to a figure more in line with financial services industry norms; end the unnecessary Exceptional Performer provisions, which now 

provide certain loan holders 99 percent insurance; and reduce the lender subsidy 

substantially. President Bush’s 2008 budget proposes a 50-basis point reduction in 

the lender subsidy, an appropriate order of magnitude. President Bush’s budget directs FFEL savings to increase need-based grants, consistent with the recommendations of this testimony. 

Loan Reform 7: Establish loan collection conflict-of-interest rules to eliminate incentives for permitting loans to go into default and to eliminate collection of private 

loans before Federal guaranteed loans when the same borrower holds both. Adopt 

the proposals of The Project on Student Debt to limit excess borrower debt through 

payment limitations and better use of income contingent loans; these appear in 

S. 359 as the Fair Payment Assurance program. 

Loan Reform 8: Require the Secretary of Education to contact borrowers and offer 

consolidation loans, including incentives as necessary, when in the interest of both 

borrowers and taxpayers.13

Loan Reform 9: There is a middle ground between winding down FFEL and FFEL 

reform: allow colleges and universities that choose the Direct Loan program to share 

in the resulting cost savings. The STAR proposal to establish such an effort is a 

good idea conceptually; critics have said it would result in excessive complexity as 

to how to calculate the savings and how to make the distributions. It is preferable, 

however, to the superficial FFEL reforms that have characterized recent HEA 

changes. 

36

14The College Board, ‘‘Trends in Student Aid, 2006,’’ p. 17. Note that in 1976 there was a 

cap of 50 percent of cost of attendance. 15Presumably the support is for aid to the lower-income. Congress should refocus Pell on the 

lower-income as it provides increases, inasmuch as under current formulas a substantial portion 

of the increases would expand the reach of Pell into the less needy population. 16http://www.princetoninfo.com/200107/10704s04.html. 17For example, the Federal funds may be used to decrease other grant aid in a student’s aid 

package, as opposed to reducing the student’s loan or work burden. One reason Pell grants have 

not been increased by Congress in recent years is criticism, especially from conservatives (but 

not limited to them) that Federal Pell increases do little good, for institutions use them as a 

reason to increase tuition. While there is not much evidence of this in terms of list price tuition, 

the same cannot be said for net price tuition. Many institutions raise net tuition by lowering 

their own grants and discounts for Pell and other outside scholarship recipients. (The procedure 

can be found on many institutions’ web pages under ‘‘outside scholarship policy.’’ The practice 

is sometimes rationalized as horizontal equity, but in the process it sacrifices vertical equity and 

Federal intent.) It is time to remove this impediment to Pell increases through process reforms, 

as discussed below. 

GRANTS

The objective of making savings in the guaranteed loan program should be to enhance Federal need-based grant funding. This should take precedence over efforts 

to make borrowing more attractive. 

Part of the problem with Federal grants (and I emphasize that it is only part of 

the problem) is that Federal grant funding has not kept up with the cost of college. 

The Federal Pell grant maximum in 1976 was $5,064, expressed in constant dollars, 

compared to the current maximum of $4,050. To have the same purchasing power 

today as 30 years ago at a typical 4-year public institution, the maximum now 

would have to be raised to approximately $6,400.14

The good news is that there seems to be a bipartisan consensus in Congress and 

much support throughout the country for a substantial increase in Pell grants.15

Pell grants alone cannot fulfill the purpose of the HEA. They must be accompanied by effective programs that provide students with good pre-college preparation and support while in college. The current Administration has been dead wrong 

in trying to kill TRIO and GEAR-UP programs in the past, and SEOG and LEAP 

in this year’s budget. These programs need support, as do other similar State, local, 

and private efforts. 

Federal grant programs such as SEOG, LEAP, and others serve good purposes 

and, while not beyond review, should not be distractions from more important 

issues, such as loan reform. Do not step on the beneficial, hard working ants of the 

HEA and claim to have slain a dragon. There is a big dragon out there, the student 

loan industry’s exploitation of the FFEL program: as a citizen and taxpayer, I ask 

you to slay it, or at least tie it back in its cave. 

PROCESS

The best intentions of loan reforms and increases in grant funding will be for 

naught unless there is reform of the student aid process. The current process is a 

national disgrace.

Here’s why:

• Average students and families have a hard time filling out the FAFSA (Free 

Application for Federal Student Aid). Even CPAs have to turn to specialists to fill 

out these forms. Many families are turning to consultants and paying high fees just 

to complete the applications.16

• The information families struggle to put into the forms is often irrelevant to the 

type and amounts of aid students eventually receive, after they go through what is 

known as the aid packaging process. Many institutions will give students the package they want them to have, regardless of Federal need analysis or funding, because 

existing Federal rules do not have the teeth to ensure that the Federal funds are 

used for their intended purposes.17

• If students and families knew how their aid packages were put together, they 

would march on Washington. The reason they don’t march is that the information 

is not available to them. How institutions package aid is often secretive, proprietary 

information. 

• The prevailing packaging practice of the past few years among both public and 

private institutions has been to award more grant aid to better-prepared students 

at the expense of financially needy students, resulting in higher debt burdens for 

37

18Sam Kean, ‘‘Report Blames College Practices on Limiting Access of Minority and LowIncome Students,’’ The Chronicle of Higher Education, September 1, 2006; Donald R. Hossler, 

‘‘How Enrollment Management has Transformed—or Ruined—Higher Education,’’ The Chronicle 

of Higher Education, April 30, 2004. 19For example, The College Board, a student loan provider in partnership with Sallie Mae 

and Citibank, has offered institutions aid-packaging software (FAST) to add back, to families’ 

expected family contribution, the amounts they receive in Federal higher education tax benefits. 

The relationship between The College Board and Citibank is expressed in this December 19, 

2006, Citibank press release: ‘‘The Citibank program allows the College Board to leverage the 

industry’s leading education loan products . . . to enhance its market position as an education 

loan provider.’’ 20 ‘‘Cherry-picking’’ students for borrower benefits, for example. 21 ‘‘Fattening up financial aid,’’ The Boston Globe, December 30, 2006; Institute for Higher 

Education Policy, ‘‘Expanding Access and Opportunity: Impact of the Gates Millennium Scholars 

Program,’’ June 2006. 

lower income families. These practices include those known as ‘‘enrollment management’’ and ‘‘financial aid leveraging.’’ 18

• The student loan industry is the largest provider of enrollment management 

and financial aid leveraging services to institutions. Some providers sell software to 

institutions to circumvent the intent of Federal programs.19

• Institutions often steer students to ‘‘preferred’’ lenders rather than help them 

get the best loan terms, based not on what is good for the student, but in large part 

because of arrangements the institution has with the lender, which are often not 

divulged. Sometimes these arrangements have involved personal benefits for institutional employees. 

• Private loans, sometimes decidedly disadvantageous for students, are increasingly put into aid packages without students’ understanding of the distinction between guaranteed and private loans, especially when the lender is the same entity. 

My own research in 2003 at the Department of Education showed that substantial 

numbers of students with remaining Federal eligibility were nevertheless borrowing 

privately, on less favorable terms. Others have reported the same confusion, to the 

detriment of students. 

Here are six process reforms that are necessary, individually or in combination, to make the HEA work for students and families: 

Process Reform 1: Require that if any Federal aid is included in an aid package, 

the packaging process may not be considered confidential or proprietary, including 

preferred lender and private loan arrangements, enrollment management and financial aid leveraging techniques, and distributions of borrower benefits. Aid packaging 

and institutional arrangements with lenders should be, except as necessary to protect individual students’ privacy, subject to the Freedom of Information Act and the 

Student Right to Know Act. Exposure to sunshine will change many practices for 

the better without further regulation, and illuminate practices that need regulation.20 The bipartisan, bicameral Student Loan Sunshine Act is a good place to 

start. It may also be time to require that students who have remaining Federal loan 

eligibility be provided an informed consent process before a private loan is included 

in their aid package. 

Process Reform 2: Vastly simplify the FAFSA application process, because much 

of the currently required application information is ultimately irrelevant to a student’s total aid package. The best idea may be to gather most information from Federal tax returns for those who check this option on their tax forms. This would simultaneously deal with problems in the current application process, wherein families may be penalized for saving and especially saving in a child’s name. We rely 

on the Internal Revenue code to determine how much we can afford to pay in Federal taxes; the tax system could likewise be used to determine how much we can 

afford to pay for higher education. 

Process Reform 3: Adopt lessons learned from the Gates Millennium Scholarship 

program. The Gates Foundation has had more success than the Federal Government 

in using grants to lower loan burdens and to help students persist in college because 

of the conditions they set for institutions. (GMS requires a supplement-not-supplant 

condition on their grants to students.) 21

Process Reform 4: Place on probation (for participation in Federal HEA Title IV 

programs) institutions that use enrollment management techniques to decrease lowVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
38

22Suggestion comes from Tom Mortenson, ‘‘Five Questions for Enrollment Management,’’ Postsecondary Education Opportunity, December 4, 2005. http://postsecondaryopportunity.blog 

spot.com/2005l12l01lpostsecondaryopportunitylarchive.html. 23Suggestion comes from Richard Vedder, ‘‘The Administration’s Pell Grant Initiative,’’ February 1, 2007. http://collegeaffordability.blogspot.com/2007/02/administrations-pell-grant-initiative.html. 24 Variations on matching have been advance by others, most prominently by Michael McPherson and Owen Schapiro in several books and articles. 25See Donald E. Heller, ‘‘Elephant in the Student Aid Office,’’ InsideHigherEd, September 25, 

2006, reproduced here as Attachment B. 26See Attachment C, the e-mail response to Attachment A, which identified waste and abuse 

in the FFEL student loan program. It is highly unlikely IES will be able to attract qualified 

researchers to fill research positions if the duties involve only research administration paperwork, as opposed to research itself. Just because researchers may turn up inconvenient findings 

that conflict with the policies of the administration, or potentially embarrass it, is not sufficient 

reason to prohibit research. In fact, IES was intended by Congress to be the office at the Department where research is insulated from such considerations. (As is often the case, the attempt 

to cover up the evidence or silence the messenger may turn out to be more damaging than dealing forthrightly with the problem. Likewise, the screening of academic researchers through 

background investigations raises the specter of allowing information access only to those who 

can be trusted in their research conclusions. On background investigations at the Department, 

see Jonathan D. Glater, ‘‘Critics Question Education Department’s Screening,’’ The New York 

Times, February 11, 2007.) 27GAO found no student aid research works produced or contracted out by the Department 

that met standards for scientific rigor. See ‘‘Student Aid and Tax Benefits: Better Research and 

Guidance Will Facilitate Comparison of Effectiveness and Student Use,’’ GAO–02–751, Sepincome/first generation shares of enrollment.22 Alternatively, if other reforms are 

not adopted, bypass some or all institutions in the awarding of Federal aid.23

Process Reform 5: In the Federal budget, move a desired Pell grant maximum by 

legislation from discretionary to entitlement, so as to cut loan entitlement expenditures in favor of grant support. This would be consistent with fiscal responsibility 

and a pay-as-you-go approach. 

Process Reform 6: One process change that would slay several dragons with one 

blow would be to make Pell grants a matched entitlement; that is, when institutions 

put up a certain level of match from their own funds, the Federal Government 

would consider the Pell grant an entitlement (up to a set maximum).24 That change 

would facilitate moving loan entitlement savings to grants but also give incentives 

to institutions such that they would, on their own, work with the Federal Government in assisting the financially needy. This would help to reverse the current 

trend, which has been for institutions to shift money away from the low income faster than Federal and State Governments have been able to add it. 

The importance of process reforms is essential. I would go so far as to say that 

not one single dollar of additional Pell grants should be spent until there is process 

reform to ensure that it will aid students and families as it is intended to do. The 

Federal Government must take the lead in getting Federal, State, and institutional 

governments to work together, rather than countervailing each other, in the national cause of improving college access and affordability. Process reform is crucial 

to restoring the moral authority of institutions to request increases in Pell grants, 

which authority has eroded to virtually nothing as institutions have moved their 

own funds away from the low income while hypocritically asking Federal taxpayers 

to pick up the bill.25 Many institutions would welcome Federal leadership to get 

away from the ‘‘alms race’’ without disarming unilaterally. 

FEDERAL RESEARCH

As a recent Federal researcher, I would be remiss if I did not make recommendations about needed research reforms in Federal HEA related research.

Here’s why reforms are needed:

• In terms of the Higher Education Act, the U.S. Department of Education has 

no research or evaluation effort worthy of the name. It does minimal HEA research 

and evaluation, despite the importance of the HEA to the future of the country and 

the fact that approximately half of the Department’s funding and personnel are involved in HEA programs. At the Department’s Institute of Education Sciences, the 

National Center for Education Evaluation (NCEE) does no evaluation of the major 

grant and loan programs of the HEA; the National Center for Education Research 

(NCER) has no researchers who do research 26; and the National Center for Education Statistics (NCES) compiles statistics but its reports fall well short of the scientific research standards set for the Department under the Education Sciences Reform Act of 2002.27

39

tember 2002, pp. 41, 46, 47. Several NCES studies have been criticized by academic researchers 

for reaching causal conclusions without using causal methodologies. 28See Attachment D for an example of the student financial aid information available to prospective students on the COOL web site. Note that it is not possible to tell where institutional 

grants (the largest source of aid) are going in terms of family income, race, or ethnicity. Families 

therefore are at a disadvantage to know what to expect in their students’ financial aid packages, 

and the public-at-large is kept in the dark as to how the financial aid process works and who 

benefits. 

• The postsecondary databases compiled by NCES at the Department of Education are outdated inasmuch as they do not adequately permit integration of student enrollment, academic preparation, and financial aid information. • Many NCES descriptive reports do not present information in a manner useful 

to policy analysis and legislative oversight. Take the debate over college affordability, for example: despite the obvious relevance of net institutional tuition 

charges (that is, tuition list price minus institutional grants or discounts), NCES 

does not present such information in its reports. Nor does NCES typically break 

down family income statistics by race and ethnicity, despite their obvious relevance 

to the debate over affirmative action. • The Department of Education has asked for an expensive and perhaps invasive 

‘‘unit record’’ data system, despite having a great deal of information that it has not 

fully explored and researched. Although it has wisely backed away from its most 

extreme ‘‘unit record’’ version, there is still room to improve the proposal. 

The following two research reforms would go a long way toward addressing the need for adequate research to support the HEA and its programs: 

Research Reform 1: Require the Department of Education to publish pricing information on its College Opportunities On Line (COOL) Web site in a manner that facilitates student and family comparison of institutional net prices, including information in terms of family income, race and ethnicity. Require similar breakdowns 

in all descriptive reports dealing with college affordability and distributions of student financial aid.28

Research Reform 2: Require an updating of current higher education databases; 

require presentations of information in terms relevant to policy debates and legislative oversight; require evaluations of major HEA programs, and restore the conduct 

of research to the job descriptions of research personnel. 

Thank you for the opportunity to testify. I think it is commendable that your committee has found time to hear from an individual who is a citizen, taxpayer, and 

parent, not representing any group with a special interest in the HEA. I would be 

pleased to answer questions and to work further with both sides of the aisle on putting these recommendations and others into legislative language and ultimately into 

effect.

ATTACHMENT A 

November 21, 2003. 

To: DEPARTMENT OF EDUCATION

Through: IES CHAIN OF COMMAND

SUBJECT: ELIMINATING WASTE IN DEPARTMENT OF EDUCATION STUDENT

LOAN PROGRAMS

In the course of doing research into postsecondary education finance, I have come 

across what appears to be significant Federal waste. I estimate it amounts to about 

$30,000 per day, perhaps more. In essence, the Department of Education is expanding the base amount of Stafford loans on which a return of 9.5 percent—well above 

market—is guaranteed to certain loan holders, when there is no reason to do so. 

Knowing that ED makes ‘‘special allowance payments’’ to student loan holders, in 

early 2003 I began to look into how a certain category of these payments, the socalled ‘‘9.5 percent floor SAPs,’’ are being distributed. By law, if the payments are 

excessive, they must either be returned to Treasury under arbitrage rules or distributed for eligible purposes, such as student benefits. I endeavored to determine how 

the payments might be benefiting students by demographic categories such as family income, race/ethnicity, and type of institution. 

I expected to find increases in the amounts of the payments, given that students 

are paying historically low interest rates for Stafford loans and therefore ED must 

pay high spreads (as much as 6.68 percent) in order to provide the loan holders a 

9.5 percent return. However, I expected to find declines in the base amount of the 

outstanding loans, inasmuch as Congress repealed the authority for the program in 

1993. What I found instead was an increase in the amounts outstanding, some of 

40

it rapid in the past 2 years, with little legal authority for the increase beyond a 

trade association’s interpretation of a 1996 ED letter. I found no effort at ED or 

Treasury to evaluate the program under the requirements of the Government Performance and Reporting Act (GPRA), and I have little reason to think the payments 

are systematically distributed in any way that would result in expanding postsecondary opportunity. The payments go to both for-profit and not-for-profit entities. 

The Secretary of Education could stop the increases in the base amount immediately. The increases are resulting from transfers of the 9.5 percent floor loans to 

taxable bond issues and refinancing of the original tax-exempt issues. Here is how 

one loan holder described the process:

According to EFC, ED provided guidance in a March 1996 Dear Colleague letter that 9.5 percent floor loans retain the floor . . . even after they are transferred from a relevant [tax exempt] bond issue. As far as the balance of loans 

earning the 9.5 percent floor, as long as the [original tax exempt] bond issues 

remain open, the recycling provisions of the indentures results in increases in 

the loans receiving the 9.5 percent floor.

Some loan holders, however, suspect that this process is questionable. A July 

2003, Nelnet IPO acknowledged that as a recipient, it questioned whether it is entitled to the funds. (IPOs must provide full disclosure to potential stockholders.)

A portion of our FFELP loan portfolio, with an outstanding balance of $925.2 

million as of June 30, 2003, is comprised of loans, which were previously financed with tax-exempt obligations issued prior to October 1, 1993. Based upon 

provisions of the Higher Education Act and related interpretations by the DOE, 

we believe that we may be entitled to receive special allowance payments on 

these loans providing us with a 9.5 percent minimum rate of return. To date, 

we have not recognized interest income generated by these loans based on the 

9.5 percent minimum rate of return. We have asked the DOE to confirm that 

we are allowed to recognize the income based on the 9.5 percent minimum rate 

of return. We have deferred recognition of this excess interest income pending 

satisfactory resolution of this issue. As of June 30, 2003, the amount of excess 

interest income deferred totaled approximately $5.9 million. Since we did not 

refinance loans with the aforementioned tax-exempt obligations until 2003, all 

of this deferred income was recorded this year.

Recently, I had a personal conversation with a different recipient, who advised,

The 9.5 percent guarantee can’t be justified. But if we are allowed to enlarge 

the base, we’d be fools not to exploit it for all it’s worth.

As to the amounts involved, last year the 9.5 percent floor SAPs cost $432 million. 

I estimate that approximately $70 million of that was due to net growth in the 

amounts outstanding since repeal of the underlying authority. For the current year, 

I believe a reasonable estimate of the cost of more growth could be an additional 

$20 million to $30 million, depending on how much the procedure is exploited. (One 

loan holder expanded amounts outstanding from $900 million in 2002 to $1.3 billion 

in 2003.) Even if the cost of the growth is only $12 million higher for 2004 (a conservative estimate) that is $1 million per month that could be saved were the Secretary of Education to act now to cut off the base growth of these payments. That 

is in excess of $30,000 per day. 

The Secretary could issue a Dear Partner/Colleague letter that would clarify the 

1996 letter, to disallow future increases in the amounts of 9.5 percent floor loans 

outstanding. This would be consistent with the 1993 law (OBRA 1993) that repealed 

the authority for new issues. 

The above discussion deals only with the growth of the amounts of the 9.5 percent 

floor loans outstanding, not with the existing base of approximately $13 billion. The 

existing loans could be dealt with as well, however, were the Secretary to ask Congress for authority to contact student borrowers and offer to replace such loans with 

loans on which the borrowers would pay less interest. This would essentially be the 

same as calling the loans, a routine business practice. Replacement loans would be 

issued through direct loan consolidation, on which ED pays no SAPs. Such a procedure would result in both a savings to student borrowers and to taxpayers, perhaps 

up to $3 billion over the next decade. 

Any or all of these savings could be used to increase funding for postsecondary 

programs that have more potential for increasing postsecondary opportunity to fulfill ED’s mission. 

JON H. OBERG, 

IES/NCER.

41

* Donald E. Heller is associate professor of education and senior research associate in the Center for the Study of Higher Education at Pennsylvania State University in University Park. 

The original story and user comments can be viewed online at http://insidehighered.com/

views/2006/09/25/heller.

ATTACHMENT B 

THE ELEPHANT IN THE STUDENT AID OFFICE

(By Donald E. Heller)*

Secretary of Education Margaret Spellings’ Commission on the Future of Higher 

Education recently released its report titled ‘‘A Test of Leadership: Charting the Future of U.S. Higher Education.’’ The report contains a series of recommendations 

built on a year of deliberation by its 19 members. First and foremost is the recommendation that ‘‘the U.S. commit to an unprecedented effort to expand higher 

education access and success by improving student preparation and persistence, addressing non-academic barriers and providing significant increases in aid to lowincome students. 

Last week, in an effort to get out ahead of the momentum that is already building 

for the report and its recommendations, the American Council on Education and the 

other organizations that make up the ‘‘big six’’ higher education lobbying groups in 

Washington issued an eight-page letter to their members. 

This document, ‘‘Addressing the Challenges Facing American Undergraduate Education,’’ describes seven ‘‘issues and actions’’ that the organizations expect will result from the issuance of the Spellings commission’s report. The first of these actions, echoing the commission’s first recommendation, is ‘‘Expanding college access 

to low-income and minority students.’’

According to the six organizations, ‘‘The single most effective step to boost college 

participation of low-income and minority students is to increase substantially the 

value of Pell grants.’’ Pell grants, the centerpiece of the Federal Government’s efforts to reduce college cost barriers for low- and moderate-income students, is indeed 

a critical part of the Nation’s financial aid system. 

The letter supports the commission’s recommendation to increase the value of the 

average Pell award form 43 percent of the average in-state tuition at a public 4-

year institution to 70 percent within 5 years. This is a noble goal, and having the 

support of the six lobbying groups is critical in helping to persuade Congress and 

the Bush administration to support it also. ACE’s own calculations demonstrate that 

such an effort could require almost doubling the current $13 billion budget of the 

Pell grant program. 

The letter also encourages colleges and universities to find ways to control the 

growth of costs, again echoing a major theme of the Spellings commission. And it 

encourages the institutions to do a better job providing to students and parents 

clearer and more accurate information about the true ‘‘net price’’ of college, after 

taking into account financial aid. 

But in all the discussion in the letter about making college more affordable, these 

organizations ignore the elephant in the room: how colleges and universities spend 

their own institutional financial aid funds. While an increase in the value of Pell 

grants will certainly help achieve the objective of expanding postsecondary opportunity for low-income students, the goal could be promoted much more quickly and 

effectively through the reform of institutional financial aid policies. 

In a study I conducted earlier this year for the Wisconsin Center for the Advancement of Postsecondary Education, I examined the distribution of grant awards to 

undergraduate students. Using data from the National Postsecondary Student Aid 

Study, a nationally representative sample of students from the 2003–4 academic 

year, I looked at what many label ‘‘traditional college students’’—those who are still 

dependents of their parents and attended a single college full-time that year. 

What I found was while colleges and universities provided just over $4 billion in 

Federal grants and $3 billion in State grants to these students, they provided more 

than $10 billion in grants from their own resources. The Nation’s colleges and universities should be applauded for the effort they make in helping to lower the cost 

of college by partnering with the Federal and State Governments to award grants 

from institutional resources. 

But not all grants are alike. My study found that while 97 percent of all Federal 

grant dollars and 75 percent of all State grant dollars awarded to these students 

went to those whose parents’ income was below the national median, only 47 percent of all institutional grants were targeted to this same population of students. 

Over half of the grants awarded by institutions, or $5.5 billion, was awarded to students without any consideration of their or their parents’ financial need. 

42

This is in contrast to Pell Grants, which are very highly targeted at needy students, and three-quarters of State grants, which also use financial need as the primary criterion for determining eligibility. The lack of means-testing in the awarding 

of over half the institutional grants, along with broader definitions of ‘‘need,’’ results 

in a very different distribution of awards as compared to means-tested Federal and 

State grant programs. 

There has been much written in the Nation about the necessity of helping middleincome students find ways to help pay for college, especially since many of them 

come from families that are above the eligibility cutoff for Federal or State needbased grants. Many institutions have indicated that they are filling that objective 

through their own institutional grant programs. And while many of these grants do 

go to students of modest means, the truth is that many go to students who come 

from families with incomes well above a level that most of us would describe as 

‘‘modest.’’

For example, in 2003–4, institutions awarded more than $2 billion in grant aid 

to dependent students from families with incomes in excess of $108,000, or approximately twice the median family income of all dependent students in the Nation that 

year. While some may believe that these families deserve help in paying for college, 

it is difficult to make the argument that this should be a priority in light of the 

Spellings commission’s declaration that its members ‘‘are especially troubled by gaps 

in college access for low-income Americans.’’ One is hard-pressed to argue that giving $2 billion in grants to students from these upper-income families helps to address the commission’s concerns. 

What is particularly troubling is that the letter from ACE and its partner organizations never once lays even a portion of the responsibility for helping lower-income 

students afford college at the doorstep of the financial aid policies of their member 

institutions. There is language in the letter, of course, about expanding Pell Grants, 

and about other ‘‘efforts’’ and ‘‘goals’’ of institutions to improve access for poor students. There is also the announcement of another public service campaign called 

‘‘Know How To Go’’ targeted at low-income students (raise your hand if you remember ACE’s ‘‘College is Possible’’ campaign, which was launched in 1997 and sounds 

awfully similar to ‘‘Know How To Go’’). 

But never does the letter recommend that these institutions conduct an evaluation of their own financial aid programs to determine whether they are working in 

consort with the goal of expanding access for underserved populations, or whether 

they are simply rewarding wealthier students who have had many social, financial, 

and academic advantages in the years before they went to college. 

Rather than focusing solely on public service campaigns, cost-cutting efforts, and 

new ways of explaining the difference between ‘‘sticker price’’ and ‘‘net price,’’ colleges and universities would be much better off by simply taking this $2 billion and 

putting it in the hands of low- and moderate-income students. This decision could 

be made tomorrow, requires no action on the part of the Federal Government, and 

would have an immediate impact on the college participation of these students. 

The American Council on Education and the other higher education organizations 

in Washington should be lauded for their attempts to be proactive in supporting the 

recommendation of the Spellings commission to improve college access for lowincome students. But before the organizations and their member institutions ramp 

up their external public relations and lobbying efforts, they should look inward at 

their own practices. 

Reforming institutional policies so that all financial aid resources are focused on 

students who truly need them to be able to afford college—rather than being awarded to students who would attend college anyway—is an important first step.

ATTACHMENT C 

From: WHITEHURST, GROVER

Sent: WEDNESDAY, NOVEMBER 26, 2003 2:24 PM 

To: OBERG, JON

SUBJECT: RE: Two Items of Concern

JON: I will forward your letters to appropriate people. As soon as acting associate 

commissioner Wiatroski is in place and has his feet under him, I want you and he 

to address your EDPAS agreement, with specific attention to your job responsibilities. NCER does not have an intramural program of research on postsecondary education finance, so whatever you have been doing in that arena will need to be justified and approved under a concept clearance if it is to continue. In the 18 months 

you have remaining, I will expect your time and talents to be directed primarily to 

our business of conceptualizing, competing, and monitoring research grants.

43

The CHAIRMAN. Thank you. 

Dr. Baum. 

STATEMENT OF SANDY BAUM, PH.D., SENIOR POLICY ANALYST, THE COLLEGE BOARD AND PROFESSOR OF ECONOMICS, SKIDMORE COLLEGE, SARATOGA SPRINGS, NY 

Ms. BAUM. Thank you Chairman Kennedy and Ranking Member 

Enzi, for giving me the opportunity to be here and talk with you 

about issues of college access and affordability. 

The Federal student aid programs make a vital difference in the 

lives of many students and Congress is to be commended for the 

recent increase in the Pell grant maximum, which was long overdue. However, significant gaps remain in college access and affordability in this country and some of our policies could definitely be 

made more equitable and more efficient in order to improve the opportunities faced by students at the bottom end of the income distribution. 

The issue is obviously two-sided. Rising prices are a problem as 

is the shortage of funds to pay those prices. I’m only going to say 

a couple of words about the tuition side of the equation. Some of 

these have been mentioned already. First, rising prices are not a 

new phenomenon. Public college tuition has been rising more rapidly, particularly at 4-year colleges in recent years than it has historically but this is just not a new story. 

Second, we should definitely be focusing on the net price that 

students and parents actually pay, after taking grant aid and tax 

benefits into consideration. It’s the net price of college that determines affordability. The story about GW that we heard before is 


33516-1.eps
44

the story about sticker prices and unfortunately, it’s all very complicated and difficult to get students and families to understand. 

To understand why prices are rising, I address that issue in my 

written testimony. Federal student aid is not the explanation for 

why prices are rising. So what we can do in order to help students 

is primarily help them with student aid. We should not be trying 

to regulate prices. We should be urging colleges and universities to 

do better at containing the costs of providing quality higher education for students and encouraging States to maintain reliable 

funding for public institutions. 

The market does work, to a reasonable extent, in higher education. Students and families are already voting with their feet and 

moving to attend institutions with lower prices and lower net 

prices. But student aid is the best vehicle for the Federal Government to address college affordability. 

Again, there is a lot of detail in my written testimony but what 

I think is particularly important is that the principles be kept in 

mind when designing student aid policies. We have a hodge-podge 

of programs now and they are not all rooted in principles that are 

valid for designing the best student aid programs. We should have 

adequate funding but we also need simple programs. We need predictable programs. We need well-coordinated programs and we 

need programs that are well-targeted. Many of our dollars now are 

targeted at students who could easily afford to go to college without 

subsidy. These programs are nice for them but they’re not necessarily changing their behavior. We need to help students in the 

bottom half of the income distribution. 

We do need to simplify. We need to simplify the Federal application form. We need to make aid predictable. When families with 

children fill out their tax forms and they could get a notice of what 

kind of Pell grant aid they would be eligible for if they were to 

apply, under current circumstances. We should be able to have a 

table that tells you, given your family size and your income, what 

your Pell eligibility will be. 

We should also be helping families early on to expect that they 

will be able to pay for college. Aid should be predictable. We should 

have subsidized savings programs for students from low-income 

families when they’re young so that their expectations will be higher about whether the money will be there when they are ready for 

college. 

The Federal Government should also be using some of its limited 

dollars, more of its limited dollars, to provide incentives for other 

partners in the higher education financing process to direct their 

funds towards students with high need. Some of the proposals by 

Senator Reed and Senator Enzi, to expand the current LEAP program, provide incentives for States and institutions to provide 

need-based aid and mentoring programs are moves in a good direction on this front. 

The Federal methodology for determining who gets aid is flawed. 

Probably the biggest flaw in the current system is the work penalty, aside from the complication of the system. Right now, if students work excessively, in order to fund their own educations, we 

penalize them by taking away their eligibility for Federal aid. 

That’s a problem. 

45

1 National Center for Education Statistics, Digest of Education Statistics 2005, Table 181. 

Then the student debt question, which has already been addressed here but I want to make some more comments about it. 

First, I agree with many of the comments that have been made but 

I disagree with others. The typical student is not the problem. The 

typical amount of debt with which a student graduates with a 

Bachelor’s degree of about $20,000 is fine for the typical graduate. 

The payoff to a college education is very high. The problem is, that 

a growing minority of students do face very real difficulty and the 

fact that the median student doesn’t have a problem does not diminish the problems with those students. We need to target our 

improvements in the student loan system. We need to subsidize the 

students who have trouble repaying their debts. So the income contingent repayment plans by Senators Clinton and Kennedy are 

really good moves in this direction, as are the improvements in the 

hardship provisions that have been proposed by the Project on Student Debt and by Senator Kennedy. 

And the private loan issue is huge. No matter what we do to help 

students pay off their Federal loans, 20 percent of education debt 

now comes through private markets. We have to do something 

about that. We have to subsidize students more through a simpler 

process, both based on their financial circumstances before college 

and based on their financial circumstances while they are paying 

off their student debt. Thank you. 

[The prepared statement of Ms. Baum follows:]

PREPARED STATEMENT OF SANDY BAUM, PH.D. 

I would like to thank Senator Kennedy, Senator Enzi, and the members of the 

Health, Education, Labor, and Pensions Committee for giving me the opportunity 

to discuss the issues of college access and affordability and the Reauthorization of 

the Higher Education Act. The Federal Government’s efforts to increase college access and affordability are critical to the Nation’s future. Existing student aid policies 

have contributed to rising college participation levels and have eased the financial 

burden higher education imposes on students and families across the Nation. Recent 

moves to increase the maximum Pell Grant are particularly encouraging, indicating 

a renewed willingness on the part of lawmakers to address the persistent problems 

of access to higher education in our society. Improving the financing mechanisms 

for students can also make a very real difference in promoting educational opportunity. 

THE IMPORTANCE OF FEDERAL STUDENT AID

In 1974, fewer than half of U.S. high school graduates enrolled immediately in 

college. The increase in that proportion to two-thirds over the past 30 years 1 could 

not have occurred without the significant contribution of Federal student aid programs. Along with the efforts of both States and institutions in providing financial 

assistance to students, Pell Grants, Stafford Loans, and other Federal aid programs 

have opened the door to financial and personal success for millions of Americans. 

Yet unacceptable gaps in college enrollment rates, and even larger gaps in college 

completion rates, persist between students from privileged backgrounds and those 

from low- and moderate-income families with similar academic qualifications. These 

gaps are not only inequitable, leading to the perpetuation of inequality from generation to generation; they also represent significant inefficiency for the U.S. economy. 

As great as the private benefits to higher education are, the social benefits are even 

higher. Society benefits in both financial and non-financial ways from increased educational attainment among the population. College-educated adults are our most active civic participants. Higher levels of educational attainment also reduce dependence on public income support programs, generate higher tax revenues, and lead to 

46

2Sandy Baum and Kathleen Payea, Education Pays 2004. The College Board. 3The College Board, Trends in College Pricing 2006. 4The College Board, Trends in College Pricing 2006. 

increased productivity and higher wages for all, including those who do not themselves have college degrees.2

Financial barriers provide only a partial explanation for the gaps in educational 

attainment across socioeconomic groups. The problems we face are also rooted in 

academic preparation, aspirations, and expectations. Efforts to increase affordability, both through moderating price increases and through providing student aid, 

cannot solve all of the problems in this area. However, it is clear that finances play 

an important role and that many students from low- and moderate-income backgrounds lack the financial wherewithal to enroll and succeed in college. More equitable and efficient policies with more generous funding have the potential to significantly reduce the barriers to educational attainment facing too many Americans 

today. 

Congress now has the opportunity to make significant improvements to the current system of higher education finance. A number of bills sponsored by members 

of this committee embody ideas that, if implemented, would represent major improvements in college access and affordability. Prominent among these are Senator 

Kennedy’s Student Debt Relief Act, Senator Clinton’s Student Borrower Bill of 

Rights, and Senator Reed’s and Senator Enzi’s proposals for revitalizing and expanding LEAP to increase the effectiveness of Federal matching funds for needbased grant aid from States, institutions, and other entities. The HEA Reauthorization is a particularly important opportunity for improving the lives of our students 

and the future promise of the U.S. economy. 

Financial barriers to college access and success result both from the high and rising price of college and from the inadequacy of the student aid funds available to 

low- and moderate-income students. I will address these two issues in turn. 

THE PRICE OF COLLEGE

Rising College Tuition has a Long History 

Tuition increases make headlines. The focus is almost always on published tuition 

and fee levels and usually on the highest prices and the largest increases. While 

tuition and fees do consistently rise more rapidly than the Consumer Price Index, 

this information is hardly sufficient to evaluate the prices students face. The 51 percent increase in the inflation-adjusted average tuition and fees at public 4-year colleges and universities over the past decade was very high by historical standards, 

and this growth is clearly not sustainable in the long run. However, the much smaller rates of increase in tuition and fees at private 4-year colleges (where dollar increases are, of course, larger than in the public sector), and particularly at 2-year 

public colleges, were actually smaller than the increases of recent decades. In other 

words, rapidly rising college prices are not a new phenomenon.3

Variations in Tuition 

The average prices that are reported by the College Board each year, as well as 

by the Department of Education, hide considerable variation not only across sectors, 

but also across States and geographical regions, and even within these categories. 

Students have many options. Forty-two percent of full-time 4-year college students—

and 58 percent of those in the public sector—are enrolled in institutions that charge 

less than $6,000 a year. Twenty-five percent of full-time college students, and a significantly larger proportion of part-time students, are enrolled in 2-year public colleges, where average tuition and fees are about $2,300.4

Non-Tuition Expenses 

Although the sticker price exaggerates the amount the majority of students pay 

for college, the reality is that the cost to students participating in higher education 

is significantly higher than just tuition and fees. Room, board, and other costs of 

attendance contribute to the affordability problem. Even if a student has a Pell 

Grant that covers the full tuition and fee charges at a 2-year public college, she/

he must cover living expenses as well. Tuition expenses constitute less than 20 percent of the total out-of-pocket cost for students at community colleges who cannot 

live with their parents. Moreover, it is foregone wages that constitute the largest 

cost for many college students. Successful participation in higher education usually 

involves diminished labor force participation. Particularly for students with family 

responsibilities, the loss of income may be the real culprit in making higher education unaffordable. While student aid policies clearly cannot solve all of the ecoVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
47

5Lutz Berkner et al., Undergraduate Financial Aid Estimates for 2003–2004 by Type of Institution. National Center for Education Statistics. NCES 2005-163. 2005. 6The College Board, Trends in Student Aid 2006. 7The College Board, Trends in College Pricing, 2005. Based on data from the National Postsecondary Student Aid Study.

nomic problems students face, the adequacy of funding must be evaluated with 

these realities in mind. 

Net Price: What Students Actually Pay 

Over half of all college students, and two-thirds of full-time students, receive 

grant aid that reduces the net price of college.5 Many others receive tax credits and 

deductions that reduce the net price they pay. Net tuition after grant aid is what 

determines affordability, so our focus should not just be on published tuition and 

fees. Over the past decade, net price actually fell in real terms at 2-year public colleges. It grew more slowly than published tuition and fees at both public and private

4-year colleges. 

It is important to remember that the difference between net price and sticker 

price is the result of a combination of Federal and State subsidies to students and 

the discounts, or institutional grant aid, which colleges and universities provide to 

their students. Institutional grant aid grew about 80 percent in inflation-adjusted 

dollars over the decade from 1995–96 to 2005–6.6

The net price of college requires neither an unmanageable nor a rapidly growing 

portion of income for students from affluent families, even if they have not saved 

in advance. In 2003–4, full-time dependent students from families in the top quarter 

of the income distribution paid about 4 percent of their incomes for tuition and fees 

and 11 percent for the total cost of attendance at the average 4-year public college. 

A decade earlier, these percentages were 3 percent and 10 percent. The net tuition 

at 4-year private non-profit colleges and universities constituted 12 percent of income and the net total cost of attendance 19 percent for these high-income students 

in 2003–4. 

The situation for families in the lower half of the income distribution is quite different. For those students from the lowest quarter of the income distribution who 

did manage to enroll in college full-time, despite the low tuition and fees, the net 

total cost of attending a public 2-year college rose from 29 percent of income in 

1992–93 to 37 percent in 2003–4. In 2003–4, the net cost of attending a public 4-

year college required 47 percent of income for these low-income families, and at private colleges, the figure was 83 percent. 

Students from the second income quartile paid only 7 percent of their incomes for 

net tuition and fees at public 4-year colleges in 2003–4, but the total net cost of attendance required over a quarter of family income. These lower-middle income families used 41 percent of their incomes to attend private non-profit colleges. Students 

enrolled in the for-profit sector pay net prices very close to those in private nonprofit 

institutions.7

Net Price as a Percentage of Income for Enrolled Students 

Lowest 25% by income

(in %) 

2nd 25% by income

(in %) 

3rd 25% by income

(in %) 

Highest 25% by

income (in %) 

1992–93 2003–04 1992–93 2003–04 1992–93 2003–04 1992–93 2003–04

Public 2-year 

Tuition & Fees ................... 2 3 2 3 2 2 1 1

Total Cost of Attendance ... 29 37 15 19 13 13 6 7

Public 4-year 

Tuition & Fees ................... 7 8 5 7 5 6 3 4

Total Cost of Attendance ... 41 47 22 26 16 18 10 11 

Private 4-year 

Tuition & Fees ................... 24 35 17 20 14 16 11 12

Total Cost of Attendance ... 60 83 33 41 25 28 17 19

For-profit 

Tuition & Fees ................... 29 34 14 19 12 11 6 7

Total Cost of Attendance ... 70 78 29 36 24 24 13 15

Source: The College Board, Trends in College Pricing 2005. 

Students do not have adequate information about net price. Both the Federal Government and institutions must do a better job of providing them in advance with 

information about how much they will actually be expected to pay. 

48

8State Higher Education Executive Officers. Data cited in Trends in College Pricing 2006, The 

College Board. 9The College Board, Trends in College Pricing 2006. Data from the Common Fund Institute. 

Why Is Tuition Rising so Rapidly? 

STATE APPROPRIATIONS

It is no surprise that the 34 percent real increase in tuition and fees at public 

4-year colleges and universities between 1999 and 2004 was so much larger than 

the 14 percent increase at private 4-year colleges, since State appropriations per 

student fell by 14 percent in inflation-adjusted dollars over this 5-year period.8 Examination of changes in tuition and fees at public institutions over time reveals a 

consistent pattern, with rapid increase coinciding with tight State budgets and more 

stable college prices prevailing when appropriations are more generous. 

COST DRIVERS

Cycles in State funding do not, of course, explain private college tuition, nor do 

they provide a complete explanation for increases in public college tuition. While 

this answer never quite seems satisfactory, the explanation lies primarily with the 

labor-intensive nature of the process of educating students. While more innovations 

are certainly possible, it is much more difficult to increase productivity in education 

than in manufacturing industries propelled by technological innovation. Some prices 

will always rise more rapidly than the average price in the economy, while others 

rise more slowly. Education is likely to remain in the former category unless we settle for significant compromises in educational quality. 

Tuition increases in recent years have also been fueled by rising costs of health 

care, energy, and technology. Between 2000–1 and 2005–6, the Consumer Price 

Index rose 14 percent, while the prices of the goods and services purchased by colleges and universities, as measured by the Higher Education Price Index, rose 22 

percent. Colleges spent 72 percent more on utilities in 2005–6 than they had 5 years 

earlier and 31 percent more on fringe benefits for employees.9 Both student services 

and student aid consume increasing portions of campus budgets. 

Competition for students is also a factor. Institutions find themselves in a sort 

of arms race, investing in ever more elaborate facilities and services in order to attract students to their particular campuses. Marketing expenses may enhance the 

bottom line, but they do little to further the quality of education available to students. 

Federal Student Aid Is Not Responsible for Tuition Inflation 

Some participants in the debates over appropriate Federal policy for higher education have argued that more generous financial aid only serves to push prices higher as it increases the demand for college. While effective student aid policies do increase the number of students who are able and willing to pay for college, the clear 

consensus of empirical investigations into this issue is that publicly funded student 

aid does not significantly contribute to rising tuition levels. 

Perhaps the most obvious evidence in this regard is that neither Pell Grant levels 

nor Federal loan limits have been rising in the recent years of rapid tuition increases. One of the many factors fueling price increases may, in fact, be that colleges and universities supplement Federal and State aid with their own funds, so 

less generous publicly funded aid can increase pressure on institutional aid budgets. 

Concerns over the impact of third-party payment are exaggerated, since students 

and families pay the incremental costs when tuition rises. A few are eligible for 

more subsidized loans but in general, increases in tuition don’t increase eligibility 

for non-institutional aid. The students who actually pay the published tuition price 

are not Federal aid recipients and their willingness and ability to pay are not increased when Federal aid becomes more generous. In other words, few institutions 

have the incentive to increase tuition in response to Federal aid availability. 

What Can We do to Slow Tuition Increases? 

It is imperative that institutions find better ways to control costs without compromising quality. There are impressive efforts underway to develop strategies such as 

coordinating purchasing, using technology effectively, and reducing time to degree. 

But there is no doubt that resistance to innovation is a problem and that much 

more progress is needed. 

While there may be room for the Federal Government to encourage innovative 

cost-saving practices, no form of price controls or restriction on student aid is likely 

to solve the pricing problem. Students and families are already voting with their 

49

10Susan Dynarski and Judith Scott-Clayton. ‘‘The Cost of Complexity in Federal Student Aid: 

Lessons from Optimal Tax Theory and Behavioral Economics,’’ Kennedy School of Government, 

2006. 

feet, choosing less expensive institutions with increasing frequency. Public policy 

should focus on assuring quality public higher education to all who can benefit from 

it, not on the few most visible high-price private colleges. 

STUDENT AID

Student aid is the best vehicle Congress has to increase college access and affordability. The focus should be on assuring that student aid programs are designed to 

optimize equity and efficiency, to be well-coordinated, and to minimize the burden 

of education debt for the many students who will continue to rely on borrowing. 

Basic principles for policy design include simplicity, predictability and targeting, in 

addition to adequacy of funding. Moreover, aid policies should be designed not only 

to provide funds for the transition to college, but also to encourage preparation and 

promote persistence to degree completion. 

Simplification 

The need for simplification applies to both the application process and the array 

of programs and eligibility criteria, to the extent that they complicate the system 

from the student’s perspective. Students should be aware of the aid available and 

the approximate amount for which they will be eligible early enough to allow them 

to take the necessary steps to prepare themselves academically for college. They 

should be able to apply for Federal financial aid without filling out a form that is 

more complicated than income tax forms. Susan Dynarski and Judith Scott-Clayton 

of Harvard University’s Kennedy School of Government are among the researchers 

who have provided clear evidence that FAFSA could be considerably shortened without having a major impact on the distribution of Federal aid.10

Efforts to simplify the form and the process would likely be furthered by recognition that the Federal methodology creates an eligibility index; it is not a real need 

analysis or measure of financial capacity. In the longer run, it is surely possible to 

effectively use the existing income tax system to collect the information necessary 

to determine eligibility for Federal student aid. 

Predictability 

It should also be possible to use the income tax system to provide advance information about student aid. For example, when families with children file their income tax returns, they could receive a statement informing them about their potential Pell Grant eligibility. Moreover, if the formula were simplified, it would be possible to construct a look-up table that would provide an estimation of the Pell Grant 

amount for which students and families with different income levels would be eligible. 

Targeting 

Student aid from all sources—Federal and State Governments as well as colleges 

and universities themselves—is less targeted on those who rely on it to enroll and 

succeed in college than it was in the past. The Federal focus on tax benefits, particularly deductions, the trend towards basing eligibility for State aid on grades and 

test scores, and the use of institutional non-need-based aid to attract students, all 

deserve careful review. Financial aid may well serve purposes other than increasing 

access to educational opportunities, but those purposes should be clearly articulated 

and evaluated. The central goal of Federal student aid should be to increase educational attainment among students who are interested and able to benefit from 

higher education, but who do not have the resources to make this achievement a 

reality. 

Federal Incentives for States and Institutions 

The Federal Government’s role is broader than the distribution of Federal dollars. 

If the national agenda for student aid is based on increasing educational opportunities for those students for whom finances create insurmountable barriers and assuring the strength of the Nation’s future labor force, Congress should also focus on 

influencing how other partners in the higher education financing process spend 

their money. This does not require new bureaucracy, but can be achieved through 

incentives. There is precedent for this strategy in the Leveraging Education Assistance Partnerships (LEAP) program, under which the Federal Government matches 

State need-based grant dollars. Efforts to revitalize this approach have the potential 

to maximize the effectiveness of limited Federal dollars. 

50

The Federal Government could use a similar approach to influence institutional 

policies, without creating new rules and regulations. If Congress were to provide financial incentives for colleges and universities to enroll and graduate low- and moderate-income students, institutions would find ways to help students succeed that 

would be most suitable to the specific circumstances on their own campuses. It is 

vital that these subsidies focus not only on enrollment, but also on successful transfer or completion, so as not to exacerbate the program of getting students into college but not through college. While there is, on average, a positive economic return 

to some college, even in the absence of a degree or certificate, that return is much 

lower than the return to completed credentials. Many students who enroll and then 

abandon their studies prematurely are left with debt that dwarfs any earnings premium they might enjoy. Encouraging degree completion should be a primary focus 

in the design of student aid programs. 

Anti-Trust Regulations 

Another strategy likely to encourage institutions to focus their dollars on students 

with the most limited financial resources is to loosen the anti-trust restrictions now 

preventing colleges from communicating about financial aid. Destructive competition 

is pushing many of them to provide too generously for affluent students at the expense of those with higher levels of need. It is not the wealthiest or the most selective institutions that are engaged in the merit aid wars. The elite private institutions with the highest levels of tuition, as well as some prominent flagship publics, 

distribute very generous aid packages to low-income students and have largely 

avoided the strategic use of student aid for other purposes. But those colleges that 

have less secure finances, that sometimes struggle to fill their seats, and that tend 

to enroll fewer affluent students, are using many of their aid dollars to attract students with high test scores and/or deep pockets away from competitor institutions. 

In several States, the private college associations have expressed considerable 

concern about this problem and are seeking solutions. They find themselves unable 

to proceed because of the anti-trust restrictions preventing colleges from cooperating 

on efforts to direct more of their aid to low- and moderate-income students. Congress could act to relieve this situation and hold the institutions accountable for socially desirable results if they are granted the privilege of cooperation. 

Federal Aid Allocation Methodology 

Another measure, and a simpler one, that would promote institutions meeting the 

financial need of their students, would be abolishing the over-award restrictions 

that prevent colleges from allocating as much need-based aid for many students as 

their assessment determines is necessary. Currently, students lose their eligibility 

for subsidized Stafford loans and Federal campus-based aid if the institution meets 

need that is not revealed by the Federal Methodology. Specific components of the 

Federal formula have made this problem increasingly common. 

The other aspect of the Federal allocation system that is particularly damaging 

to educational opportunities is the work penalty embodied in the Federal methodology. Students who work many hours in order to supplement their family incomes 

and/or to make up for the inadequacy of their financial aid packages frequently lose 

future Pell eligibility as a result of their responsible behavior. The high assessment 

rate on student income discriminates against hard-working students, in favor of 

those who have access to other resources to supplement their aid awards. 

Using Aid to Encourage Preparation 

The debate about whether the gaps in college enrollment and completion across 

socioeconomic groups are best explained by inadequate academic preparation or by 

financial constraints is not very constructive, since there is overwhelming evidence 

that both are major problems. Moreover, they are not entirely distinct. Young people 

from low-income families whose parents are not college-educated and who live in 

neighborhoods where college experience is rare are likely to believe that higher education is simply not an option for them. They have little incentive to prepare themselves to take advantage of an opportunity that is so far out of reach. Financial aid 

programs that provide not only early information about financial aid, but also early 

commitment of funds, have the potential to encourage academic preparation, in addition to alleviating financial constraints. 

Promising policy approaches for financial aid to encourage preparation include: 

Matched Savings 

There is a growing movement across the country for individual development accounts, where savings of low- and moderate-income families are matched by public 

and/or private entities. These IDAs could serve as a model for the student aid system. 

51

11Sandy Baum, ‘‘Approaching the Dilemma from Both Sides: PROMISE Credits for Young 

Students,’’ in Course Corrections, The Lumina Foundation, 2005. 12 U.S. Census Bureau, http://www.census.gov/hhes/www/income/histinc/p26.html. 13 Ngina Chiteji, ‘‘To Have and To Hold: Young Adults and Credit Markets,’’ Sheldon Danziger 

and Cecilia Rouse (eds), The Price of Independence: The Economics of Early Adulthood (New 

York: Russell Sage Foundation Press), forthcoming. 14 U.S. Census Bureau, http://www.census.gov/hhes/www/income/histinc/p26.html. 15The College Board, Trends in Student Aid 2006. 

Savings Accounts for Low-Income Students 

The Federal Government encourages families to save for college, subsidizing them 

through tax-exempt savings plans. Young people whose parents do not have the resources to participate in these programs could receive Federal and State funding to 

serve the same purpose. Specific accounts for education, with earmarked deposits 

for young people from low-income families every year as they progress successfully 

through school would encourage academic success and help move our less-privileged 

youth into the so-called ownership society.11

Partnerships 

Partnerships involving the Federal Government, with incentives for participation 

by States, institutions, and private entities, can combine early commitment of funds 

and information about aid with the personal mentoring and support systems that 

have proven to promote access to higher education for low- and moderate-income 

students. 

STUDENT DEBT

Education Debt is Good Debt 

The typical student is not drowning in debt. The investment in college is an excellent one, both financially and in terms of other aspects of quality of life and opportunities. The median total debt level for students earning 4-year degrees was $19,300 

in 2003–4 and will probably reach about $22,000 this year.12 Certainly college graduates would be happier not to face this debt, but with average earnings of about 

$50,000 a year for full-time workers who are repaying these loans—over $20,000 a 

year more than the earnings of high school graduates in the same age range—this 

burden is not excessive. 

A colleague of mine at Skidmore College, Ngina Chiteji, has analyzed data on 

young adult debt from the Federal Reserve Bank’s Survey of Consumer Finances. 

She concludes that young adults do not appear to have an unusual or distinctly 

troublesome relationship to credit markets. Increases in housing debt best explain 

the increase in the average amount of debt over time for this age group.13

Many Students Do Need Debt Repayment Relief 

The fact that the typical college graduate can reasonably pay off the typical education debt without undue burden does not diminish the need for Federal policies 

to alleviate the problems of student debt. It does mean that these efforts should be 

appropriately targeted. 

Despite the high average earnings premium for college graduates, there is considerable variation in earnings among those repaying their student debts. Many never 

earn degrees. Others enter occupations where they make significant social contributions but sacrifice personal financial gains. The median income for college graduates 

between the ages of 25 and 34 working full-time is about $50,000. But 25 percent 

of this group earns less than $30,000 and another 25 percent earns more than 

$75,000.14 Clearly taking these earnings differentials into consideration is important 

in determining who requires additional subsidies from the taxpayers. 

Although the average 4-year public college graduate who borrows (about twothirds do borrow for college), borrows only about $16,000, 15 percent of these students have accumulated over $30,000 in debt.15 Clearly, focusing on the plight of 

these heavily indebted students is more constructive than searching for blanket

solutions, as though any education debt were problematic. Efficient and equitable 

policies for alleviating the student debt burden must be targeted at those who are 

in particularly difficult situations. 

Income-Contingent Repayment 

The solution to the student debt problem requires taking financial circumstances 

during loan repayment, not just financial circumstances before college, into consideration when allocating subsidies. The income-contingent loan repayment plans proposed in legislation offered by Senator Kennedy and by Senator Clinton exemplify 

the approach we should take to this issue. In my research with my colleague Saul 

52

16Sandy Baum and Saul Schwartz, How Much Debt is Too Much? Defining Benchmarks for 

Manageable Student Debt. The College Board and The Project on Student Debt. 2006. 17Project on Student Debt, ‘‘White Paper: Addressing Student Loan Repayment Burdens,’’ 

2006. http://projectonstudentdebt.org/files/pub/WHITElPAPERlFINALlPDF.pdf. 18 Elizabeth Warren, Sandy Baum, and Ganesh Sitaraman, ‘‘A Ticket to the Middle Class: 

Working Off College Debt,’’ Communities and Banking, Federal Reserve Bank of Boston, Winter 

2007. 

Schwartz of Carleton University, I have developed principles for a sound loan repayment plan. The policy would eliminate payment obligations for borrowers with incomes below approximately 150 percent of the poverty level, assure that payments 

do not exceed more than about 10 percent of income for the typical borrower, and 

require higher percentages of income from borrowers with higher incomes than from 

those with lower incomes.16

Congress should pass legislation embodying the principles incorporated in Senator 

Kennedy’s Student Debt Relief Act and Senator Clinton’s Student Borrower Bill of 

Rights, both of which propose comprehensive income-contingent repayment plans 

that would solve the problems of most former students. 

Economic Hardship Provisions 

As long as we do not have comprehensive reform in this direction, the Fair Payment Assurance provisions in Senator Kennedy’s Student Debt Relief Act would go 

far to mitigating the difficulties facing former students with excessive debt. Many 

of the most serious problems former students face are generated by compounding 

interest that causes the payment obligations of borrowers under financial duress to 

increase dramatically. The current system could be greatly strengthened by eliminating the all-or-nothing interest subsidy inherent in the current hardship provisions and removing some of the other work disincentives that have been highlighted 

by the Project on Student Debt in their analysis of current provisions for economic 

hardship.17

Loan Forgiveness for Public Service 

Another approach to mitigating the problems some former students face because 

of their student debt involves a more comprehensive program of loan forgiveness for 

public service than we now have in place. I have recently developed a proposal together with Elizabeth Warren and Ganesh Sitaraman of Harvard Law School that 

we have called Service Pays. This program would forgive a year of debt for each 

year of public service performed by former students, in addition to assuring a living 

wage.18

Stafford Loan Limits 

Finally, any policies designed to address the student debt problem must take into 

consideration the increasing reliance on private loans, which now constitute about 

20 percent of education borrowing. Federal debt relief policies will not affect these 

loans, some of which carry stunningly high interest rates. Increasing Stafford loan 

limits is likely the only way to stem the growth of this rapidly growing market that 

has the potential to jeopardize the future financial security of college students. 

CONCLUSION

• Federal student aid policies have made and continue to make a significant contribution to increasing educational opportunities for American students. • Financial barriers contribute to persistent and unacceptable gaps in college enrollment and success for students from the lower half of the income distribution. • These financial barriers result from a combination of rapidly rising tuition and 

fee levels, the additional costs involved in attending college, and the inadequacy of 

student aid policies. • It is the net price of college, after taking grant aid and tax benefits into consideration that determines how affordable college is for students and families. Focusing 

only on sticker prices is misleading and can lead to misguided public policy. • Congress can best contribute to restraining growth in college prices by providing incentives for innovative cost-savings strategies on campus, assuring that 

students have adequate information, and maintaining well-funded and transparent 

student aid policies. • Federal student aid processes and programs should be simple and predictable. • To increase access to higher education, Congress should continue to increase 

Pell Grants and should simplify the application process. • Congress should target its student aid on those students who need it most, focusing both on financial circumstances before college and on financial circumstances 

during the period of student loan repayment. 

53

• The Federal Government should strengthen financial incentives for States and 

institutions to provide more generous need-based aid to college students. 

• Congress should implement programs to encourage preparation for college, including education savings accounts for students from low-income families. 

• Through policies such as income-contingent repayment and expanded loan forgiveness for public service, student loan relief should be targeted at the sizeable minority of borrowers whose debt is out-of-proportion to their incomes. 

• Other promising approaches to improving the student aid system include raising Stafford loan limits, reducing the work-penalty in the Federal Methodology, loosening anti-trust restrictions on cooperating to increase need-based aid, eliminating 

over-award restrictions, and rationalizing student loan repayment hardship provisions.

The CHAIRMAN. Very good. Thank you, very helpful. Let me ask 

you, Dr. Baum, what more should we be doing with regards to just 

tuition generally? I mean, what we’re looking at here are student 

loans but we also hear the concern about the escalation of tuition. 

What are your suggestions? I mean, where should we be? Others 

on the panel might have some ideas as well. I mean, what is the 

Federal role? What is the State role? How do we get cooperation? 

How do we also not interfere with colleges that are trying to do innovative kinds of programs and offer greater variety and be on the 

cutting edge? How do we deal with these issues here? You might 

get into some ideas about working with the States. What should we 

be doing? I mean, exemption of antitrust provisions to permit the 

community colleges to purchase things together? Give us some of 

the suggestions and maybe the rest of the panel can talk to this 

as well, please. 

Ms. BAUM. I think that’s a very important and complicated question but the fact is, that one, if the Federal Government can do 

anything to stabilize and make State appropriations more reliable, 

that’s very important. It’s important to distinguish between cost 

and price. We do need to provide positive incentives for institutions 

to come up with innovative ways to control costs. Institutions are 

best positioned to figure out for their campuses, what the right way 

to do it is but we can provide incentives. And we need to make sure 

that when they control their costs, that that’s reflected in price reductions. That’s the problem, is that cost and price are two very 

different factors. 

You mentioned the antitrust provisions. I talked about that in 

my written testimony. It is true that colleges are afraid to cooperate on many fronts. They’re afraid to cooperate in talking about 

agreements for providing services and purchasing. They’re afraid to 

talk about cooperating to provide need-based aid. That would be a 

very important part of the enrollment management problem and 

the buying of students with non-need-based aid comes from the fact 

that students are competing with each other and they can’t agree 

not to compete because of the antitrust regulations. 

But we should not be punishing students——

The CHAIRMAN. Isn’t there a different provision? They can talk 

without it violating antitrust if it’s about athletes or they can’t with 

regards to students? 

Ms. BAUM. Yeah, well, we have a lot of exemptions for athletes. 

The CHAIRMAN. Okay. 

Ms. BAUM. So that way, the highest priority——

The CHAIRMAN. This was not the central thrust of where I was 

going to go but I’ll come back. Now, Dr. Oberg, do you want to comVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6601 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
54

ment or the rest of our panel, just on that? Or on my suggestions, 

please? 

Mr. Oberg. Yes. Yes, Mr. Chairman. One of my specific recommendations——

The CHAIRMAN. Let me just describe the issue—people will say, 

well, this is fine. Again, we’re going to look back into the student 

loan programs and how they can be shaped and reorganized but 

there will be the suggestion by some, well, even if we are able to 

do something more for students, we’re going to see the colleges will 

all jack up the price and this thing will be lost for these families. 

I mean, that will be out there. There is some interesting information showing that the schools where they have the greatest kind of 

dependency, have not raised tuition. Others have. I mean, that 

kind of responds to that issue. But I’m interested in the broader 

kind of question—that most parents will say, well, this is good, you 

keep working on it, but also we’re seeing tuition continue to go up. 

I’d be interested in what you think we ought to be thinking about 

on this. 

Mr. OBERG. Mr. Chairman, I have one recommendation in my 

written testimony that deals with a previous effort that was led by 

this committee, Senator Dodd in particular, the COOL system, the 

College Opportunities Online. It is intended to be a help to students and families to figure out exactly what prices are and what 

aid might be at various colleges. One thing it doesn’t do very well 

and it needs to change, is to be able to differentiate between sticker 

price and net price. Net price is what is paid. You can’t tell from 

the COOL online system what net price might be and one of the 

things that this committee could do would be to instruct the Department of Education to make that system available to parents 

and families online. 

The CHAIRMAN. Dr. Draut. 

Ms. DRAUT. I would just underscore that any way that the Federal Government can incentivize States to stabilize and improve 

their funding of higher education should be looked at, whether 

that’s providing rewards for those States who do not raise tuition 

faster than inflation. There is perhaps, maybe a range of ways that 

could be accomplished but in my mind, the rise in tuition is most 

directly attributed to the decline in State funding of higher education, which is now at a 25-year-per-pupil low. 

The CHAIRMAN. Ms. Orman. 

Ms. ORMAN. Mr. Chairman, I’m always going to address this on 

the personal finance level for the actual people that are involved 

because that is my expertise here, which is this. While States can 

do things, while schools can do things, if the actual consumer, the 

one that uses that product, does not understand how it works, has 

no idea how to repay back a loan, what is available to them, so I 

think a lot of money has to go somewhere to educate the actual end 

use consumer of the things that are out there because they, today, 

do not have a clue. So we can not just ask States and the government and everybody to offer something when the people using it—

they have got to be educated as to why they should use it because 

they don’t have a clue today, in my opinion. 

The CHAIRMAN. Senator Isakson. 

55

OPENING STATEMENT OF SENATOR ISAKSON

Senator ISAKSON. Thank you, Senator Kennedy, for holding the 

hearing. My three children subscribe to the Suze Orman recommendations of paying for my six grandchildrens’ education. 

Every Christmas, I write six checks to their college fund rather 

than give them gifts so you’ve done a great job and I try to do the 

same thing. I want to go back to the statement you just made because I was getting ready to read directly from your written testimony, but I encourage you to also address the need for more and 

better education on how to handle student loans in the repayment 

period. It’s a failure on our part when we just hand out money to 

young adults, credit cards or student loans, without truly making 

them understand the mechanics of how these agreements work. 

I cannot tell you how much I ratify that statement and Senator, 

one of our responsibilities as we look into the entire student loan 

issue is to figure ways where we can see to it that those students 

are better educated when they take—when credit is extended to 

them. I was in a business that depended on credit. I sold houses 

for 33 years and mortgages are the name of the game and we went 

through the Truth in Lending laws and Reg C and full disclosure 

to try and help people understand the component parts of finance. 

We have that same obligation, I think, on student loans and particularly with young people who, (a) think they are invincible, (b) 

think they’ll live forever and have never, in many cases, yet had 

to deal with the responsibilities of credit and this is sometimes 

their very first experience. 

Can you give us any suggestions what we might do to help in 

that education process? 

Ms. ORMAN. Well, obviously financial education on the personal 

level needs to start the day a child enters grammar school, kindergarten up. Why we do not teach it in the majority of our schools, 

in fact, none of our schools is absolutely beyond me. Home economics should not just be about how you bake. It really needs to be 

about how do you balance a checkbook, how do you pay for things, 

where does the money come from, where does it go. It is totally a 

non-existent topic that is spoken about within a family unit. 

So the problem is today, many of the students are getting money. 

They are using that money for things other than their financial 

education. They do call into my show and they say, Suze, we don’t 

need it right now. I have 4 years. What if I start to put it in the 

stock market? What if I do this? And I’m sitting there, how did you 

get money to begin with? So there are obviously gaps in who gets 

money, who doesn’t get money, what’s it used for. I would like to 

see it go directly to the school and not into the hands of the child, 

believe or not, because you cannot ask a child or a person to hold 

money and do something responsibly with it when they’ve never 

been taught responsibility to begin with. You would not place a 

child in the seat of a car and ask them to drive without actually 

having taught them how to do so because that is a legal weapon 

otherwise. The same is true with money. So we have got to start 

teaching it, but who is going to teach these children? Our teachers, 

that are all at poverty level to begin with? The parents don’t know. 

Grandparents don’t know so we have, in my opinion, for middle 

56

America—not the extreme ends but even middle America, a system 

that has failed them on every single level. They are seduced on the 

college campuses by credit card companies. They graduate college 

now with not only student loan debt but credit card debt. They 

don’t understand a FICO score. Because they’ve paid their bills 

late, all across the way, they don’t have a good FICO score so now 

they’re not getting jobs, they’re not getting apartments rented to 

them—they’re moving back in with their parents and again, the 

whole system is failing. So I think it should be mandatory that before a child is allowed to graduate college—actually, let me put 

that different. Before a child is allowed to graduate high school, 

that they need to not only take the SATs, they should take the 

FATs—some financial exam that they have got to pass before they 

enter into the world of what could be their destruction rather than 

their creation because they don’t understand money. 

Senator ISAKSON. Mr. Chairman, we didn’t practice this. I’ve 

never had the privilege of meeting Ms. Orman until just now but 

she has just hit on the main thing we can do. I know nobody is 

for a national curriculum but when I chaired the State Board of 

Education in Georgia, we tried to embed in the curriculum in 

mathematics and home economics and all those things, examples, 

financial examples of every financial technique—the miracle of 

compound interest, the problems with add-on fees and things like 

that. If these kids do understand these things coming out, I think 

that’s a responsibility of education to do so. 

One last thing because my time is almost out. The second 

thing—I know this is about student loans but I just want to make 

one statement. What is charged by the institutions is part of the 

problem. We make an increase in the grants and then they raise 

tuition—we experienced that in Georgia. We passed the Hope 

Scholarship. Every student graduating from high school in Georgia 

with a B average has a full scholarship to any State university. 

The University of Georgia—every freshman is on full scholarship 

but the problem we had is once we passed that, when we paid for 

tuition, books and fees and all of a sudden, books and fees started 

going up, particularly fees. And we can’t fix that problem and 

shouldn’t fix it—I’m not a price fixer. I don’t want government 

meddling but the colleges and universities are still trying to, I 

think, do 20th century education in the 21st century. We’ve got too 

much money going into bricks and mortar and not enough into 

technology delivering content to our students, which is far more effective and my time is out but that is a huge—distance learning, 

use of technology. The non-traditional student of my day was the 

student that had to work to go to school. That today is the traditional student and both in time and in curriculum and in accessibility, I don’t think the colleges and universities, as a whole, are 

doing everything they can do to meet the demands of that student 

and also deliver it in a more affordable fashion. 

And I apologize for making a speech rather than asking questions. 

The CHAIRMAN. Dr. Oberg. 

Mr. OBERG. Senator, I’d like to say, I certainly agree with your 

exchange here but to add another aspect of it, too and that is, how 

very complicated our system is. When I was at the Department of 

57

Education, I was frequently on the receiving ends of calls, from 

CPAs, who would say, I’m trying to fill out the FAFSA or I’m trying to fill out the profile—how does this system work? And I would 

get into trying to explain and saying, well, under the Federal methodology, here’s the result and if you put the institutional methodology on top of that, then here is the result. And if you read the 

fine print on the various tax-favored instruments, you get a certain 

effect on your financial aid and if you read it the other way, you 

get another effect and it may be up to the institution. 

My point is, is that our process system is so complicated, I don’t 

know any amount of financial education can adequately prepare a 

student and a family, even with the best intentions, if CPAs themselves are having difficulty in understanding the consequences. 

The CHAIRMAN. Just a—and I’d hope that the Senator would 

chime in at any time now, just on this point. We here in the Congress have made it more complicated, by and large, more difficult, 

as Senator Isakson has pointed out, for the student to understand 

it and the financial experts to understand it. And what we have 

seen in recent times is a the change of policy here in the Congress, 

where we targeted money to where the need was but that changed 

and the public debate said, look, you can get a two-for-one. You can 

do something for students and get also a tax cut. And that has 

more zip to it in terms of the politics of the time rather than a 

spending program that is going to be targeted to needy students. 

I mean, that happens, I believe, strongly, to have been the atmosphere and the politics of the more recent times. I think this has 

been true in my party as well as others and I think that has added 

to these complications, which is an unfortunate take, rather than 

getting the focus somewhere it’s needed. 

But I was going to come to this question about the complication—I mean, we are going to try—I believe and we haven’t gotten 

into it. Maybe, Dr. Oberg, you’ve been restrained when you talk 

about the 9.5 percent and you weren’t going to get in and describe 

this. I’m interested in how we simplify this. What suggestions 

across the board do you have in terms of simplifying this system 

so that people do understand it? And the public understands where 

their money is going in terms of spending on education. Students 

understand this. We’re going to wrap into the system, a good old 

concept, which people generally appreciate in this country and 

that’s competition. I know we’ve got your points, Dr. Oberg and 

your footnotes, which we will look carefully through. But all of you 

have given this some thought—are we asking too much in trying 

to do that? 

Ms. BAUM. Could I? I want to address the simplification question. 

First I’d like to comment on Senator Isakson’s comments about the 

relationship between grant aid and price and what happened with 

Georgia Hope and I just want to clarify the difference between 

Georgia Hope and Pell is so extreme. Georgia Hope pays all of the 

cost for all of the students at this State university and so the State 

can decide to raise the price and for Pell grants, a small percentage 

of students at most institutions are receiving Pell grants. They 

cover far below the whole cost. A whole different picture, so raising 

Pell grants will be much more effective than the Georgia Hope in 

that regard. 

58

But on this simplification issue, I think we should abandon the 

notion that the Federal methodology is a need analysis system. We 

have a whole complicated system for trying to figure out exactly 

how much a family can afford to pay. We don’t figure it out very 

well and then they have to pay a lot more than that, anyway. We 

should just say, here’s an eligibility index. If your income is this 

level, this is how much Federal aid you are going to be eligible to 

get and then families would know, students would know. We 

wouldn’t need a complicated form to get the information and everyone would understand the system much better. 

Mr. OBERG. I would certainly concur with my colleagues on the 

panel about this. In my written testimony, I also talk about the 

same thing and that is, if we can somehow spin off this information 

from our tax system, our income tax system and spin it off early 

and make it clear to people how much they are going to be eligible 

for, that would be an excellent change. 

There is a bit of an irony here in that the Federal system and 

all the questions that are asked on the FAFSA are thought to have 

something to do with how much aid a student gets. But it so complicated now that there isn’t much relationship between much of 

what a person puts on the FAFSA and what the package actually 

is and I think a lot of this could be done away with and we could 

go to a much simpler system. 

The CHAIRMAN. I might just put up this chart. This is a GAO—

Government Accountability Office chart—and it is the flow of funds 

for the Federal Family Education Loan program. As I understand, 

Dr. Oberg, you can look at that chart and you’ll understand very 

clearly and I’m sure you can explain it to us all but we’ll do that 

at another time. This is the complexity we’ve had, but there are alternatives. We have a program, the Direct Loan program, which is 

a good deal simpler. I think it’s more cost effective, myself. Could 

you talk, the panelists, talk a little about what we ought to expect 

in terms of the competitive world out there, to advantage the students? No question—I was here when this legislation was first 

passed and the banks all testified at that table. In this same room. 

The banks were all out there and they said, we can’t do it. We can’t 

afford it. We haven’t got the ability to do it and they had to sweeten it and sweeten it and sweeten it and sweeten it and it’s gone 

on now and they are all benefitting. If you can start a bank with 

a credit card business and the student loans, you can head to Florida tomorrow because you’re going to make so much money on 

these businesses. And we have turned to new Bankruptcy Act to 

be the enforcer on those credit card companies, many of which are 

hurting these students. 

But let me ask you, what is the role of competition? What should 

we expect? And then Ms. Draut—I wish the others would comment 

on this. Ms. Draut, would you like to say a word about that? 

Ms. DRAUT. Well, sure. The playing field isn’t level between the 

Direct Loan program and the FFELP program. We know that. The 

idea was that the two would compete with each other and that the 

market—let the market work its magic. We now know that between preferred lender arrangements, that the FFELP program 

has a major upper hand over the Direct Loan program and the percentage of participating schools in the Direct Loan program has 

59

been on the decline since it was first started. So my preference is 

to save money and convert to the Direct Loan program, which I realize politically, is a very challenging and difficult thing to do. That 

being said, a couple of weeks ago, I was testifying in front of the 

Senate Banking Committee about credit cards and the role of our 

government—I keep coming back to this—is to set the fair rules of 

engagement and right now, the rules are so grossly slanted away 

from students and from consumers and toward the banks and the 

student lenders that we have a long way to go before we would sort 

of be over-intervening in the market. 

The CHAIRMAN. How do you react to the statement, well that will 

be a government-run program and doesn’t the government run very 

good programs? Why should we rely on it? Why would that be more 

efficient? 

Ms. DRAUT. Well, I think if you ask anybody who gets their Social Security check, how they feel about that question, I think 

they’ll tell you that the government, when it puts its mind to it, 

can run a very efficient, great program and specific to the student 

financial aid system, I would say, back in 1965, after the Higher 

Education Act was passed and we actually put money behind the 

rhetoric of helping low-income people afford college, that the percentage of low-income students who went to college doubled in just 

7 years. So yes, the government can do tremendous things. And 

we’ve gotten away from the power of the government to create the 

kind of opportunity where people can achieve their aspirations. 

The CHAIRMAN. Ms. Orman. 

Ms. ORMAN. Well, I’m not one for competition, believe it or not, 

in this area because I think competition implies that there are 

choices. When there are choices, there is confusion. When you have 

a child or parents that do not understand anything anyway about 

money, to ask them to choose this over this over that because that 

over this over that gives you this over that—all of a sudden, they 

don’t know what to do and they do nothing. Or if they do make a 

choice, it’s—they do eeny meeny miny mo. I would like to see one 

place—I would like to see, just as it was said, I would like to see 

the government involved with it. I would like to see that you take 

out the banking industry, so to speak, and somebody has got to 

look over them because in my opinion, they are all scoundrels, I’m 

sorry to say and they will do things that benefit their bottom lines 

at our own sacrifice. So I do think we need to step in here and say, 

this is how you do it. This is how it works. Not too many choices, 

again just for income eligibility, I think it is a little bit difficult because there are all different things that go into somebody’s income, 

depending on where they live and what their expenses are so in the 

same way this panel has said, look at the net cost of a school, one 

should look at the net of somebody’s income and where it has to 

go, in a different way. I just think to go across the board for income 

eligibility is really damaging in certain parts of this country where 

it is very expensive to live. So I would like the choices and the competition, believe it or not, to be taken out of it because we always 

lose when others are competing over our business. 

The CHAIRMAN. Thank you. 

Dr. Oberg. 

60

Mr. OBERG. Yes, Mr. Chairman, on the subject of competition, 

there are some ironies here. The Direct Loan program is actually 

contracted out on a competitive bid basis for loan origination to private industry. So there is a great deal of competition in that sense, 

in that there is bidding for it. It uses Treasury capital. Of course, 

that is a bidding process, too, in how the Treasury raises money. 

The FFEL program, on the other hand, the subsidy is not set by 

competition. It is set by legislation and unless you view the legislative process as competition as to how that is set, there is not competition in the same way. That is why there is some interest in 

bringing in auctions under different arrangements and there have 

been great studies done by GAO and others about the possibilities 

of bringing more competition into the system. The question is, of 

course, would savings through this competition exceed the amount 

of the reduction in the subsidy that has been proposed by the 

President? Fifty basis points on the subsidy is a substantial 

amount, which he would direct to Pell grants and I think that 

probably, competition through auctions would result in a reduction 

of greater than that amount but that is very difficult to say. 

The CHAIRMAN. Senator Isakson, do you——

Senator ISAKSON. Please, if I could. Five minutes? On the competition on the Direct Loan, that’s on the origination fee, right? 

Mr. OBERG. That’s on the origination of the loan itself. The Department of Education does not, in its bureaucracy, do all this. It 

contracts that out to originators who make those loans. 

Senator ISAKSON. But the capital is appropriated money or in effect, debt of the United States. 

Mr. OBERG. Yes. 

Senator ISAKSON. And in the competitive program in the private 

sector, where does the money come from? 

Mr. OBERG. It comes from private capital, from bank capital. 

Senator ISAKSON. Ms. Draut—is it doctor? 

Ms. DRAUT. No. 

Senator ISAKSON. I always ask that. 

Ms. DRAUT. Thank you. 

Senator ISAKSON. What rules are slanted toward lenders? You 

said the rules were slanted toward lenders. What rules are slanted 

toward lenders? 

Ms. DRAUT. Let me specifically answer that by talking about 

credit cards, which by the way, have become used by a quarter of 

students to pay for tuition. 

Senator ISAKSON. Okay but also, I want you to talk about rules 

as they relate to student loans. 

Ms. DRAUT. The credit card companies have the right to do something no other industry in this country has the right to do and that 

is, change the terms at any time for any reason and raise the price 

of the loan, going retroactively, applying it to your existing balance. 

So that truism right there, that reality by and of itself and there’s 

all sorts of other tricks and traps that happen, makes it a market 

enormously slanted towards the lenders rather than the borrowers. 

In the student loan industry, I think that it’s a little different in 

that the lenders are practically guaranteed a rate of return. So 

there is not much that they really need to do to be good providers 

towards the students. What is their incentive to create a product 

61

that is really the most convenient and easy to understand towards 

the student? There is no incentive there because they’re going to 

get their rate of return, regardless of what they do. The other thing 

I would say is the reality that you can’t discharge student loan 

debts, even under extreme illustration of financial devastation 

through bankruptcy laws and that is another way that the system 

is tilted toward the lender interests rather than the student interests. 

Senator ISAKSON. Thank you. That point, the latter on student 

loans, is what I was looking for. On the chart that Senator Kennedy put up and you folks are all a lot smarter than I am, but isn’t 

it a fair statement to say, if you put FHA and VA loans up there 

instead of student loans, that you’d have the same type of flow 

chart? And the reason I ask the question—that was my business 

and the government got in the business of FHA and VA financing 

to help people get into homes. It insures those loans. The secondary 

markets provide funds as private capital goes in but it’s just as 

confusing in terms of the flow. But it’s a tremendously advantageous program. 

Suze. 

Ms. ORMAN. I can’t comment. I don’t know. 

Senator ISAKSON. Okay. Well, my point is, Senator Kennedy, 

charts confuse me and especially around here. We get all kinds of 

confusing charts but any time you get the government incentivizing 

the private sector to put its capital into a worthy proposition, 

which certainly students going to college and people owning homes 

are, you’re going to almost always get—you’re going to get that confusing a chart unless the government is just borrowing the money 

and providing it to the people. So the private sector provides a tremendous need and we have Fannie Mae, Freddy Mac on the conventional loan today, government organizations that were started 

when the savings and loans failed, to create a capital market to be 

able to provide funds for housing. The same thing is true on the 

student loans as well. I’m not saying this in defense of lenders or 

in defense of anything except to say when you look at a confusing 

chart and say, wouldn’t it be so much simpler if—you have to remember, can you get to the same place you are today in terms of 

the amount of available capital with just that? 

Dr. Baum. 

Ms. BAUM. Can I comment on this? Yes. I think that this complexity issue relates both to the loan system and to the student aid 

system in general, and the complexity is what is a problem for students. The way the system is structured behind the scenes matters 

but it matters less than how students are affected so that for example, the issue of how can students navigate the student loan system, it’s really true that you put 27 options in front of a student, 

they can’t make a decision. There’s a warning about the current 

trend towards direct to consumer marketing of student loans. You 

get an e-mail message and it says, take out a loan and students 

are doing that and I think if there is anything we can do to regulate that, we should. But the dichotomy, the idea that what we 

have is direct lending, which is the government and FFELP programs, which are free market, is just wrong because obviously 

that’s not the free market. We can make that more of a free market 

62

without generating increased complexity for students, which is the 

critical issue. 

Mr. OBERG. Senator, comparing the FFEL system with the VA 

or FHA and so on, I think there are differences in all——

The CHAIRMAN. Bring the mic up a little closer, please. 

Mr. OBERG. There are differences in all the systems. One thing 

that is probably different is in the FFEL system, there is ultimately less risk to the lenders. It is—there is a guaranteed subsidy 

and there is very little risk because lenders—when students go into 

default, are guaranteed 97 percent insurance and in some cases, 99 

percent and in the President’s budget, he has reduced—he has proposed to reduce that insurance from 97 to 95. I think it could go 

lower than that myself but that would be one difference and I 

think that is a recognition that the FFEL system may ought to be 

brought in to line with the other comparable systems in terms of 

subsidies and risks. 

The CHAIRMAN. You know, isn’t one of the differences the subsidy? I mean, we have major subsidies in the loan program, which 

don’t exist in the other programs and we do have a simpler system 

than the complicated one that we’ve just outlined here. Maybe we 

ought to look at the FHA and the VA. But we’ve got subsidies in 

this program, which people are paying for. I might ask, Dr. Oberg, 

we’ve just seen—I guess it’s Missouri and Illinois, the State organizations, go and they have sold—they’ve grouped together all their 

student loans and then sold those for a 4 to 7 percent profit. Sallie 

Mae has picked those up. They think they can make a profit, after 

paying the 4 or 7 percent additional on these loans. Does that say 

there is some water in this boat or not? I mean, if we find out—

and you’re familiar with this because there was a question then 

about who ought to recover that, you know. I know that you think 

the States ought to recover it and some of us feel that if we are 

putting it up, the feds should—but that’s a different issue. But if 

they are able, these States, which more of them and more of them 

are doing now, to put it together and then go out and sell the loans 

like that, if that doesn’t send a message, we’ve got too much subsidy in this program, I don’t know what does. 

Mr. OBERG. Mr. Chairman, yes. I think you’ve touched on a very 

important point and this is, we need to think of the future here 

about loan asset sales on a secondary market. Indeed, Sallie Mae 

and Nelnet did buy Illinois at quite a premium, which shows that 

those are very good subsidies and those are very—that guarantee 

is worth a lot. The proceeds of the loan asset sales by these secondary markets raises some interesting questions. I think that the 

Illinois example is one that is preferable to the Missouri example. 

Illinois is using its loan asset sales in order to improve student aid 

through its agency, through its student aid agency. The Missouri 

MOHELA loan sales are going to be used for purposes, I think, 

which are really outside the mission of the Higher Education Act 

and this is one thing that you might consider legislating on as you 

revise it. The Missouri loan assets are going to be used for capital 

construction at various campuses in the University of Missouri system, which raises the question of whether or not that is not a State 

obligation rather than the use of HEA funds. It also raises questions of inducements because institutions are being induced to parVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6601 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
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ticipate in the MOHELA system and there are also strings attached to the Missouri loan sales that for example, the loan assets 

that would be used to build the buildings at the University of Missouri at Columbia could not be used for stem cell research and that 

is stretching the use of Federal loan assets into policies that I’m 

not sure that—my preference would be that the Congress would 

legislate on the appropriate uses of loan asset sales at the State 

secondary markets. 

The CHAIRMAN. Let me ask you. If they are doing that and 

they’re making a profit, why don’t we do that at the Federal level 

and sell off then loans, and make a profit, and return that to students? 

Mr. OBERG. Senator, that’s the essence really, of the loan auction 

proposals that are floating around out there. There are many different kinds. One of them is to originate and then sell loan assets 

into the student loan industry at the Federal level, just as the 

States secondary market. 

The. CHAIRMAN. What are you talking about in terms of resources? What could we be making on that? 

Mr. OBERG. Well, the student loan originations are very large. 

We’d be talking in the billions of dollars, depending on how much 

we wanted to sell. There are some cautionary notes that ought to 

be added, however, and that is that one of the advantages of the 

Direct Loan program has been that that debt is held by the United 

States. The borrowers in the Direct Loan program always know 

who their servicer is. The loan doesn’t get sold around to different 

servicers. They don’t know who to contact and they might get in 

trouble and lose some of the borrower benefits by loans being sold. 

However, in the auction system, we’re really talking about auctioning in the FFEL rather than Direct Loan system. As to how 

much, that is indeed the question and whether or not—I think that 

the proceeds would probably exceed the President’s 50 basis point 

cut on the subsidy but I can’t be sure of that. 

The CHAIRMAN. Okay. Just before we leave this, Dr. Oberg, the 

Department of Education last month announced its settlement with 

Nelnet regarding the 9.5 loans. You brought this up to the Department in 2003. I guess the settlement didn’t include in the recovery 

that Nelnet should refund the program. Should Nelnet have known 

that its efforts to expand the number of loans eligible for the high 

subsidy was questionable? What’s your take? 

Mr. OBERG. Yes. I think they did know it was very questionable 

and I think the Secretary of Education last month, made the right 

decision to say that indeed, the process that Nelnet and other secondary markets were using was illegible and those were illegal 

payments and she cut off all future payments using that particular 

bond manipulation scheme. I think that was the right answer. I 

think, however, that part of that answer to forgive $322 million to 

Nelnet in past illegal payments was inappropriate and furthermore, if she also forgave in advance, other secondary markets for 

their illegal payments and before they have been audited, we don’t 

know which secondary markets those might be or what kind of 

money might be at stake and that is the basis of my recommendation that before everything is approved at the Federal level, that 

64

the committee ask for some oversight through the Department of 

Justice. 

The CHAIRMAN. Did you have any comments on the auctioning off 

of student loans? Senator Isakson, anything further? 

Senator ISAKSON. No. I thank the panel for coming. 

The CHAIRMAN. Well, we’re going to have some questions from 

some of our colleagues here. We thank you all. We had this hearing 

scheduled earlier and we’ve got several organizations in the higher 

ed community to submit testimony and we’ll include that in the 

record. 

And we changed and altered that and inconvenienced you all but 

we’re very grateful to you and if there were questions that—we’ll 

submit some questions. I’ll just mention one final thing today. In 

your book, I saw your reference to what the cost was of tuition at 

Harvard and my brother, Bobby, was a seaman on a destroyer but 

he came back to Harvard just at the end of the war and as you 

point out, it was $100 a course. A hundred dollars a course. And 

they took four courses at Harvard for the year and it was $50 for 

the books and $50 for athletic fees. And that was $500 and that’s 

what they received. They got $500 a year for the education and 

then, I guess as you pointed out, the $50 a month, the stipend for 

living expenses. But it’s how a whole generation of veterans got 

through in that post-war period. And my understanding, I heard 

from a wonderful friend, a good Republican, Sil Conte, who was 

from Massachusetts and followed this very, very closely all the 

time he was a member of the House Appropriations Committee. 

For every dollar that was invested, $7 came back to the Treasury. 

We’ve started to lose sight of this in our country that you couldn’t 

spend a dollar that’s more effective, I don’t think, probably, than 

in these areas of education. I don’t know if there is anything you 

want to add. 

Ms. DRAUT. Sure, a couple points. I agree with you completely. 

I mean, we built the middle class that we have today that is a signature strength of our Nation through efforts like the GI bill and 

I agree with you. It’s an investment that at this point, we can’t afford not to make and we are under-investing at this point in terms 

of the amount of money spent on need-based grant aid. I would like 

to take this opportunity to make one point about student loan debt 

because it hasn’t been touched on. I do think the average amount 

of student loan debt today, which is around $19,000, is too much 

for the typical borrower. And let me tell you why. We make a lot 

of big deals—and I get asked this all the time. Why shouldn’t students have to take on the responsibility of a $20,000 student loan 

payment if they’re going to end up earning a million dollars more 

than somebody without a college degree and that’s true. Absolutely, 

you will earn more if you have a college degree but what is also 

true is that the median earnings of a 25- to 34-year old with a college degree have declined in three decades, after you adjust for inflation. College—your typical college earners are no better off today 

than they were a generation ago yet we are asking them to add a 

significant—whether it’s 8, 10, 12 percent to those earnings, which 

are again, less than they were a generation ago. At the same time, 

this generation also faces much higher costs for things like housing 

and health care. So this really is an undue burden if you look at 

65

it, if you step back and look at it in a larger economic context. That 

million dollar premium isn’t coming because college earners earn so 

much more today than they used to. It’s happening because high 

school degree workers are earning so much less and that’s a really 

important distinction to think about when we talk about the average student loan debt that the typical graduate is paying today. 

The CHAIRMAN. Okay. I see. 

Ms. BAUM. Could I make a brief comment to that? 

The CHAIRMAN. Sure, that’s fine. 

Ms. BAUM. I mean, somebody has to pay. It would be great if it 

were cheaper. We should try to make it cheaper to educate students but somebody has to pay and it’s not the people who don’t 

go to college who should bear a bigger burden and so people who 

do go to college do get a much bigger return that they would have 

a generation ago. Somebody has to pay. Certainly people who go to 

college and end up with the good return—not those people who 

don’t benefit from going to college—but those who do have higher 

earnings have to make a contribution. Twenty thousand dollars—

they borrowed $20,000 after they graduate to buy a car. So there 

are many students with problems but it’s not the general taxpayer 

who needs to bear—they need to bear a part of the burden, obviously there are very positive social benefits to higher education but 

students will continue to have to borrow. 

The CHAIRMAN. Ms. Orman, did you have anything to add? 

Ms. ORMAN. And the last thing is, because obviously there is a difference of opinion here but the $20,000 student loan isn’t just 

$20,000 because we have not educated our students on compound 

interest, as you so wanted to teach everybody later on and we have 

offered them solutions—deferment, forbearance, whatever it may 

be, the students don’t understand what it means when they do not 

pay back their student loan. They defer, they defer, they defer. The 

interest rate is then compounding and it is not then a $20,000 student loan, it is now a $60,000 or $80,000. They are not getting notices from the student loan companies. Nobody is showing them 

their balance growing. They just know they’re in deferment and all 

of a sudden they get hit and they owe $80,000 when it started out 

as $20,000 and now we have ruined that person’s life. Again, I go 

back because we did not educate them. We do not send them statements. We have not shown them at the age of seven what it will 

go into and it all starts and ends with education of the student. 

The CHAIRMAN. We thank all of you. It’s been very interesting, 

very, very helpful. We thank all of the students. We don’t know 

how many are missing class today. We’ll give you—we won’t dock 

you for that. Thank you very much. You tell them that Professor 

Kennedy gave you an A today. Thank you very much.. 

The committee stands in recess. 

[Additional material follows.]

66

ADDITIONAL MATERIAL

PREPARED STATEMENT OF SENATOR ALEXANDER

I am pleased that the committee is starting the new Congress 

with a hearing on the costs of higher education. About one half of 

American college students have a Federal grant or loan to help pay 

their tuition. 

It is necessary to remember that the Federal Government plays 

an important role in imposing costs on our institutions of higher 

learning through regulatory policies that Congress and the executive branch establish. Every time we impose a new policy, a new 

data system, a new requirement on colleges and universities, we 

impose costs. We must be diligent in our efforts to reduce the regulatory burden on higher education, or else all of our other efforts 

to improve student aid or reduce student costs will be vastly diminished. 

I believe the greatest threat to the quality of American higher 

education is not underfunding, it is overregulation. The key to the 

quality of our higher education system is that it is NOT a system. 

It is a marketplace of 6,000 autonomous institutions. Yet, thanks 

largely to the last two rounds of reauthorization of the Federal 

Higher Education Act, each one of our 6,000 higher education institutions that accepts students with Federal grants and loans must 

wade through 7,000 regulations. The President of Stanford has said 

that 7 cents of every tuition dollar is spent on compliance with governmental regulations. 

It is also important to remember that the rising costs of Medicaid 

have soaked up State tax dollars that States otherwise would have 

spent on higher education, and that has been a major cause of rising tuition. To be specific, nationally, during the 5-year period 2000 

to 2004, State spending for medicaid was up 35 percent, while 

State spending for higher education was up only 6.8 percent. As 

one result, tuition was up 38 percent at State institutions. 

The story in Tennessee has been worse. Medicaid spending was 

up 71 percent, while higher education was up 10 percent, and tuition was up 43 percent. By the way, during this same 5 years Federal spending for higher education was up 71 percent. 

When I left the Governors office in 1987, Tennessee was spending 51 cents of each State tax dollar on education and 16 cents on 

health care, mainly Medicaid. Today it is about 40 cents on education and 26 cents on health care, mainly Medicaid. 

To give governors and legislatures the authority properly to allocate resources, congress should give States more authority over 

Medicaid standards and more ability to terminate outdated Federal 

court consent decrees that remove decision making authority from 

elected officials. Those would be important steps in reducing the 

cost of higher education for many students. 

I would also like to focus some attention today on the Direct 

Loan program. The Direct Loan program was created in 1992, 

while I was Secretary of Education. Although it was started as a 

pilot program, I was skeptical about the program from its beginning. It did not make sense to me to add billions of dollars to the 

Federal deficit by borrowing to start such a huge program. And I 

could not imagine the government managing such a large enterVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6601 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
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1The CBA is the recognized voice on retail banking issues in the Nation’s capital. Member 

institutions are the leaders in education finance, consumer, auto, and home equity, electronic 

retail delivery systems, privacy, fair lending, bank sales of investment products, small business 

services and community development. The CBA was founded in 1919 to provide a progressive 

voice in the retail banking industry. The CBA represents over 750 federally insured financial 

institutions that collectively hold more than 70 percent of all consumer credit held by federally 

insured depository institutions in the United States. CBA members regularly include arbitration 

agreements in their consumer loan documents and deposit contracts. 

prise more efficiently than the private sector. My views have not 

changed. 

As we debate the Direct Loan program and the Federal Family 

Education Loan (FFEL) program in general, I look forward to 

learning more about the true cost of the Direct Loan program. I am 

concerned that the current methods of estimating the costs of the 

program aren’t accurate and rely on generous assumptions. I am 

also concerned that the operational costs borne by the Department 

of Education are not factored into the program. These questions 

must be resolved so that we can have a fair comparison between 

the two programs. 

As we look at the Federal Family Education Loan (FFEL) program, I share the concern about the expense of the program. I am 

willing to explore policies to change or improve the FFEL program. 

But I caution my colleagues, and the Administration, that we must 

be careful in any changes that we make. 

We need to think carefully about the role of private lenders in 

the FFEL program. We must ensure that a vibrant and competitive 

market remains for colleges and universities, and most importantly 

for our students. The success of our economy is based in large part 

on our successful higher education system, and any significant 

changes that could impede the ability of our citizens to obtain a 

high quality education must be viewed with great scrutiny. 

I look forward to working together with my colleagues to find 

practical solutions to the costs of higher education, and ensuring 

that American families can afford to send their children to college.

PREPARED STATEMENT OF CONSUMER BANKERS ASSOCIATION

The Consumer Bankers Association (CBA)1 is pleased to submit this statement for 

the record in connection with the committee’s hearing today. CBA is the national 

trade association specializing in retail, consumer and small business banking. Our 

members hold 75 percent of the Nation’s bank deposits and are engaged in the full 

array of consumer loans and financial services products to help our customers, their 

families, and their financial futures. CBA is the leading association of bank lenders 

participating in the Federal Family Education Loan program. 

In recent weeks, a number of ideas have been raised on how to help students and 

other borrowers cope with rising student loan debt resulting from rising college tuition costs. Today’s hearing includes testimony on ideas on how to ‘‘reform’’ the student loan program. In this statement we hope to provide you with the perspectives 

of banks in the FFEL program and to share our thoughts on what is at stake in 

the current debate. 

First, let there be no mistake about the position of banks on the issue of student 

debt: We share the concerns of all members of this committee about rising levels 

of debt. We welcome constructive amendments to the Higher Education Act to assist 

borrowers that find themselves facing increasing debt burdens. 

Second, we note with some reluctance that the primary cause of rising student 

loan debt is not the existence of the current Federal student loan programs, but the 

fact that the cost of education continues to rise faster than the rate of inflation. In 

this regard, CBA is pleased that one of your four witnesses today, Dr. Sandy Baum, 

is an expert in this area and will be able to shed some light on this central element 

of the college affordability debate. 

68

Third, we note that all known solutions to making college loans more affordable 

are expensive. We also understand that in the current political and fiscal environment, members of both political parties are unwilling to call for a new Federal investment in education to meet these costs, and thus members of both parties are 

looking to cuts in the FFEL program as a short-term means of meeting them. 

Because of these three circumstances, loan providers in the FFEL program find 

themselves in the curious position of having to defend private sector participation 

in the student loan program. The program, as you all know, is currently subject to 

proposals ranging from multi-billion reductions in lender yield, to paying schools to 

quit the program in favor of the presumably less-expensive Direct Loan program, 

to naive proposals such as eliminating the guarantee on FFEL loans while at the 

same time presumably not increasing interest rates on any borrowers. 

FFEL loan providers believe that Congress and the Bush administration are in 

immediate danger of throwing the baby out with the bathwater. In this case, private 

sector participation in the student loan programs is the baby. 

Lenders, guarantors, services, and others involved in the FFEL program offer considerable added value to students, to parents, to schools and to taxpayers. This 

added value, however, seems to have been forgotten or ignored in a hurried rush 

to craft solutions to the problem described as borrower over-indebtedness. 

The added values offered by FFEL loan providers fall into four categories: 

Reliability: Put as simply as possible, loans are available for all students who 

need them. This is currently the case and has been the case for over 42 years. In 

contrast, in its relatively short history, the Direct Loan program has already been 

subject to one catastrophic failure. This occurred in 1997 when the Department of 

Education’s contractor for processing Direct Consolidation Loans was overwhelmed 

by the volume of applications received, resulting in months-long delays for borrowers. After hearing from numerous constituents whose plans to buy a home or car 

were put on hold, Congress eventually addressed the situation by enacting the 

Emergency Loan Consolidation Act, Public Law 105–78. 

Proven Effectiveness in Addressing Defaults: The FFEL program has been very 

successful in reducing borrower defaults and delinquencies. Defaults in the student 

loan programs reached 22.4 percent in fiscal year 1990. For fiscal year 2004, the 

most recent year for which rates have been published, that rate had dropped to 5.4 

percent. This remarkable progress results, in large part, from investments in technology and customer service by lenders, guarantors, and loan servicers. 

Much of the human and capital investment behind this achievement occurred not 

as a result of new Department of Education regulation or even the desire to avoid 

losses on borrower defaults—it occurred as a result of competition between loan participants in the marketplace attempting to meet the needs of their customers, both 

borrowers and schools. Today, the cohort default rates on Direct Loans are higher 

than those on FFEL loans for every category of loans. 

World-Class Technology and Customer Service: FFEL program participants have 

adopted world-class technology to facilitate every aspect of the administration of student loans. Schools have access to ELM Resources to facilitate loan origination and 

to track account data. Borrowers can apply for loans on-line and use an electronic 

signature. Borrowers can also access their account data and conduct transactions relating to their accounts, such as applying for deferments, on-line. 

None of these investments were mandated by regulation or statute. They occurred 

both because FFELP loan providers want the program to work for borrowers and 

because marketplace competition requires them to match the best efforts of their 

competitors. 

Lower Cost Loans to Borrowers: Generally speaking, FFELP student and parent 

loans cost less than Direct student and parent loans. This occurs because FFELP 

loan providers invest part of their own earnings to discount origination fees and interest rates for borrowers. As is the case with the quality of loan servicing, none 

of these discounts is required under the Higher Education Act or regulations. They 

result from marketplace competition—competition between private lenders. 

Recent legislative proposals, including some put forward this week, would greatly 

reduce or eliminate the value-added in the FFEL program. They would reduce lender return below the level that makes offering these benefits possible. Worse, they 

would shrink the FFELP market by paying schools to use the Direct Loan program, 

notwithstanding the schools’ obvious decisions that FFEL best meets the needs of 

their students. 

In addition, the cuts to FFELP loan providers proposed in the President’s fiscal 

year 2008 budget make no sense on two counts. If we assume the Department of 

Education is interested in students having access to the lowest-cost loans supported 

by the highest-possible customer service, they make no sense. Second, the Direct 

Loan program serves only about 20 percent of the overall Federal student loan marVerDate 0ct 09 2002 16:10 Jun 02, 2008 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 S:\DOCS\33516.TXT SLABOR1 PsN: DENISE
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ket. If we assume, as many do, that the Department would have trouble doubling 

or tripling its capacity in 12 to 18 months, the cuts certainly make absolutely no 

sense. Let’s turn specifically to the STAR Act, one of the proposals currently pending. 

This legislation represents bad education and fiscal policy from a number of perspectives. 

Reliance on unreliable budget estimates. The STAR Act is based on budget scoring 

rules that have been questioned repeatedly by budget experts. More importantly, 

the act relies on cost estimates that have proven to be unreliable. For example, the 

President’s fiscal year 2008 budget ‘‘re-estimates’’ the cost of the Direct Loan Program, revising its costs upward by over a billion dollars above estimates issued just 

1 year ago. These upward re-estimates of costs have taken place numerous times 

during the short history of the Direct Loan Program. Yet the STAR Act would immediately seize projected savings—that, is hoped-for savings that may never be realized—and spend them now to pay schools to quit the FFEL program. 

To bankers, this scheme seems like bad financial policy, especially since Direct 

Loan administrative costs would probably shoot up if loan volume skyrocketed as 

a result of this legislation. 

Reliance on the same inducements proposed to be made illegal in the Student Loan 

Sunshine Act. The STAR Act is also bad education policy because it incorporates the 

use of inducements to persuade schools to deny their student and parent borrowers 

a choice of lender. In many cases, such a restriction will result in denial of access 

to a lower cost loan. In all cases, borrowers will have no choice but the Department 

of Education as their loan servicer. 

If providing inducements to secure loan applications is wrong in the FFEL program—and CBA and its members believe it is—it should also be wrong in the Direct 

Loan program. And, unlike some of the inducements in FFEL that are currently 

considered improper, those proposed in the STAR Act will, in almost every case, 

deny a borrower access to a lower cost loan. 

The FFEL program has served America well. It should not be jeopardized by new 

cuts on top of the more than $18 billion in cuts to FFELP loan providers that were 

enacted as part of the Higher Education Reconciliation Act in 2006. It should not 

be jeopardized by schemes like the STAR Act, nor by an auction of the right to 

make, hold, guarantee or service student loans. 

A priority for this committee and for the Congress should be to support a reliable, 

innovative, and responsive student loan program. FFELP is such a program. 

CBA and its members urge the Committee on Health, Education, Labor, and Pensions to reject the easy temptation to seek short-term savings from the FFEL program that jeopardize its vitality, even if the savings are to be used to pay for new 

benefits for borrowers or for new grant aid. We urge the committee to take a measured, longer view of the good the FFEL Program has done for our country over the 

past 40 years and preserve this very successful private-public partnership for the 

good of future students. 

Congress and the administration should work together to address the problem of 

student debt and to find new resources to fund needed changes. CBA and its members would welcome the opportunity to work with you on this goal. 

NELNET, 

LINCOLN, NE 68508, 

February 16, 2007. 

Hon. EDWARD M. KENNEDY, 

Chairman, 

Committee of Health, Education, Labor, and Pensions, 

U.S. Senate. 

Hon. MICHAEL B. ENZI, 

Ranking Member, 

Committee of Health, Education, Labor, and Pensions, 

U.S. Senate. 

DEAR CHAIRMAN KENNEDY AND SENATOR ENZI: I am writing to respond to 

misstatements concerning Nelnet in Jon H. Oberg’s written testimony, which will 

be presented to this committee at its hearing today. Specifically, his characterization 

that the Secretary of Education determined that Nelnet’s billings for 9.5 percent 

special allowance payments (SAP) were illegal is simply wrong. Neither the Department of Education nor the Department’s Office of Inspector General (OIG) questioned the legality of the billings, and actually the issues raised amount to nothing 

more than a good faith dispute. To suggest that there was something different is 

70

a gross mischaracterization of the facts, and one that unfairly attempts to taint 

Nelnet and the entire student loan industry. 

Nelnet’s qualification of loans for the 9.5 percent SAP conformed to existing Department regulations and interpretations that have been long understood by the Department. In fact, it was Nelnet that approached the Department and brought to 

its attention how lenders could qualify additional loans for the 9.5 percent SAP 

under existing regulations. 

Throughout the extensive policy debate on this issue, no one ever raised any question with Nelnet about the manner in which it qualified loans for the 9.5 percent 

SAP until the OIG challenged the practice in an audit. The OIG presented a novel—

and highly dubious—re-interpretation of the applicable statute and regulations to 

challenge the 9.5 percent payments to Nelnet for what the OIG newly labeled as 

‘‘third-generation loans.’’

Nelnet vigorously disputed the OIG’s conclusions, presenting detailed analyses 

showing that the OIG’s interpretation ignored the realities of student loan 

financings, was inconsistent with the Department’s public statements and its longstanding practice of making 9.5 percent payments on third-generation loans, and 

conflicted with two pieces of legislation that restricted eligibility for 9.5 percent SAP 

prospectively, thereby grandfathering what were almost certainly third-generation or 

later loans. 

To resolve the dispute, the Department and Nelnet entered into a settlement 

agreement. In the agreement, the Department recognized that, at a minimum, there 

were ‘‘bona fide, good faith disputes and controversies’’ regarding the issue. The Department’s acknowledgement of the existence of ‘‘bona fide, good faith disputes and 

controversies’’ is utterly inconsistent with Dr. Oberg’s characterization of Nelnet’s 

actions and the Department’s views. 

There simply is no basis for Dr. Oberg’s claims. When Nelnet submitted requests 

for 9.5 percent SAP, the Department understood the basis for those requests and 

appropriately paid them. Any claims to the contrary are simply wrong, and the committee should not credit them. 

Sincerely, 

JEFF NOORDHOEK, 

President. 

QUESTIONS OF SENATOR ENZI FOR SUZE ORMAN, TAMARA DRAUT, JON OBERG, AND

SANDY BAUM

QUESTIONS FOR SUZE ORMAN

Question 1. I commend you for all you have done to raise the level of financial 

literacy in the country today. You have raised the consciousness about the need to 

have good financial information and make good financial decisions. How can we help 

prospective students ask the right questions to find out how much specific colleges 

will cost them so they make informed decisions?

Question 2. Many of you have talked about the problems young adults face with 

managing their finances. But I wonder if we’re really addressing the core issues. 

The need analysis concepts we use and the financial aid programs we use are rooted 

in the past, when the typical postsecondary student was an 18–22 year-old dependent student. The typical postsecondary student now is a ‘‘non-traditional student,’’ 

an adult who may have family responsibilities. How would you change the way we 

evaluate student resources and expenses to serve today’s students better?

Question 3. We’ve talked about the cost of college and the cost of money, but what 

about the value of the education students are getting? How can students tell what 

they are getting for their money and if it is what they need?

Question 4. There has been discussion about student loans as ‘‘good debt,’’ but one 

we need to manage better, begs the question how we go about doing that. Should 

we consider getting the Department of Education and private lenders out of the student loan business and running the student loan programs out of the Department 

of Treasury, advancing funds and collecting repayment through the Internal Revenue Service?

[Editor’s Note: Responses to the above questions were not available at time 

of print.] 

71

QUESTIONS FOR TAMARA DRAUT

Question 1. Many of you have talked about the problems young adults face with 

managing their finances. But I wonder if we’re really addressing the core issues. 

The need analysis concepts we use and the financial aid programs we use are rooted 

in the past, when the typical postsecondary student was an 18–22 year-old dependent student. The typical postsecondary student now is a ‘‘non-traditional student,’’ 

an adult who may have family responsibilities. How would you change the way we 

evaluate student resources and expenses to serve today’s students better?

Question 2. We have both need- and merit-based student financial aid. What role 

does each kind of aid serve, particularly at public institutions?

Question 3. The college degree of today is like the high school diploma of the 

1950’s. It’s the key to success. Yet many people leave the educational process before 

they attain the degree. Some drop out of high school. Some finish high school, but 

do not have the knowledge and skills they need to succeed in either postsecondary 

education or the workforce. They may start postsecondary education, but then drop 

out, leading to a sense of defeat. What can we do to turn this around, to improve 

college entrance and completion rates?

Question 4. We’ve talked about the cost of college and the cost of money, but what 

about the value of the education students are getting? How can students tell what 

they are getting for their money and if it is what they need?

Question 5. There has been discussion about student loans as ‘‘good debt,’’ but one 

we need to manage better, begs the question how we go about doing that. Should 

we consider getting the Department of Education and private lenders out of the student loan business and running the student loan programs out of the Department 

of Treasury, advancing funds and collecting repayment through the Internal Revenue Service?

[Editor’s Note: Responses to the above questions were not available at time 

of print.] 

QUESTIONS FOR JON OBERG

Question 1. Many of you have talked about the problems young adults face with 

managing their finances. But I wonder if we’re really addressing the core issues. 

The need analysis concepts we use and the financial aid programs we use are rooted 

in the past, when the typical postsecondary student was an 18–22 year-old dependent student. The typical postsecondary student now is a ‘‘non-traditional student,’’ 

an adult who may have family responsibilities. How would you change the way we 

evaluate student resources and expenses to serve today’s students better?

Question 2. Students of all ages, and their families, need easy to understand information on costs and available assistance. Both of you have pointed out that the current financial aid form, the Free Application for Federal Student Assistance, or 

FAFSA, is long and hard to fill out. Should we think about a change in the mechanism we have for determining student aid eligibility? Would it make sense to let 

taxpayers ask for an eligibility determination when they file their tax forms?

Question 3. We’ve talked about the cost of college and the cost of money, but what 

about the value of the education students are getting? How can students tell what 

they are getting for their money and if it is what they need?

Question 4. You have testified that your research has showed that a substantial 

number of students with remaining Federal eligibility loan eligibility were taking 

out private loans at less favorable terms. Can you tell us more about the amount 

of remaining eligibility we’re talking about? And what needs to be done to provide 

students information to make informed decisions.

[Editor’s Note: Responses to the above questions were not available at time 

of print.] 

QUESTIONS FOR SANDY BAUM

Question 1. Many of you have talked about the problems young adults face with 

managing their finances. But I wonder if we’re really addressing the core issues. 

The need analysis concepts we use and the financial aid programs we use are rooted 

in the past, when the typical postsecondary student was an 18–22 year-old dependent student. The typical postsecondary student now is a ‘‘non-traditional student,’’ 

72

an adult who may have family responsibilities. How would you change the way we 

evaluate student resources and expenses to serve today’s students better?

Question 2. Students of all ages, and their families, need easy to understand information on costs and available assistance. Both of you have pointed out that the current financial aid form, the Free Application for Federal Student Assistance, or 

FAFSA, is long and hard to fill out. Should we think about a change in the mechanism we have for determining student aid eligibility? Would it make sense to let 

taxpayers ask for an eligibility determination when they file their tax forms?

Question 3. You have noted that there are unacceptable gaps in college enrollment 

and completion rates between students from privileged backgrounds and those from 

low to moderate income backgrounds and that this is due to a combination of inadequate academic preparation and financial barriers. What more can we do to address the root problems?

Question 4. The college degree of today is like the high school diploma of the 

1950’s. It’s the key to success. Yet many people leave the educational process before 

they attain the degree. Some drop out of high school. Some finish high school, but 

do not have the knowledge and skills they need to succeed in either postsecondary 

education or the workforce. They may start postsecondary education, but then drop 

out, leading to a sense of defeat. What can we do to turn this around, to improve 

college entrance and completion rates?

Question 5. We’ve talked about the cost of college and the cost of money, but what 

about the value of the education students are getting? How can students tell what 

they are getting for their money and if it is what they need?

Question 6. You have explained that net price is what students actually pay. Yet 

most students focus on the quoted tuition price and constant increases in tuition. 

What can we do to slow the tuition increases? And what can we do to help students 

get a better understanding of what postsecondary education will actually cost them?

[Editor’s Note: Responses to the above questions were not available at time 

of print.]

[Whereupon, at 11:25 a.m., the hearing was adjourned.] 

Æ