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Policy Analysis

A New Partnership: The Road to Reshaping Federal & State Financial Aid

Key Issues Facing Student Financial Aid System

Principles for Reform

A Redesigned Federal System of Financial Aid

  1. Combine all current federal grant programs into one federal-state matching grant program. Matching funds will be awarded to states on the basis of several criteria, with the primary requirement being that the state must match federal spending at a rate of one state dollar for every four federal dollars. For states to be eligible, grant funding from this program must be given on the basis of need, and tuition increases at public institutions of higher education must be limited to the rate of increase in family income.
  2. Eliminate tax credits for higher education, which primarily provide funding for students who would attend college anyway.
  3. Use the savings from the elimination of the tax credit program to fund a “Race to the Top” for state-level efforts to improve access through student financial aid based on known best practices, and a competitive campus-based incentive program that rewards campuses for funding need-based aid that encourages student success.
  4. Simplify the financial aid application process by having student aid eligibility determined using tax returns.
  5. Make income-based repayment the “default” option for loan programs, with repayment handled through a payroll withholdings approach similar to federal insurance contributions.

Intended Outcomes of the Reforms:

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Date Published
January 24, 2013

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