Financial aid policy should ensure that students from all backgrounds can get a college education without taking on crushing debt or excessive outside work that reduces the odds of completing a degree or certificate. Truly supporting college access and success requires more need-based grant aid and better targeted tax incentives that help limit how much students need to borrow and work while in school, and a financial aid process that is a gateway rather than an obstacle.

Secure and improve Pell Grants

A strong, competitive economy requires a well-educated society, and federal Pell Grants help seven and a half million low- and moderate-income students a year pursue higher education or training. Grants based on financial need reduce the amount that low- and moderate-income students need to borrow and encourage them to attend and finish college. Pell Grants are the federal government’s most effective investment in college access and success, and they have broad, bipartisan support from business, education, veterans, civil rights, and student groups, as well as from the higher education community. However, the purchasing power of Pell Grants has significantly declined over time. In fact, Pell Grants now cover the lowest share of college costs in the program’s history. And Pell Grant recipients continue to carry a disproportionate debt burden relative to their higher income peers. Strengthening Pell Grants must be a top priority. Based on existing research, we recommend doubling the maximum Pell Grant to restore its purchasing power and close income gaps in access and attainment; the grant’s former automatic annual inflation adjustment should also be permanently restored  to maintain its value going forward. We recommend making Pell Grants a fully mandatory program that is not subject to annual appropriations based on projections that will never perfectly align with actual program participation. We also support restoring Pell eligibility for defrauded students to provide such students with an opportunity to complete a quality credential at another school. We support legislation introduced in 2017 (S. 1136, H.R. 2451) that reflects these recommendations.

Further simplify the federal financial aid application process

The complexity of the federal financial aid application process discourages too many students from applying for or receiving the aid they need to attend and complete college. Significant changes have been implemented to simplify the Free Application for Federal Student Aid (FAFSA), including our proposal to let applicants electronically transfer their IRS data to the FAFSA, using the tax data available when students typically apply to college to determine aid, and the introduction of skip logic in the online FAFSA. These changes have streamlined the aid application process for millions of students and their families and will let students find out how much federal aid they are eligible for before they have to decide where to apply. We recommend further simplifying the FAFSA by eliminating 20 burdensome questions that cannot be automatically answered using Internal Revenue Service (IRS) data and that require students to collect detailed financial information from multiple sources. While these changes would further simplify the federal financial aid application, in order to simplify the entire process, we must also address the burdens and complexity of verification, which for over a quarter of FAFSA filers – most of whom are Pell eligible – is the final step to receiving aid for which they are eligible. Our research has found that verification remains a complex and costly part of the FAFSA process that can delay aid and derail enrollment, and is furthermore an unduly burden financial aid offices. Policy and institutional changes would reduce the heavy paper­work and bureaucracy typical of the aid verification process, which can keep eligible students from getting the aid they need.

Streamline and improve higher education tax benefits

Current higher education tax provisions are too poorly timed and poorly targeted to efficiently increase college access or success. Bipartisan legislation (H.R. 3393) introduced in 2013 incorporated many of our recommendations to dramatically streamline tax benefits by creating an improved American Opportunity Tax Credit (AOTC) and eliminating less targeted and less effective tax benefits, such as the Tuition and Fees Deduction and Lifetime Learning Credit. Research suggests that the AOTC is the most likely of the current tax benefits to increase college access and success because, unlike other higher education tax benefits, it is partially refundable, allowing low income students and families to see tangible benefits. The bill also eliminated the taxation of Pell Grants, removing unnecessary complexity while helping Pell recipients access the education tax benefits for which they are eligible. Bipartisan legislation (H.R. 3581) introduced in 2017 also eliminates the taxation of Pell Grants.

Additionally, to simplify the tax code, ensure equity, and reduce the burden of student debt, we recommend eliminating the taxation of any forgiven or discharged federal student loan debt. Currently, borrowers who receive a loan discharge after 20 or 25 years of responsible payments in an income-driven repayment (IDR) plan may face an unaffordable tax liability because these discharged amounts are treated as taxable income. For many, this tax liability, which can run into the thousands, simply replaces one unaffordable debt with another. Concern about this potential tax liability discourages some borrowers from enrolling in IDR—including borrowers whom IDR was specifically designed to help. By contrast, loan balances discharged after 10 years of payments under the Public Service Loan Forgiveness program (PSLF) are not treated as taxable income. This disparity is highly inequitable and multiple bills have been introduced to correct it so that discharged student loans are not taxed as income.

Promote state investment in affordable higher education

A decades-old trend of state disinvestment in public higher education accelerated dramatically during the Great Recession. About three-quarters (77 percent) of undergraduates attend public colleges, where, even after significant recovery after the Great Recession, average inflation-adjusted per student state funding at public institutions remains 12 percent below its pre-recession level. We recommend making significant new federal investments in public higher education contingent on states also pulling their own weight. It is critical that Congress take steps to ensure that states increase and maintain their investment in public higher education, with a particular focus on maintaining or lowering the net price of public college for low- and moderate-income students. For example, legislation introduced in 2015 (S. 2191), 2016 (H.R. 5756), 2017 (S. 806), and in 2018 (S. 2598) all include strong maintenance of effort provisions to ensure that new federal dollars sent to states do not supplant state and other forms of higher education funding and financial aid.