Big Changes Are Ahead for Higher Ed
A major reform of higher ed is underway. Colleges are bracing for abrupt change, financial headwinds and uncertainty.
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Congress just passed the biggest higher education policy update in two decades. The Republicans’ recent tax and spending law includes new caps on federal loans, new repayment plans and a sweeping accountability system. With most rules set to take effect next July, the Education Department and colleges need to act fast.
To try to lower college prices and student debt, an overhaul of federal student loans is coming. Federal student debt stands at $1.7 trillion, affecting about 43 million borrowers. Half of the debt comes from graduate loans, a big target of the law. Under the new policy, graduate students and parents of undergrads face new caps on yearly and total borrowing. (Limits on loans made directly to undergrads are unchanged.) A simplified loan repayment plan is on tap, which will reap about $270 billion in federal savings over a decade. Two repayment plans, a standard one with fixed payments and a new income-driven plan, spell higher monthly payments for many borrowers.
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The new accountability system marks a huge shift. Schools will lose access to federal lending if graduates don’t earn more than nonattendees in the state. Advocates of the system say the goal is to push high-cost programs to reduce their prices. Undergrads will be measured against those with high school diplomas. Grad programs get measured against similarly situated adults without a graduate degree. 20% or more of associate degrees fail this test, per an analysis by Preston Cooper, senior fellow at the American Enterprise Institute. That failure rate comes with a caveat: “Students in these programs are less likely to use loans to begin with,” writes Cooper. “Many will be able to continue operating even if they lose loan access.” Around 8% of all master’s degree programs fail the test (the failure rate is higher for master’s degrees at for-profits). But just 3% of bachelor’s degrees fail.
Among the other policy changes: A bigger endowment tax on wealthy schools of up to 8%, up from today’s top rate of 1.4%. Small colleges with fewer than 3,000 students are exempt, however. And Pell Grants are now available for very short work programs of eight to 15 weeks, a big win for community colleges. Pells also received an extra $10.5 billion in funding.
Schools are racing to adapt and alert students about financial aid changes, though much uncertainty remains. Revenue could take a hit if fewer students enroll, especially at schools that rely heavily on grad programs. Some programs will shrink or be cut, as schools at least consider lowering tuition in some cases.
Expect more business for private lenders, such as College Ave, SoFi, Sallie Mae and Ascent. For example, 40% of medical students borrow more than the law’s annual loan limit. Private loans make up 8% of overall student debt and that figure is sure to increase.
Delays are likely as the Education Department faces implementation struggles. The agency has cut half of its workforce so far and has a lengthy, complex to-do list with tight deadlines. Passing the bill is “just the tip of the iceberg,” says Sarah Sattelmeyer, an education policy analyst at New America. “An incredible amount of work is coming at the Education Department.” This includes issuing reams of rules and guidance about loans, starting the new accountability system, policing lending violations and much more.
Meanwhile, the Trump administration will continue to pressure institutions to change policies, including by withholding current or future federal research funds. Expect more investigations of antisemitism, diversity, foreign students and other issues.
All this change comes as schools face other financial headwinds. A sharp decline in foreign enrollment looms ahead. There’s a homegrown demographic challenge, as the college-age population shrinks in the coming years. Higher costs of everything from construction to insurance are stressing budgets. These trends, and the new policies, mean more schools will mull budget cuts, while also considering sharing resources with other schools or even mergers.
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John Miley is a Senior Associate Editor at The Kiplinger Letter. He mainly covers AI, technology, telecom and education, but will jump on other business topics as needed. In his role, he provides timely forecasts about emerging technologies, business trends and government regulations. He also edits stories for the weekly publication and has written and edited email newsletters.
He holds a BA from Bates College and a master’s degree in magazine journalism from Northwestern University, where he specialized in business reporting. An avid runner and a former decathlete, he has written about fitness and competed in triathlons.
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