Our two guests on this episode—Ethan Pollack of Jobs for the Future and Andrew Smalley of NCSL—discuss how a set of innovative financial tools are helping students pay for college and other post-secondary education, and the role legislatures can play in facilitating those efforts.
Paying for college and other post-secondary education continues to be a challenge for many. Already, 44 million Americans owe more than $1.7 trillion in student loan balances. At the same time, there's strong evidence that lifetime earnings increase for those who attend and complete college or other post-secondary education.
The guests for this podcast are Ethan Pollack , a senior director at Jobs for the Future, a national nonprofit aimed at expanding economic opportunity, and Andrew Smalley, an education policy expert at NCSL.
Pollack discussed a number of innovative financing strategies involving philanthropic organizations, employers, government and financial institutions that offer the promise of helping students pay for their education at a lower cost. And in some instances that better scale the cost to the potential earnings of the graduate.
Smalley explained the steps states are taking to help facilitate these innovative approaches and also broke down what most students and families pay for post-secondary education.
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Ed: Hello and welcome to “Our American States,” a podcast from the National Conference of State Legislatures. I’m your host, Ed Smith.
EP: What we saw there was this emergence of exciting and innovative new models to pay for education and training.
Ed: That was Ethan Pollack, a senior director at Jobs for the Future, a national nonprofit aimed to expanding economic opportunity. He is my guest on the podcast along with Andrew Smalley, an education policy expert at NCSL.
Paying for college and other postsecondary education continues to be a challenge for many.Already, 44 million Americans owe more than 1.7 trillion dollars. --Yes, trillion with a T--in student loan balances.At the same time, there is a strong connection between lifetime earnings and postsecondary education. Ethan discussed a number of innovative financing strategies involving philanthropic organizations, employers, government and financial institutions that offer the promise of helping students pay for their education at a lower cost. And in some instances that better scale the cost to the potential earnings of the graduate.Andrew explained the steps states are taking to help facilitate these innovative approaches and also broke down what most students and families pay for postsecondary education.
Here is our discussion starting with Andrew.
Andrew, nice to have you on the podcast again.
AS: Yeah.Great to be back, Ed.
Ed: So, Andrew, the cost of college and postsecondary education, the affordability of it is a topic we’ve discussed before on this podcast and I suspect its one we will probably discuss again. It’s kind of perennial issue. I wonder if you could just start by giving the listeners a broad overview of what it costs to go to college or postsecondary education these days and how that situation has changed over time.
AS: Sure.It is definitely a topic that generates a lot of media coverage. As you mentioned, we’ve talked about it on this show before. But if you are a parent or grandparent with a student thinking about enrolling in college you probably see tuition prices that are significantly higher than what you paid when you went to school even if it wasn’t that long ago. Tuitions have grown about four to five times the cost of inflation over the past few decades. Private schools routinely average over $40,000 a year for tuition. And some four-year universities are approaching $20,000 a year in tuition costs. But two sort of key things to think about around the cost conversation is that first, institution type matters a lot. Many in-state public schools are much more affordable. And the second piece of it is that the topline numbers generally reflect sticker prices that don’t factor in financial aid and the significant discounting that many low and middle-income students can receive.
If you look at the net cost of attendance which include things like books and housing and meals and tuition, but you apply the financial aid that’s available to many students, it hovers around $20,000 a year at public four-year institutions and about $15,000 a year at two-year community colleges, which is obviously a lot of money. But when you factor in that some of it is living costs, it’s a different picture. And cost of attendance has been relatively steady for several years now. The other piece of context here is that what the data suggests is most students who graduate will see a pretty good return on that level of investment. The data shows that nearly all students who attend and graduate from a public college or university or a private nonprofit school recoup that net cost within the course of their career.
But it is important when we are talking about this you know speaking of graduation that gives it something that maybe sometimes doesn’t get enough focus in the cost equation.If we are talking about $20,000 a year for a four-year degree, but nationally only about 4-in-10 students are going to complete that degree within the four years that we traditionally assume a college degree is completed in. You know, many institutions have measured completion rates in six-year windows, eight-year windows and there are methodological reasons for that, but the reality is that a pretty large chunk of students are either taking a lot longer and paying a lot more because they are doing this for more years. Or they are failing to complete and leaving without any degree or credential of value and that’s I think a lot of where the cost discussion really leads.
Ed: Well, I think that is a good point that the value of a postsecondary education in terms of later earnings and we are going to talk a little bit later in this podcast with Ethan from Jobs for the Future and he makes that point as well. I guess I’m very surprised. Maybe other people know this, but the notion that only 4-in-10 people graduate in four years is a surprise to me. I can see where that completely skews the financial issue if you are, again, a parent or a grandparent, as I am both, and worrying about education for your kids and grandkids. So, given all of that, that you’ve just laid out, how do most students pay for college in 2024?
AS: So, as I mentioned in the discussion around costs of attendance, the majority of students receive financial aid either from federal government, from the state scholarship or state program or directly from the institution. Almost two-thirds of the students receive some kind of grant or scholarship. There is about 5% of students who receive federal work study funds. Those are obviously not funds that have to be paid back. Also, surveys show that the majority of college students sometimes even as high as 80% work at least part-time while they are enrolled so they might be using some of that money to pay for their expenses. Obviously beyond the realm of just scholarships and grants and working, there is a lot of attention around student loans which are of course a significant source of funding for many students. We know a bit more than a third of undergraduate students will start borrowing and you know by some matrix overall undergraduate borrowing has declined a bit over the past decade or so. Some of the really high levels of borrowing are driven by graduate students.But of course, there are still significant concerns around student loan debt particularly for low-income students, students of color and especially again those students who don’t complete a degree or credential. You know after we talk about the scholarships and loan piece, we are really talking about the unmet share that students and families are responsible for. I know we’ve talked on this podcast before about 529 accounts and college savings programs. We know that the usage of those have increased by about 200% in the last decade. So, it really it does depend heavily on individual circumstances. You know the data around this suggests on average students and families pay out of pocket about half the cost of college. The overall takeaway is really that there is no concise definition of cost and how students pay because it varies so drastically based on situation, institution attended, undergraduate and things like that.But it is fair to say that there is a growing trend a trend that you know parents and families and individual students are paying a growing share compared to what they were expected to contribute a few decades ago.
(TM): 7:41
Ed: So, Andrew, you pay a lot of attention to what legislatures do in this area of course.And I wonder if you can talk a little bit about what they are doing and how their approach has changed over time and what that means for students in their state?
AS: So, yeah, around the state funding conversation in fiscal year 23, states provided over 112 billion dollars in total fiscal support to higher education.That’s an increase over fiscal year 22 and states have increased fiscal support over the past decade after it notably declined during the Great Recession. Today, the situation we have today is that higher education is the third largest single budget area in state budgets. This is obviously a major budget priority for states and how states provide that funding is really a diverse landscape, but I think it is fair to say that it is basically through two streams here. There are the direct appropriations to institutions and hiring and coordinating commissions and the like in states. And then there is the financial aid programs that give money directly to students. That financial aid side of the ledger has increased a lot in the past decade. It’s up by about a third. Many states have expanded their scholarship offerings in the financial aid programs. In many states somewhat generous need based financial aid that supplements the federal Pell program. The direct appropriations side is much more significant though however in the state spending context because that is about 70 to 80% of state funding is the direct appropriations to the institution.
One of the biggest ways states can tailor their funding to meet their postsecondary goals and how states distribute that funding, there is a lot of nuances there. Most states have a relatively complicated approach to doing this. Some do it more simply than others, but many states don’t even do it the same way they would appropriate to a 4-year college as they do to a community college. So, there is a lot of differences in structures and how these funding formulas work. Historically most states have used you know higher education funding formula that relied on how many students are attending an institution creating a proxy measure through full-time enrollment or FTE and funding based on that. But over the past you know several years, a growing number of states have slots to include kinds of performance matrix to incentivize goals such as you know boosting completion or having a high representation of underrepresented students. And so, the majority of states have some element of performance funding built into how they appropriate higher education spending today. While they have that in their model though, the data suggests that most of the models use a small portion of the overall appropriation is allocated in that performance so. The national average is about 10% of higher education funding is allocated by performance. In some states though that is starting to change. We have seen states create newer more targeted formulas that put more resources sort of in this performance lane of funding. So, Texas for example, last session passed a new formula for community college funding that includes matrix like successful dual enrollment; successful transfer to a four-year institution; and now, of course, degree and credential completion. Colorado has done work to modify its funding formula to increase funding for Pell eligible students, underrepresented minority students, first gen college students.There is a lot of work and these funding formulas really are moving the target states. Modify them, amend them and they are trying to you know reflect the workforce goals of their state and their higher ed goals as well.
Beyond just the sort of funding formula component here is also that states are also sort of experimenting with different kinds of programs like pay for success which is you know Virginia Fast Forward is one of the most well-known models of this where students pay a third of the tuition cost when they register. The state pays a third once the training is completed and then the state pays that last third once the actual credential is awarded so.New Jersey also has a pay it forward model to provide 0 interest no fee loans to participants who are working in high quality jobs. And I think with these programs what you see especially is a connection to workforce needs.We are seeing a lot of momentum around state financial aid programs targeting specific professions, specific work workforce needs. South Carolina, Colorado and many other states have passed scholarships for specifically high need occupations where they are experiencing shortages. Things like nursing, education, construction so there is a lot of energy overall on a lot of different fronts on both the funding formulas front, the financial aid and other types of programs to look for ways to reduce the costs, split costs among you know so it’s not such a large burden on students and families and drive postsecondary completion so that students leave with a degree or credential of that.
Ed: Well great for you for laying out that landscape because I think that is really important as we move onto our conversation with Ethan about some of those innovative financing approaches that you were just mentioning. Andrew, thanks so much. Take care.
AS: Thanks, Ed.
TM: 13:22
Ed: Ethan, welcome to the podcast.
EP: It’s good to be here, Ed. Thanks for having me.
Ed: So, Ethan, you are a senior director at Jobs for the Future and I wonder just to get started if you could tell us a little bit about the organization its mission and your role there.
EP: Sure.Jobs for the Future is a national nonprofit. We focus on expanding economic opportunity mostly through higher ed and workforce programs and designing career pathways. We leverage really deep partnerships with employers, investors, entrepreneurs, policymakers, education and workforce development providers. We as you can tell, we do a lot in this space which is appropriate because there is a lot to be done. Now I run the Finance in the Future initiative at JFF.We launched this initiative in 2020.We really saw there was this emergence of exciting and innovative new models to pay for education and training.We had a particular interest in models that did achieve like three objectives. You know one reducing the learner’s cost and the risks. The second is really like aligning school incentives with learner outcomes. And the third is to really try to unlock it government employer and private investment.
Ed: Well, I always find these conversations interesting because I am of an age when higher education, postsecondary education was not very expensive and was really pretty accessible to a lot of people and I think it is good to educate people about how those things have changed in the last few decades. I talked earlier on this show with Andrew Smalley from NCSL about some strategies states are using to deal with college affordability or really postsecondary affordability to be more precise. And I thought maybe you could take a minute to explain why these strategies are necessary in the first place and how the landscape has changed for students looking at postsecondary education in recent years.
EP: Definitely and I think that’s so important to like start off in defining kind of this trend in defining the problem we are trying to solve. I think oftentimes people like in my position can get really kind of in love with certain solutions and without first thinking about hey what are the specific problems we are trying to solve. So, it is really important to set that out ahead of time.Yeah, so what we’ve seen is kind of a that more and more that the cost of attending college or other types of postsecondary education is really falling on students themselves. And it is the function of two factors. You know, one is over the last few decades the cost of education has really been going up and up. And second is that the federal government, states and even employers have really been pulling back some of their own contributions to the cost of education. So, learners are now on the hook for about 45% of the total postsecondary education in the U.S. This is more than double the average of other industrialized countries. This has led, well a lot of learners can now borrow more and more in federal student loans to afford their education. The average bachelor’s graduate is leaving school with about $30,000 in loans. And about 1-in-4 borrowers are defaulting within 12 years of starting school. So already, we can kind of identify this is a problem. And while the average value of the education usually justifies those costs, really, for too many learners, especially those who don’t complete their education, the education is unfortunately not leading to a well-paying career, leaving them and oftentimes the parents saddled with a lot of debt burdens that they can’t pay off.
Ed: Those of us who are not experts in this area certainly have read plenty of news stories about the student debt situation and the rather enormous load of debt that millions of people are living with and certainly I think that makes it clear to everybody that this is a problem that needs to be addressed. I wonder if you could walk us through some of these innovative finance strategies that states have considered.
EP: Yeah, certainly so we define innovative finance and I recognize that this is a term that is very kind of vague ambiguous and people may have heard you know innovative finance and it can mean a whole bunch of different things in different contexts.But for our context, we define it as an array of emerging models to financing postsecondary education that really represent new ways to spread the cost and the risk of the education across a variety of stakeholder entities including education providers, employers, government, community-based organizations and even private investors. I’ll give you a few examples. One is outcome-based financing. You know this is a financial instrument similar to a loan but different in many respects. It’s underwritten specifically based on the outcomes of an individual program or groups of programs. So, these can include, you’ve probably heard of income share agreements or outcomes-based loans or income-based repayment plans. All of these determine how much the learner is going to pay based off of the learner’s own earnings. And then they make no payments if their earnings are too low. This group of outcomes-based financing it also includes education insurance which protects the learner against the risk of low income and merit-based lending, which is structured as a traditional loan, but prices the loan on the basis of programs outcomes.
Another category is pay for success also known as can pay for performance or social impact bonds.But these are all partnerships that fund effective education and other social services through performance-based contracts. The learner doesn’t pay anything and instead the cost is distributed between the education provider and some other organization such as go government or philanthropy on the basis of the learner’s outcomes. So, the best way to explain is maybe kind of an example. Massachusetts Pathway to Economic Advancement is a partnership between the Jewish vocational service, the state of Massachusetts and JFF and social finance. They provide English language classes and integrated job search assistance and the state pays, but they only pay if the participant is achieving positive outcomes.
(TM): 19:45
Ed: Now that is interesting. I am a product of the University of Massachusetts. The size of the educational structure in that state is so immense that it does sound like that would be a good place to work on a lot of different experiments. How about employers? What is their role in this?
EP: Yeah, that is a great question. So let me tell you about first why it is important. You know employers play such an important role in the funding of postsecondary education. They generally have more resources than learners and they also have more information about the skills that are important to acquire. You know they are also the ultimate beneficiaries of an educated workforce so it really makes sense that they contribute to some of that.Data actually suggests that employers are the largest force of workforce training such as on the job training, continuous upscaling opportunities, tuition reimbursement. Yet employers may be hesitant to invest in their employees because they may be worried that once their employees are trained, the employees may leave for a competitor and the rest is obviously the larger for training a worker that isn’t even their current employee. There is a variety of models that we have that can incentivize employer contributions. One is lifelong learning accounts. These are structures that consolidate and leverage contributions from multiple sources and can be used by a learner to pay for education training.
Another is employer training incentives. These use government incentives either tax credits, deductions or grants to encourage employers to increase their education provided to workers. One example is the California employment training panel.It’s a levy grant scheme that uses revenues from an employer tax to reimburse employers that invest in approved training. And finally, the employer connected training model. It is a training program you know apprenticeships I would say fall into this category. It combines job training with paid employment and usually involves the employer. It is you are working with the training provider to create kind of a customized career pathway there.
Ed: So, our audience of course is primarily legislators and legislative staff and other people concerned about state policy and I wonder what is the role for a state legislator or state legislatures in this area?
EP: Yeah, so you know state legislators have a tough job. You know there’s many needs and worthy causes, but resources just aren’t infinite. You know [these things] … that we are studying, these could be really powerful tools that could expand access to high-quality education training to workers and learners across their state, but in a way that requires few government resources. So, some of them may have a one-time cost, but then they can be self-sustaining over time so. For example, New Jersey, Indiana and Connecticut have recently established pay-it-forward programs. Now these are programs that are fully or partially sustainable revolving funds that offer affordable education financing. I think one of the most impactful things that state legislators can do is simply to reform their consumer credit regulations. Your existing consumer credit regulation is fairly ill-suited for income share agreements and outcome-based loans. And they are normally in regulatory policy there is this tradeoff between consumer protection, but also you want to give businesses space to innovate. But in this case, we are actually getting the worse of all of those. Consumers aren’t protected and innovation is unnecessarily stifled. And so, I’ve been working in various states to update the regulatory guardrails. Colorado recently finalized a regulatory reform. California is in the process of doing so. They have a good rule. And then legislation to update their regulatory frameworks passed in Illinois State House unanimously and awaits Senate consideration. You know so rarely do legislators have kind of the opportunity to expand access to high-quality education training without a budget cost.It is kind of a win/win/win here.
Ed: Well, that is very interesting. I don’t think most of us would have thought of that as an area where legislatures could act. These are all programs it seems to have a great upside for learners but there is always risk to these things as well and I wonder if you could just talk a little bit about what kinds of concerns you folks have that if this isn’t done correctly it could be a problem for some people.
EP: Yeah definitely. So, it depends on the model. So, if you look at something like outcomes-based financing you know which includes both income-share agreements and outcomes-based loans. But any time you are talking about a financial product to consumers, there is a risk. There is a risk that the product may not be well designed. There may be a risk that the lender or the financer is predatory that the student doesn’t understand it and that’s particularly the case with these types of models. You know they are relatively new. They are fairly complex too. And so, learners may have a difficult time understanding the terms and how much they need to repay. You know they may also have difficulty kind of comparing these options against each other or comparing them to the traditional loans that may also be available to them. And you can imagine a bad faith provider if they are you know this is really kind of a bad actor. You know you could in theory design an outcome-based financing instrument that overcharges learners.It only gives the appearance of shifting the risk away from the learner, but it actually doesn’t do that. So, it is one of the reasons why we need really you know clear strong and intentional regulatory guardrails. Overall, I would just say that you don’t need a finance model.These are just tools right. Tools are neutral and they can be used well or they can be used poorly. You know a hammer is something that can be used to build a house, but hammers can also cause a lot of damage as well. So, I think that it is important for us to see that there is a lot of real you know upside, transformative upside to these tools if used wisely. But we also need to be you know clearer about the fact that there are some risks and the goal that we should have is how do we mitigate against the risks and capture that upside at the same time.
Ed: Talk a little bit about the best way for states to work with the other partners in this area whether those are federal agencies or employers. What kind of advice would you give to states?
EP: Yeah.There is a lot of opportunity for collaboration. So, one of the best examples I think is the New Jersey’s pay it forward program.This is a $15 million evolving workforce fund. It upscales residents and fills critical job openings. And it was set up through a partnership between the state and the New Jersey CEO Council which is a business group. I think there is also an opportunity to leverage federal funds especially workforce funds. Pay it forward approach in particular it offers the promise of stretching that limited funding to serve more people. So, I think that there is a lot of opportunities for kind of again you know finding areas where this is a win/win/win here. There is some money that is in the system. I think it is really a question of how do we leverage it and if we can leverage it wisely by using these tools, I think that a variety of different stakeholder groups are going to be very happy that and want to be a part of that.
Ed: Well Ethan, we’ve hit on a few of the different innovative finance strategies, but this whole thing is a huge topic and I wonder if there is as we wrap up here if there is anything else you would like to point out and share with our listeners before we finish.
EP: One of the things that I try to hit on every time I do an interview like this is the importance of state data infrastructure. I know it sounds so boring and so kind of tedious, but it is so, so important. And we have heard you know I know I’ve listened to your podcast before and a lot of other podcasts in this area how important you know the data infrastructure is for learners to be able to understand you know the quality of the training that they may be doing. It is important for government to understand right so they are able to access do we want to be funding this program or not. But in addition to that you know having a better labor market data infrastructure can also help these innovative finance tools. So, you know many of them are you know cumbersome. They lack accurate available statistics. They may not have standardized data. This makes it really difficult for innovative finance providers to accurately price their products because the student payments are contingent on income and that income is going to be harder to predict if you have poor data. So, if you have better labor market data that is connected to your enrollment data from a variety of different programs so you have a good sense of what the outcomes are going of those programs. You can be a lot more precise when you are underwriting some of these financial products and therefore you are lowering your risk as a provider and/also able to then offer more favorable terms to students. So, you know the issue of data infrastructure is much larger than a lot of the innovative finance solutions that we work on at JFF, but it is just this is just kind of like now more than ever. This is just one more reason why you know state legislators should really truly invest in creating comprehensive standardized you know state launched robust data systems.
Ed: Well, I have to say that in all the more than 100 podcasts I’ve done on public policy topics that is probably the one thing that always comes through is data, data, data. If you don’t have robust data, you’re at sea because you really just don’t know what you are doing. So great point. Ethan, thank you so much. This is a really important topic and I know that we are going to visit it again so.Take care.
EP: Ed, it was a real pleasure. Thanks for having me on.
(TM): 29:18
Ed: I’ve been talking with Ethan Pollack from Jobs for the Future and Andrew Smalley of NCSL about new ways to help students pay for secondary education. Thanks for listening.
You can check out all the podcasts from the National Conference of State Legislatures by searching for NCSL podcasts wherever you get your podcasts. This podcast “Our American States” dives into some of the most challenging public policy issues facing legislators. On “Across the Aisle” host Kelley Griffin tells stories of bipartisanship. Also check out our special series “Building Democracy” on the history of legislatures.