Gaining Freedom from Federal Controls

Dr. Larry P. Arnn is the twelfth President of Hillsdale College, a private liberal arts college in south central Michigan.

In recent weeks, politicians in Washington have been racing to provide a solution to the proclaimed crisis – or at least difficulty – in the student loan market. Naturally, the solution they have come up with entails further government involvement. But the truth is that the current troubles stem from government involvement.

Most Americans are accustomed to thinking that college finance is something that government has to do. Hillsdale College has shown to the contrary that it is possible for a school to give students the financial aid they need without taking a single dollar of government money.

Hillsdale College is known nationally for its commitment to independence — independence both from federal control and from federal funding. The two are inextricably linked.

The federal student loan system is heavily regulated and changes in the regulations can upset lender and investor expectations, throwing the system into turmoil. That happened recently as the housing-based credit crunch reduced lenders’ equity at a time when Congress had just reduced subsidies to college-loan lenders. Now the government is coming to “rescue” the system by offering to serve as a lender of last resort, entangling itself further in the provision of money for college.

Government financing of higher education is not, however, inevitable. Hillsdale’s Independence Grant and Loan Program avoids the problems of governmental tinkering with a student financing system that is both original and traditional.

Founded in 1844, Hillsdale College’s basic principles were remarkably similar to those of the hundreds of other colleges founded in the 19th century. It proudly heralded the blessings of liberty while pledging to provide “a literary, scientific, and theological education.” This stance, which arose from the view that education was not an enumerated power in the United States Constitution, was common among colleges founded at that time.

When Congress passed the National Defense Student Loan Act in 1958, Hillsdale’s Board of Trustees agonized over the decision. If it accepted students who relied on the federal loans, the school’s independence might be put at risk, but if it refused to participate, some needy students would be deprived of the chance to attend Hillsdale. In 1959, the trustees voted to participate in the federal student loan program. In 1962, the trustees voted against accepting any direct federal aid on the ground that doing so would jeopardize the school’s independence. They did not consider loans that students obtained on their own as direct federal aid.

Unfortunately, the belief that its independence would not be jeopardized by participating in federal student aid programs proved to be mistaken.

In 1972, Congress amended the 1964 Civil Rights Act with Title IX, which deals with the issue of discrimination by colleges and universities. The new law required that schools accepting federal aid would have to gather and report data on the race and sex of students and staff. Throughout its entire history, Hillsdale had never discriminated on the basis of race or sex, but it refused to comply with the onerous federal demands. The Board of Trustees saw this move as an attempt by the federal government “to impose its control through the subterfuge that a few students of Hillsdale College receive federal aid….”

As a result, Hillsdale and Grove City College were sued by the Department of Health, Education and Welfare in 1977. The argument the schools made in their defense was that they were not subject to these federal regulations merely because some of their students received indirect loans under federal programs. But after years of litigation, in 1984 the Supreme Court ruled in favor of the government in Grove City v. Bell. If any students accepted federal money, the Court stated, that made the institution subject to regulation.

Desiring to avoid the snare of federal control, Hillsdale therefore established the Independent Grant and Loan Program in 1984. It replaces federal student funding with private funding. The funds required to sustain the Independence Loan Program are raised annually. Arrangements with individual lending institutions allow the college to borrow the money necessary for the Independence Loan Program. Hillsdale College acts as the guarantor of each loan and pays the interest due for student borrowers while they are enrolled at the college.

The college also continues to pay the difference between the 5% interest rate paid by the student borrowers and the amount actually charged by the lending institution. It finances this in part through an array of grants and loans funded by endowments and annual contributions from the friends, alumni, foundations, and businesses who admire Hillsdale College’s independence and insistence on the recipients’ accountability and responsibility. In the most recent academic year, 44.5% of the Hillsdale student body received aid from one or more of our scholarship, grant, or loan programs.

Hillsdale’s private funding makes its loan program more effective than its federal counterpart. It allows discretion regarding repayment between the borrower and the college, resulting in an extraordinarily low default rate of less than 1.7% in recent years. In comparison, the administrators of the federal student loan program counted it a huge success when they achieved a 4.6% default rate in 2005.

Rather than having a sense of entitlement to funding from some faceless institution, Hillsdale College students are sincerely grateful to the donors who personally support them.

Finally, Hillsdale College’s private funding allows it to maintain its high academic and institutional standards without compromise. This freedom is desirable and recommends private funding to other universities that prefer independence to government control and inefficiency.

The success Hillsdale has experienced with its system of student aid strongly suggests that the politicians who are intent on increasing the role of government in college financing are making a mistake. Instead of relying more on government, the right path is to find ways to rely more on the private sector and voluntary action.