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The Truth About Pell Grants

The Truth About Pell Grants
January 18, 2005

President Bush made headlines last week for proposing an increase in Pell Grants for low-income students. Urging students to "aim high in life," he announced that he would ask Congress to raise the maximum award by $100 each year for the next five years. Just three weeks ago, the Department of Education announced updates to the Pell Grant formula that will cause almost 90,000 students to lose their grants entirely, and another 1.3 million to see their awards decline by $100 to $300.  The news is as confusing as the exchange on the subject in the final presidential debate, when Bush and Kerry differed on the question of whether Pell Grants were increasing or decreasing. What does all of this really mean for low-income students aspiring to earn college degrees?

The Pell program is the cornerstone of aid for low-income students. Unlike the federal education tax credits and a growing proportion of the state grants for college students, Pell dollars are effectively targeted at low-income students, whose college participation frequently depends on financial aid. In 2003-4, $12.7 billion in Pell Grants helped 5.1 million students with average grants of $2,466 and a maximum grant of $4,050. The number of students participating in the program had increased by 37 percent over the preceding decade. At the same time, the increase in the maximum award amount from $2,300 in 1993-4 constituted a 38 percent increase in the inflation-adjusted value of the grant provided to the lowest-income students. This was an important development, but only partially compensated for the decline in the grant value since its peak in 1976-7. The maximum Pell Grant suffered a particularly severe decline in the late 1980s and early 1990s, before beginning its recovery.

If Congress had continued to increase the Pell Grant maximum as it did from 1996 through 2002, real progress might have been made. However, a $50 increase in 2000 has been followed by two years with no increase at all. The $100 annual increase Bush is proposing is about equal to the average dollar increase over the past 20 years -- a period over which the general purchasing power of $100 has declined quite a bit, and over which the average level of tuition and fees at public four-year colleges and universities has increased by almost $200 per year.  Over the past 10 years, the maximum grant has increased by about $170 per year on average, even accounting for the zero increases in 2004 and 2005.

In other words, Bush's announcement does not represent a windfall for students. In fact, between the 2003-4 and 2004-5 academic years alone, the average tuition and fees at public four-year colleges and universities increased by almost $500 -- the amount the president hopes to increase the grant over the next five years. The president's proposals for moving in the direction of treating Pell as an entitlement and eliminating the persistent "shortfall" in the program that has resulted from underestimates of the number of eligible students, as well as his idea of writing future increases in the maximum grant into law, represent significant improvements. But without a greater commitment of funds for every eligible student, educational opportunities will not be secure.

The fact that the president's promise follows so closely the announcement of an adjustment to the formula that will cut grants to many students makes it particularly difficult to be optimistic about the prospects facing low-income students. Reports of the revision relating to the allowance for state and local tax payments have been difficult to follow. The basic issue is that in an attempt to approximate family and student ability to pay for college, the formula subtracts from income allowances for funds not available for educational expenses. Federal income taxes are based on actual amounts paid, but the allowance for state and local taxes is based on state-by-state estimates. Because adequate data have not been available, the allowance has not been updated for over a decade. The recently announced revision reduces the estimates of state and local taxes for most states, and because it views most students as having higher levels of available income, reduces or eliminates their grant eligibility.

It is certainly appropriate to use the most current estimates available, but unfortunately, the new formula will misrepresent the amount of state and local taxes paid by many aid applicants. There are a variety of reasons for this. The formula relies on federal income tax deductions in 2002. Some states have increased their tax rates in the intervening years. Moreover, the estimates are based only on filers who itemize their deductions and do not appropriately account either for all forms of state taxes or for differences in tax burdens across income levels. In other words, a detailed and complex formula results in a gross approximation of the appropriate measure.

Opponents of the formula change argue that it takes money out of the pockets of needy students and make the important point that these same students are likely to lose additional dollars from states and institutions that rely on the federal formula to allocate their own funds. Supporters argue that the revision improves the accuracy of the formula, redirecting funds at those who need them most. Neither of these arguments actually captures the essence of the issue.

In order to maintain the most equitable allocation of funds, the formula should certainly be frequently updated to reflect changing realities, but any dollars saved through such updates should be used to raise the maximum award level. Moreover, the formula should rely on data that allow accurate estimates of family and student financial circumstances.  Provisions of the formula for which no such data are available should be altered with an eye to simplification.

The real issue is that the Pell program is not funded generously enough to assure that all low-income students will have enough grant aid to allow them to enroll and succeed in the institutions of their choice. Moreover, both the formula and the application process are too complicated and confusing to provide reasonable assurance to young people that when the time comes, if they are academically qualified, adequate financing will be available to allow them to enroll in college.

It is time for Congress to recognize the importance of the Pell Grant for providing low-income students the opportunity to continue their education after high school. Rather than devoting significant resources to tweaking a complex formula that creates only the illusion of an equitable allocation, both the formula and the application process should be simplified. In addition to replacing the inaccurate and inequitable estimates of state and local tax payments -- probably with a generous across-the-board allowance -- the formula should be modified to eliminate the work penalty paid by students from low-income families. A higher and more predictable amount of aid should be provided to low-income students, with resources devoted to improving college access rather than to a process that intimidates prospective students.

We should acknowledge that the formula does not provide a precise measure of ability to pay and stop subjecting students to arbitrary and unanticipated changes in their awards as a result of technical updating procedures. The program should be funded generously and predictably enough to provide timely assurance to students that if they can meet the academic requirements for college enrollment, they will be able to pay the tuition and fees, regardless of their personal financial circumstances.

Sandy Baum is a professor of economics at Skidmore College. She is also a senior policy analyst for the College Board.

 

Bio

Sandy Baum is a professor of economics at Skidmore College. She is also a senior policy analyst for the College Board.

 

 

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