Republicans are Wrong; Doubling the Pell Grant Is Good Policy

Recently, a number of Republican lawmakers expressed opposition to proposals to double the Pell Grant. They argued that more generous grants would simply lead colleges to increase their prices, canceling out the intended benefit of making college more affordable for low-income students. However, not only is that result unlikely, as past research has shown, but there are accountability measures that lawmakers could incorporate to ensure that would not happen. My own research shows that doubling the value of the Pell Grant would significantly improve students' ability to afford a college education.

Introduced in 1972, the Pell Grant is the largest grant-based element of federal financial aid. Along with loans and funding for "work-study" jobs, it represents the centerpiece of federal policy designed to help lower-income students cover the high costs of a college education. It provides up to a maximum grant of $6,495 in the 2021-22 academic year. Institutions themselves often provide additional grants to lower-income students that also help cover costs.

Unfortunately, for students from lower-income families, that still is not enough to make college affordable.

To see how this works in practice, let's look at college costs for a hypothetical, incoming dependent student living on campus. In the 2019-20 school year, the median in-state cost of attending a public flagship or other research-intensive institution was $27,100 (other public institutions charge a little less). This student's family has income of $37,000 and assets of about $23,000 (the 25th percentile of each for families with children approaching college age in 2019).

Based on her family's financial resources, an estimate based on the federal financial aid formula indicates she would be eligible for a Pell Grant of about $5,900. She also would receive additional grant funding from other sources, including the institution itself, of $7,100 (my calculations using public institutions' online "net price calculators" for a student with these basic financial characteristics). After this grant aid, there is still an outstanding balance of $14,100, which is labeled the "net price" (total costs less grant aid).

To cover that cost, this student is eligible for $5,500 in federal loans (although she'll have to pay that back after graduation). She would also be eligible for work-study funding; $2,400 is a plausible amount (obtained by working perhaps 7 hours per week). Given her financial characteristics, this student would also be expected to make a cash payment of $600. In the end, $5,600 remains.

There is no good answer as to how students are supposed to pay the bill left over after financial aid is taken into account. In financial aid parlance, this is known as a student's "unmet need." Additional loans can fill the gap, but the associated greater debt burden created makes that an insufficient solution.

This problem of unmet need at public institutions would be solved if lawmakers doubled the maximum Pell Grant to $13,000. It would eliminate the gap. Once doubled, the grant should be indexed to inflation over time to prevent future erosion in its value.

It is possible that if the Pell Grant is doubled, colleges and universities will respond by increasing tuition or reducing their own institutional aid to students, pocketing the additional federal funds and leaving college just as unaffordable as it was before. This theory is known as the "Bennett Hypothesis," named after Ronald Reagan's education secretary who first made this claim.

Yet research does not support the view that institutions act in this way. One review of the evidence concludes "the amount of the federal support that winds up diverted, or taxed, by nonprofit colleges and universities seems quite low." A recent, unpublished study finds that "institutions capture 11 to 20 percent of all Pell Grant aid."

Still, a policy solution exists that could further reduce or eliminate this possibility. The desire for accountability could be achieved by requiring that public institutions receiving enhanced Pell Grant funding meet the full financial need of in-state recipients.

In the example of our hypothetical student the positive gap of $5,600 in "unmet need" remaining at the end of the calculation indicates those institutions do not meet full need. Meeting full need requires that gap to be $0. Very few public institutions (exceptions include the Universities of Michigan, North Carolina, and Virginia, along with several dozen highly endowed private institutions) meet the full need of even their own states' residents. Requiring public institutions to meet full financial need for state residents would provide accountability because schools could not pocket additional Pell Grant funds without driving up "unmet need."

The recent introduction of net price calculators facilitates this accountability. The calculations I reported earlier would not have been possible without them. Tracking the results from those tools can help determine whether colleges and universities manipulated their pricing to extract the additional funding.

Of course, it is possible that institutions seeking to thwart this measure could meet full financial need for the students they accept, but then reject meritorious applicants with significant financial need. However, that is unlikely to happen because if current gaps in need are filled with larger Pell Grants and the institution is required to meet those students' full need, then the finances of the institution would remain unaffected.

It would be more difficult to implement my proposed accountability measure at private institutions with smaller endowments because the gap between what these institutions charge lower-income students and what those students can afford remains too large -- currently in the vicinity of a $12,000 at typical institutions in this category according to my calculations. Doubling the Pell Grant would not completely fill that gap; imposing such a rule on them would harm their finances. Yet it is still likely to generate significant savings to lower-income students at these institutions. They will continue to compete with public institutions for incoming students. If they do not pass along the increased Pell grants, they risk losing some of them.

The benefits of doubling the Pell Grant, though, will not achieve its maximum positive impact if we cannot find a way to better communicate the actual cost of attending college, after factoring in financial aid, to prospective students. As it is, the complexity of the system hinders its effectiveness. The policy will be most beneficial if students actually know what their college cost will be and how doubling the value of the Pell Grant will lower it.

This analysis strongly supports doubling the Pell Grant. It is a feasible solution that will accomplish the goal of bringing the cost of a college education within reach for lower-income students who are now currently charged significantly more than they can afford. Research indicates that a college degree, while not a guarantee, is the single best way to jumpstart economic mobility and improve broader measures of well-being. The potential downside that schools could extract a small portion of the funds for themselves seems preventable, and a minor cost compared to the undeniably large benefits. This is a policy we should adopt.