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President's Pell Plan Probably Problematic

The wrong tool for the job.

August 22, 2013

From yesterday’s reports, President Obama’s plan for changing how higher education is paid for is very much a mixed bag.  It sounds mostly well-intended, and parts of it are quite good: I was heartened to hear an embrace of competency-based education, for example, and it’s hard to argue with the idea of allowing students with bachelor’s degrees to get aid for vocational training if they need it.  A little well-timed brushing up on, say, software skills can go a long way.

But with money, the devil is in the details.  And I’ve already spotted one slippery devil.  

The plan is based mostly on “ratings” of colleges, based on their performance on a set of measures to be determined.  Students who choose “better” colleges, as defined by the rating system, will be eligible for larger Pell grants and subsidized loans.

Let’s think about that for a minute.  Larger Pell grants for students at “better” schools?

For community colleges, that falls somewhere between “irrelevant” and “catastrophic.”

I understand the surface-level appeal.  Pay for performance sounds a lot like fairness.  It recognizes the power of incentives, and it combines carrot and stick.  I get that.

And done right, it can do exactly that.  But I don’t see larger Pell grants accomplishing that.

That’s because Pell grants go to students, rather than to colleges.  For expensive schools, that may be a distinction without a difference; their tuition is high enough that it consumes the entirety of even a maximum grant..  But in the community college world, the distinction matters.  Here, Pell money above and beyond tuition and fees goes directly to the student.  (The idea is to help offset the costs of books, transportation, and the like.)  That means that the higher Pell grant would help more expensive colleges directly, and community colleges not at all.  

In other words, for most community colleges, a higher Pell ceiling wouldn’t mean a single dollar more for the colleges themselves.  But it might well mean a larger influx of low-income students, who would presumably be rewarded for forsaking more expensive options.  If you buy the argument about “undermatching” -- I’m not a fan, but some people are -- this policy should make it worse.

Over time, more expensive colleges would benefit doubly.  They’d get higher graduation rates from having a higher-income student body -- these things tend to correlate -- and as a result, the low-income they do attract would come with larger checks. Meanwhile, the lower-cost colleges would absorb more high-risk students, without additional funding to pay for the supports that increase their chances of success.  The only way that community colleges would capture a gain from an increase in Pell grants would be to ... wait for it ... raise costs dramatically.  

If a low-cost school were to try to capture some of those gains in order to provide support, it would get dinged for a large percentage increase in cost.  Meanwhile, institutions that already cost much more could raise prices much more in absolute terms, since starting from a higher base means the percentages would be smaller.


In the world of the lowest-priced colleges, there’s a yawning gap between the money available to students and the money available to colleges.  That gap means that, say, increasing the maximum Pell grant does absolutely nothing to help a college improve.

I’d also be concerned about regional differences.  In New England, community college graduation rates tend to be lower than in, say, the Dakotas.  That’s not a reflection of institutional performance; if it were, then presumably we’d see exceptions. It’s a reflection of the other local options available for high-achieving students.  States with more robust four-year sectors tend to have lower two-year graduation rates, and vice versa.  That’s because the Honors high school grad in rural North Dakota is far likelier to attend a community college -- for lack of other options -- than the Honors grad in Boston, where options are thick on the ground.  How that reflects any given college’s “performance” eludes me.

I’d like to think that we wouldn’t base measures of something as important as higher education on dumber statistics than we use for baseball.  The sabermetric movement in baseball -- featured in the book and movie “Moneyball” -- has devised such measures as “expected wins” that a given player generates, or performance above or below “replacement level.”  But we haven’t really done that in higher ed, where the societal stakes are much higher.

Given how important this is, I’d like to see us develop a sabermetrics of higher ed.  Start with an “expected” graduation rate, say, based on the demographic profile of the students.  Colleges that do better than their demographics would suggest must be doing something right; colleges that underperform their demographics presumably have some work to do.  That way, we aren’t just conflating institutional performance with the economic class of the student body.

Of course, that would require recognizing the integrity of institutions as institutions, rather than as simple collections of individuals.  (That’s why I’m so impressed by College for America: it captures the reduced transaction costs of an institution, but also gets around Baumol’s cost disease with competencies.  That’s a powerful one-two punch.)  But that’s a much longer post.

Much of what the president outlined may be moot, absent Congressional approval.  This year the House is too busy with ritualistic votes on repealing Obamacare to deal with much else, and I don’t see this platform being any kind of exception.  As an indication of elite thinking, though, I saw real cause for optimism.  I just hope they’re fluent enough in the details not to do great, if unintended, damage.

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Matt Reed

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