Despite its many accomplishments since its enactment in 1972, the Pell Grant program has strayed in key ways from the initial conception of the Senator for whom it is now named. Instead of disadvantaged students and their families knowing years in advance of their eligibility for aid, the process of applying for and receiving a Pell Grant (and federal student aid more generally) is excessively complicated and often serves as a barrier to access. Also, roughly one in two undergraduates now receive a Pell Grant, meaning that it is far less targeted to the neediest students.
This expansion of eligibility also means that it takes a lot more money to fund Pell Grants at any given level of maximum award. Moreover, there is reason to be concerned that the recent large increases in Pell have had the unintended effect of accelerating the trend for more than a decade in which institutions move their own aid up the income scale because Pell is viewed as taking care of the neediest students.
In short, there is little evidence that the large investments over time in the Pell Grant program have moved us much closer to meeting national goals such as narrowing gaps in the participation, completion and attainment rates of rich and poor students and those from different ethnic and racial groups. In a world of more plentiful resources, this ineffectiveness might be less of a problem, but in the current climate of soaring federal deficits, it is neither likely nor desirable for Pell Grants to continue to be shielded from a sharp-eyed review of their effectiveness.
The Forgotten Middle Class
In a companion essay,
Hamid Shirvani argues for
expanding Pell by ending
federal tuition tax credits.
One way to react is to make further modifications in the current program structure in the hope that such changes will lead to greater effectiveness. But this seems a faint hope. The hundreds of pages of program rules that have accumulated over four decades are virtually indecipherable; further patches will make them more so.
A better way to proceed, in my view, is to start from scratch, including a reaffirmation or an adjustment in principles for modern times and then designing a program that meets those principles. Luckily, contrary to student loans where hundreds of billions of dollars of outstanding loans make the process of starting from scratch much more difficult, in the case of grants, every year represents a chance to start anew.
My candidates for reform principles would include a radical simplification of the application process and a better targeting of benefits to the neediest students. I would also include as a principle that Pell Grants should be better integrated with other federal policies so that they work in concert to meet key policy goals rather than the current situation where they too often work at cross-purposes.
To achieve these purposes, I suggest the following elements of a redone Pell Grant program:
1) The FAFSA should be eliminated and replaced with a provision whereby parents and students can apply for aid by allowing their federal income tax submissions to be used to calculate their eligibility for all forms of federal student aid. Families who don’t submit income tax forms but who are eligible for welfare, Medicaid, food stamps or the Earned Income Tax Credit (EITC) would be automatically eligible for the full amount of Pell Grants and other federal student aid.
2) The rules for determining eligibility for Pell Grants would be based on the 1040A income tax provisions. These tax-based amounts could be translated into categories of eligibility rather than precise dollar amounts so that students with the least family resources would have the highest category of eligibility and thus be eligible for the maximum Pell Grant award.
3) Eligibility for Pell Grants would be more restricted than is currently the case in at least two key ways. The family income of students qualifying for Pell Grants would be limited to a certain percentage of national median income or some other indicator of family financial strength. In addition, eligibility for Pell would once again be limited to students enrolled half time or more. To address the legitimate needs of the groups of students who would no longer be eligible for Pell grants, their eligibility for tuition tax credits could be enhanced (see below).
To make the overall student aid system more effective, in addition to changes made to Pell Grants, other student support policies should be changed to allow for more effective integration with Pell Grants. Three specific examples of this are:
1) Integration with tuition tax credits. For any given student, as family income increases, eligibility for tax credits should increase up to the maximum credit as Pell Grant eligibility recedes. This integration would recognize that tuition tax credits can be a more effective way of providing aid to middle-income students and students enrolled for only one course than cramming these students into Pell Grant eligibility and thereby reducing the effective maximum award for any given level of program funding.
2) Distributing other federal student aid. The formula for distributing campus-based student aid funds to institutions and LEAP funds to states should be changed so that in the future any appropriated funds would be distributed on the basis of the number of Pell Grant recipients who graduated in the previous year from that institution or institutions within a state. Institutions and states should also be given greater autonomy to spend those funds as they see fit to enhance the chances of Pell Grant recipients graduating from college.
3) Limiting in-school interest subsidies. Eligibility for in-school interest subsidies in the federal student loan programs in the future would be limited to Pell Grant recipients.
The collective effect of these changes would be to reduce substantially the $60 billion in federal funds that are currently expended annually on federal student aid, thus contributing to the overall federal deficit reduction effort. These changes also would help to make federal student aid investment more effective in meeting the goals of increasing college participation, completion and attainment and to narrow chronic equity gaps in these indexes.
Arthur M. Hauptman is a public policy consultant specializing in higher education finance issues.
The Pell Grant Program, enacted in its earliest form in 1972, provides financial assistance to lower-income students who otherwise would not be able to afford college. Award amounts depend on the family’s expected financial contribution and remaining financial need, with a current maximum award of $5,550 per year. Our economy has reaped the benefits of a more educated population as a result.
However, Pell Grants are no longer keeping up with need, and the problem of affordability is no longer limited to lower-income students. Today, a college education is unaffordable for many students who are considered middle-class, but who do not qualify for Pell Grants.
More realistic expectations of what families can afford should be reflected in Pell Grant awards. Families with higher incomes, perhaps even $100,000, should qualify for Pell Grants. And families that currently qualify should receive larger grants.
To help fund this expansion of the Pell Grant program, tuition tax credits should be eliminated. The equivalent of the tax revenue previously lost to the credits should be spent on Pell Grants.
Focus on the Neediest
In a companion essay,
Arthur Hauptman argues
for revamping Pell to
ensure that dollars flow
to the poorest students.
In 2010 Congress created the $2,500 American Opportunity Tax Credit, which is designed to give middle-income families some relief from costs for tuition, fees and course material. Yet I question the usefulness of a tax credit that only benefits families who already have the resources to pay college-related expenses. This tax credit has been most beneficial to wealthier families with an adjusted gross income of $100,000 to $180,000; they received an average credit of $1,773 in 2009. In comparison, the average credit was $1,572 for recipients with incomes of $75,000 to $99,999; $1,164 for recipients with incomes of $50,000 to $74,999; and $866 for recipients with incomes of $25,000 to $49,999.
Somewhere in between the families benefiting from the tax credit and those eligible for the Pell grant are families who have substantial need, but receive very little or no assistance from either program.
Because tax credit-equivalent funds (approximately $5.5 billion in 2009 but estimated to increase to an average of $9 billion in 2011 and 2012) most likely will not cover the full cost of expanding the existing $30 billion program, the federal government will have to spend more on Pell.
The facts for today’s students are bleak, as are the implications for future students.
Tuition is skyrocketing. The average tuition at a public four-year university for 2011-12 is $8,244, an 8.3 percent increase from the previous year that also follows a 7.9 percent increase the year before. A longer-term perspective is even more dramatic; tuition at public four-year universities, when adjusted for inflation, is more than 3.5 times greater than it was in 1981-82. Thus, a college degree is roughly 3.5 times more expensive for this generation than the previous generation.
At the same time that tuition increases are far outpacing inflation, incomes are faltering. The median household income was $49,445 in 2010. When adjusted for inflation, this represents a 6.4 percent decline since 2007 and a 7.1 percent decline since 1999. Families with declining purchasing power find it even more difficult to keep up with rising tuition. Unsurprisingly, then, the average amount of student debt for graduates of public four-year universities is also increasing, reaching $22,000 per borrower in 2010. Unless these trends change, student and family debt will continue to increase as tuition increases.
It is impossible to identify a specific income where students become ineligible for Pell grants, since awards are calculated based on a number of factors, including family size and the cost of attendance. But it is possible to identify ranges where students will probably not be eligible for Pell grants. Well over half of dependent students with a family income of $39,999 or less receive federal grants (Pell grants are by far the most common, though a small small number of other grants are included). However, less than a quarter of dependent students with family incomes of $40,000-$59,999 receive federal grants, and almost no dependent students with family incomes of $60,000 or more receive federal grants.
Who, then, do we consider to be middle-class, and can they still afford higher education? The $40,000-$59,999 range for comparing federal grant recipients is roughly equivalent to the middle quintile of household income in 2010: $38,044 to $61,735. Some would argue that this could be viewed as the true “middle” class. Yet, the long held notion of middle class has always been associated with norms that include home ownership, retirement savings, and college educations. Many might argue that the fourth quintile, with incomes from $61,736 to $100,065, and even some households in the fifth quintile, with incomes of $100,066 or more, could also be considered middle-class.
Can these families afford higher education? The average annual cost to attend a four-year public university, including room, board and expenses, is $21,447. At the higher range of the middle quintile, $60,000 is one-third of the family’s annual income for just one child. Yet, the fact that this family would likely have an expected contribution so high as to disqualify the student from Pell grant eligibility seems totally unreasonable. These students still have great financial need!
Widespread opposition to the existing Pell grant program will make expansion politically challenging. However, as President Obama has said, "A world-class education is the single most important factor in determining not just whether our kids can compete for the best jobs but whether America can out-compete countries around the world. America's business leaders understand that when it comes to education, we need to up our game. That's why we're working together to put an outstanding education within reach for every child."
If we do nothing to help students who are falling into the middle-class abyss, and if college continues to become unaffordable to a growing number of students, we must be willing to accept the consequences of a less-educated workforce at a time when a quality education is more important than ever, not only for the betterment of the individual (intellectually and financially) but for the future of our country.
Hamid Shirvani is president of California State University at Stanislaus.
No one likes rising prices. In an era of substantial increases in tuition at public universities, alums wistfully recall that they paid $50 a semester for their education. But they may not recall the reason that bargain price was possible: strong financial support from state legislatures.
The upward trend in public university tuition over the last decade is largely a function of the erosion of that support -- the failure of legislative funding to keep pace with enrollment growth and inflation and the resulting reliance on tuition and fees to pick up the slack. The price -- if not the explanation -- has gotten plenty of coverage in the news media.
One impact of the notoriety of higher tuition costs may be to deter low-income students from even applying for university admission. In economic terminology, the perception of price may itself reduce demand. We know from behavioral economics that perceptions of pricing are often critical in predicting consumer behavior. There is solid evidence that poor families often overestimate the cost of higher education, sometimes doubling the actual amount. If they are the first in their families to consider college, they may not have good sources of information, they may fear the unknown, they may worry about amassing debt when they are not confident of academic success.
This is confirmed by the fact that high-performing, low-income students enroll at universities at a much lower rate than do low-performing, high-income students. Ideally, well before the 12th grade, students should be aware of three attributes of higher education financing:
The "sticker price" of higher education, which is so highly publicized, is not the same as the average price actually paid by students. In the University of Texas System, the average discount, provided through scholarships and grants, is 30 percent off "list." The discount is often even larger at private institutions. Some students pay full freight, but many others do not pay any tuition and fees at all.
Pell Grants from the federal government are "portable;" they follow the student to wherever he or she is admitted. Many but not all state programs have a similar feature. With all of the acrimonious debate over voucher systems in elementary and secondary education, the fact is that there has been a voucher system in higher education for many years.
Low- and modest-interest-rate loans to finance one's higher education are outstanding investments in human capital. The average college graduate will earn about $1 million more than a high school graduate over his or her lifetime. This beats the heck out of a loan for an automobile or kitchen appliance, assets that depreciate over time. Low-income families that understandably eschew debt of all kind should reconsider in the case of higher education. Having said this, it is imperative to improve university graduation rates, so that students see the benefits of their investment and fully realize their potential.
One way to educate and clear up perception issues for low-income families is for the federal government to make Pell Grant commitments in the 11th grade. For families barely getting by, the reality of an early commitment swamps the often ineffective, written and oral assurances that students receive. Early award notification might guide a student's curricular choices as he or she seeks to be college-ready and college-eligible. It might also encourage a student to work harder during the senior year, to provide a clear sense of purpose rather than drifting through an unproductive senior year, and it might encourage families to do more financial planning and to seek out other sources of support, including merit-based scholarships.
Not many years ago, along with officials from other Texas universities, I addressed a crowd of low-income Hispanic high school students and their parents from the Rio Grande Valley at a celebratory event for honors students. One of my colleagues extolled the virtues of students attending his university. When he got around to financial aid, he said that no student would be denied an education for lack of financial means, that his institution had fulsome, need-based scholarship programs. I looked around the room. The families had almost no reaction. These were just words, no matter how honorable the source. If those students had already received financial aid commitments, it would have been a very different story. As Ronald Reagan said, “trust but verify.”
Currently, students cannot complete the Free Application for Federal Student Aid (FAFSA) until January 1 of their senior year of high school. Despite electronic processing, the notice of federal, state and institutional awards may not arrive at the doorstep until the summer before a student enrolls in college. This often late notice, combined with the much criticized complexity of the form, predictably has a negative effect on the decision as to whether to apply to college--particularly among low-income families. The College Cost Reduction and Access Act of 2007 commendably has taken steps to reduce complexity and to increase the level of family income (from $20,000 to $30,000) to qualify for a zero family contribution, but the timeline for application and notification remains unchanged. There is pending legislation for a pilot study to determine if awards are feasible as early as the junior year of high school, but it is not clear it will survive the higher education reauthorization process.
An early award program for Pell Grants would require the resolution of a number of obstacles. A family's income might significantly rise between the junior and senior year of high school. My own view, supported by the experience in Indiana, Oklahoma and other states awarding early state-provided financial aid, is that the occasional miscalculation is more than offset by the positive effects of an early award system on low-income families. The perfect is indeed the enemy of the good. What if family income declines? Adjustments in the package might be made in the second year of college or institutions might make up the differences with institutional or state funds. Or Pell funds might be set aside for this purpose.
There would also be some conflict with state financial aid laws and practices. Many state awards are not portable but dependent on the institution to which the student is admitted. A university cannot process such awards until a student is admitted, and thus, in such circumstances, the student would face a two-step process, an 11th grade application and another in the 12th grade. Furthermore, many states award merit-based scholarships. There are no simple answers. One approach, building on an analogy to the interplay between federal and state income taxes, would be to encourage the states to piggy-back on the Pell Grants and to create supplementary and portable state grant programs.
Perhaps the riskiest part of the early award strategy is that the students and their families will receive only partial information in the 11th grade as to the affordability of college. This can easily mislead. For example, an 11th grader might be notified of an award of the maximum Pell Grant of $4,310 (the maximum grant will rise to $4,800 next academic year and to higher figures in subsequent years), but the estimate of total expenses may be $15,000 or more at a public university. A poor family might quite reasonably think that it is responsible for the entire shortfall, not realizing that other financial aid may be available (or realizing it but worrying that it might not materialize).
One partial solution, if federal and state programs are in lock-step, is to make the state scholarship award at the same time. Another approach is to build on a recent trend among private and public universities. Public institutions such as the Universities of North Carolina, Texas, Virginia and Washington have established income cut-offs (often in the $25,000 range or higher), guaranteeing that families at or below those levels will receive adequate scholarships to cover tuition and fees. Harvard, the University of Pennsylvania and other distinguished private universities have similar programs. If the early award notification included such information for institutions designated by the student, the adverse effect of the partial information might be largely offset.
On balance, the benefits of an early award program for Pell Grants, particularly in terms of higher college participation rates for low-income Americans, outweigh the risks. If there is still doubt, the U.S. Department of Education might pilot such programs in a number of states. But one must remember that there is no silver-bullet solution for improving access. Out-of-pocket costs are critically important to families, but the greatest cost is the value of the work opportunities lost through college enrollment.
It is true that many students may be ill-prepared academically for college, requiring developmental courses to be college-ready. Many may also not be motivated to make the effort. Any solution to improving access to college for low-income students would be incomplete without addressing these issues, but an 11th grade award of Pell Grants may ameliorate the false perceptions of costs that cloud the application and enrollment processes.
Mark G. Yudof
Mark G. Yudof is chancellor of the University of Texas System.
First in his speech to Congress and then in his first budget, President Obama made his campaign rhetoric about higher education a reality. His speech laid out three ambitious goals for higher education. His budget would make Pell Grants an entitlement and would make permanent the tuition tax credit changes that were part of last month’s economic stimulus legislation. These and other changes in federal higher education policy would largely be paid for through a fundamental shift in how federal student loans are financed.
It is difficult to recall any prime-time presidential speech where higher education was spotlighted more as a domestic priority. But to examine the feasibility and advisability of this ambitious agenda, it is worth asking if the president’s goals for higher education are both consistent with one another and achievable. And whether the president’s budget proposals are the best way to achieve these lofty goals must also be considered.
Are the president’s three goals consistent with each other? Not entirely. First he called for increasing college graduation rates, then said every American should be able to try postsecondary education for at least one year. These two goals don’t mesh. Graduation rates are the share of enrolled students completing a degree. Giving more people a chance to go to college is why graduation rates in the U.S. traditionally have been modest when compared to other countries. Thus, any effort to produce more access now is likely to make it more difficult to increase graduation rates in the future.
The president’s third goal for higher education was that by 2020, the U.S. should again be the leader among OECD countries in attainment rates -- the proportion of the working age population that holds a postsecondary degree. Here the objective of increasing access is consistent with increasing attainment. The U.S., in fact, is a prime example of how more access has led to higher attainment even when graduation rates are modest.
The U.S. continues to have one of the highest bachelor's degree attainment rates among OECD countries. Associate’s degrees from community colleges are where the U.S. has had an average record of attainment; this remains the case. But if our work force surveys counted people with certificates and other short-term credentials as sub-bachelor's degree holders in the same way as Canada, which has the highest overall attainment rates among OECD countries, our attainment rate would be higher than Canada's and we already would rank as the highest in the world (so we don't need to wait until 2020!).
The president’s speechwriters picked up on a drumbeat sounded by many groups in this country in recent years. The argument is that the U.S. is falling behind when it comes to higher education and that the federal and state governments must increase their funding for both students and for institutions if the country is to remain globally competitive.
The statistics cited in this drumbeat include: college access is falling, graduation rates are low and declining, attainment rates also are declining, and the rate that younger workers attain their degrees is lower than older workers for the first time in our history. These assertions are based on OECD-reported statistics or on their interpretation.
But these assertions are often misleading and in several cases simply wrong. In higher education, and many other functional areas, the OECD indicators are often proxy figures because member countries simply do not collect data in similar ways. As a result, OECD reports may not accurately reflect reality in the individual countries. For example, the OECD version of participation rates – enrollment ratios -- make it seem that access in the U.S. is declining, but it is very hard to find any other evidence that this is so.
Enrollments in the U.S. grew by 3 percent per year in the first half of the 2000's -- a high rate of growth historically -- in reaction to the recession and other factors; 18 million students now annually enroll in the fall -- an all time high. And these figures do not include most career school students as well as those students in traditional institutions who don’t enroll in the fall.
The college graduation rates as reported by OECD are particularly problematic; they divide the number of students who graduate in a year by the population of traditional graduation age in that year. They are really more a bad measure of attainment than of graduation and they should not be used in any serious way. Based on other data sources, the U.S. probably has a below-average graduation rate that reflects the philosophy of a mass higher education system that aims to give people a chance to go to college.
The drumbeaters, and now the president, have made attainment a key national goal by combining our historically high bachelor’s degree attainment with average sub-bachelor’s rates to produce a mediocre OECD ranking for the combined rate. But as noted above, this ignores the fact that we don’t count career school programs in measuring attainment rates while others like Canada do. More importantly, looking at the combined rate can mask the very real challenges that community colleges face which need to be addressed.
Assertions about declines in the U.S. attainment rate also can be deceiving. They are based on comparing degree attainment of the youngest and the oldest workers; in the U.S. these rates are virtually the same. By contrast, higher education in most OECD countries is growing and younger workers are gaining degrees at much higher rates than older workers. But U.S. Census data confirm that our attainment rates, at least for those earning bachelor’s degrees, are growing, albeit more slowly than for many other OECD countries. The reason for this paradox: younger workers continue to attain degrees as they age and their attainment rate eventually will exceed that for current older workers.
Expanding a Flawed Status Quo?
Statistics aside, though, we all recognize that all facets of our postsecondary pipeline -- preparation, participation, and persistence as well as attainment -- must improve if we are to remain globally competitive, particularly for the most disadvantaged students. The problem with the president’s proposals is that current programs and policies to some extent have contributed to the current challenges; expanding them thus may not be the best solution. It also is not clear whether the president’s budget proposals as presented will lead to higher graduation rates and levels of attainment.
For example, putting more money into Pell Grants and expanding tuition tax credits should help improve access, at least in open-enrollment community colleges and for-profit colleges, but there is little evidence this will help improve graduation rates.
Moreover, some of us believe these policies may not achieve more access if steps are not also taken to prevent the additional funds from fueling higher tuitions – this is the “health care cost problem” in higher education caused in part by growing loan availability that we haven't been willing to address directly. There is also reason to worry that past expansions in Pell Grants may have led many institutions to rely more on federal funds for access so that they could use discounts for marketing to middle income students who can pay a bigger portion of the bill. Thus, we should be wary of “substitution effects,” as well as possible price effects, as unintended consequences of federal policies.
One effect of the president’s proposals to make Pell Grants a federal entitlement, index its future growth to inflation, and make tax credits refundable is that this will increase the degree of overlap between these two largest forms of non-repayable aid. We should aim instead to reduce that overlap in the future by focusing Pell Grants more on students from the lowest income families who pay no or little taxes and rely on tuition tax credits as the primary vehicle for helping students from families who pay income taxes as well as growing numbers of older workers enrolling in college.
The president’s budget also picks up on a campaign promise that would represent another form of integration between federal aid and the tax system: allow families and students to permit their income tax information to be used to determine aid eligibility. This proposal would simplify the system and increase access by doing away with the dreaded FAFSA form. A further form of integration would base eligibility for Pell Grants and loan subsidies on how much taxes families and students would pay under the 1040A tax rules.
For those of us who have long advocated relying more on federal financing of student loans than subsidizing banks, the president’s direct loan proposal is certainly welcome. But it makes the mistake, as others have before, of focusing too much on when students borrow and not nearly enough on when repayment begins and heavy loan burdens become a reality. Democrats demonstrated this foible when assuming leadership of the House in the previous Congress. They made higher education one of their top legislative priorities and their major accomplishment was to halve the interest rates for borrowers for whom the federal government already pays the interest while they are in school. For the many millions of borrowers already repaying their loans, much less help was provided.
What is really needed in this country with respect to student loans is a seamless system so that it does not matter whether the federal government or the private sector initially finances the loans. In such a system the principal focus would be on providing all borrowers with viable options that allow them to make their repayments manageable relative to their incomes once they complete their education. For such a system to work it would also be necessary for institutions to become an active partner by reducing their sticker price for those students who must borrow, thereby reducing debt burdens.
The president’s budget does include one proposal that could make a real difference with respect to improving graduation rates. It would pay states and institutions based on the numbers of low-income students who graduate. This kind of supply-side approach to get states and institutions more involved in improving attainment, particularly for the most disadvantaged students, is much needed and a welcome addition to the debate. But the president proposes this new fund be layered on top of longstanding federal programs that fund states and institutions to provide aid. Instead, the new fund should replace the existing programs and thereby do away with anachronistic funding formulas that favor wealthier states and institutions because they traditionally have provided more aid.
What is missing in the president’s budget is a much more aggressive early intervention strategy that reaches out to at-risk students well before they arrive in college. This gap is surprising given that Secretary of Education Duncan cut his teeth professionally on such a program in Chicago. There is evidence that federal programs like Gear Up and private efforts such as I Have a Dream often can be more effective than traditional student aid in getting at-risk students onto the college track and keeping them there. These efforts deserve big increases in funding and attention before we limit our future options by making Pell Grants another federal entitlement.
It would be beneficial if the president’s speech and budget stimulated a thoughtful debate in this country about how we pay for college and other postsecondary training. This debate should use real statistics in comparing us with other countries as well as drawing on the experience of those other countries. We should also be examining closely what states and the private sector here are accomplishing.
This debate should also include a hard look at the mix of academic and vocational training we provide in this country and produce a strategy that will maximize our ability to compete globally and to rebuild the infrastructure that we all know needs repair. The answer ultimately may well be found more in policies that produce better-prepared high school graduates, more effective community colleges, a network of well-run career schools, and much greater use of apprenticeships that are all tied to current and emerging labor force needs than in any large-scale expansion of our universities.
Arthur M. Hauptman
Arthur M. Hauptman is a public policy consultant specializing in higher education finance issues. He is based in Arlington, Va., and can be reached at Art.Hauptman@yahoo.com.