Pell Grants

Meshing Speechwriting and Budget Making

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.

Questionable Comparisons

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
Author's email:

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

Subprime Student Loans

An unintended consequence of making access to college an entitlement readily available to all high school graduates is that serious study in high school has become optional, even for those intending to go to college. Without an incentive to study diligently, many students are disengaged in high school and, as a result, underprepared for college. Some freshmen arrive at college thinking that having fun is the main reason they are at college and that the pursuit of knowledge should be available for when they have nothing better to do.

This situation came about relatively recently, partly the result of a change in the meaning of financial aid. Until World War II, financial aid referred to traditional scholarships that were awarded to academically meritorious students who mostly also were needy. The G.I. Bill, which financed college for discharged veterans of World War II, foreshadowed broader programs of federal grants and loans -- 20 at present from the federal government, 17 from the Department of Education and 3 more from other federal agencies -- that essentially universalized "financial aid." Few of them require better than mediocre previous or current academic achievement. As a consequence, about 30 percent of incoming freshmen at four-year colleges and over half the freshmen at two-year colleges are assigned to remedial courses in writing, mathematics, or other courses.

Nevertheless, federal grant programs, though supplemented by state and private grant programs, were never able to cover the financial needs of the millions of college students whose families could not afford the rising costs of attending college. So Congress established several loan programs, some indirect loans whose federal subsidies made attractive to banks, credit unions, and other financial institutions, and some financed directly by the Department of Education. Unlike Pell Grants and other federal grant programs for college students such as work-study programs for needy college students, which do not have to be repaid, loans must be repaid with interest after graduating from or leaving college.

Repayment is a problem for student borrowers. Many of these loans are subprime -- toxic in the same sense that some mortgages were toxic. They are even more likely to be subprime than mortgages are; the only collateral is usually the student’s future earning prospects after graduating, presumably enhanced by what he or she has learned at college. Student borrowers who do not learn enough from their educations to get jobs that permit then to repay what they have borrowed are likely to default on their loans, leaving taxpayers liable for them.

The student financial aid system was created by Congress not as an integrated system but in pieces: to do a variety of things for a variety of reasons. One major objective was to help youngsters from low-income families gain access to higher education. In the light of our egalitarian ideals, limiting educational preparation for good careers to children fortunate enough to have educated, affluent parents seemed immoral. A second reason for promoting college access for youngsters from low-income families is that, as Jefferson argued, persons of extraordinary talent may be born in humble circumstances, and giving them educational opportunities might enable the American economy to be more productive. The knowledge explosion during the 20th century demonstrated that ideas are extremely important to the "creative destruction" that a market system needs in order for the economy to grow. Institutions of higher education are where many new ideas are developed by adults through research and transmitted to youngsters through teaching. Politicians are referring to this economic growth function when they speak euphorically about student grants and loans as "investments." Realistically speaking, however, only a few federal grant programs -- and none of the loan programs -- seek out top-notch students who will presumably contribute most to the productivity of the American economy; others aim only to make accessible the college experience for children of lower-income families. The existing system is an uneasy compromise between these two objectives.

It is an uneasy compromise partly because promoting access for youngsters from low-income families sometimes conflicts with the meritocratic ideal of educating youngsters most capable of making great intellectual contributions to knowledge. A better compromise could be made to realize these two objectives by targeting the grants and loans devised by the federal financial aid program to needy students studying diligently in order to prepare to go to college. Instead they were set up mainly as incentives simply to go to college, prepared or not. Congress apparently assumed that the colleges would screen admissions appropriately or perhaps Congress was afraid to appear elitist by imposing meritocratic conditions. Thus, federal aid to college students removed most financial barriers to attending college. Applications increased as high school students heard the message that college attendance led to well-paid, interesting careers, and was now affordable. Many colleges expanded facilities and lowered academic standards for admission; virtually any high school graduate could get into some college. Students might have had an incentive to work harder in high school if they had had to demonstrate academic achievement both to gain admission to college and to obtain financial aid to cover expenses while enrolled. The unintended consequence of failing to set this requirement is students graduating from college without good job prospects, a problem made worse in an economy where the unemployment rate has now risen above 10 percent. The predictable result is a growing rate of student loan defaults.

I am about to propose to change federal loan programs to college students but not to change federal educational grants to college students. Why the difference? Both suffer from the same drawback; they entitle mediocre as well as able students to obtain federal financial aid. A different approach is justifiable because federal loans have much worse consequences for both students and taxpayers than federal grants.

Consider grants first. As gifts from American taxpayers that students do not have to repay, it is true that grants are a complete loss to taxpayers if students do not make contributions to American society as a result of going to college. On the other hand, grants involve less than half as much money as loans in the aggregate as loans. And even individual cases of defaulted loans, accompanied as they are by interest and penalties, can be very large burdens both to American taxpayers and to individual student borrowers. In a November 2009 case decided by a panel of five New York State judges who ruled against admitting a student borrower to the New York bar, the panel said, “His application demonstrates a course of action amounting to neglect of financial responsibilities with respect to the student loans he has accumulated since 1983.” The student owed nearly half a million dollars. This admittedly unusual case shows the advantage to both students and taxpayers of grants over loans. Because there are strict limits to the annual grants that students can receive from the Department of Education in any academic year, students cannot attend college whose costs are way beyond their means.

With the help of Pell and other grants, students can afford a community college even if they cannot get loans rather than an expensive private college, especially if they live at home and commute. Students who start at community colleges and are successful academically can transfer to four-year colleges for their junior and senior years. In other words, student grants ignore academic merit even though everyone knows that students who have not done well in high school are unlikely to do better in college. These grants are an expression of American society’s willingness to make higher education available even to students who are poor risks. Giving Pell Grants is a societal bet -- though a long shot -- that mediocre students are late bloomers and can do better scholastically in the future, not that mediocrity is acceptable in itself.

This bet is riskier for loans, and consequently I recommend that loans be treated differently. Congress and the President should start to require the Department of Education to make student loans contingent on the best available evidence of the student’s prospects for repaying them, such as good job prospects based on high school and college grades, curriculum in which they enrolled, and their credit ratings. Defaults would still occur. Predicting the earning potential of college students is chancy. However, many young people would almost certainly be saved from financial ruin, and American taxpayers would almost certainly not have to bail out as many subprime student loans.

As theologians have said, we mean well and do ill and justify our ill-doing by our well-meaning. The unintended consequences of good intentions apply to our system of financial aid to American college students, as it did to our providing mortgage money to borrowers who could by no stretch of the imagination have kept up payments on their mortgages.

To sum up: Federal grants give mediocre students a chance to become late bloomers. Loans, however, are expected to be repaid, and mediocre high school students with bad credit ratings are likely to default on their loans, causing serious financial problems for themselves and financial complications for the American economy. Targeting loans to students with good prospects for repaying them is more prudent financially and makes more sense educationally. Some illiterate high school graduates have already sued their high schools for educational malpractice; disappointed college graduates may follow suit. Some diplomas are "tickets to nowhere."

Jackson Toby
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Jackson Toby is professor emeritus of sociology at Rutgers University. His new book, The Lowering of Higher Education in America: Why Financial Aid Should Be Based on Student Performance,was published last month by Praeger.

Road Not Taken on Pell Grants

Smart Title: 
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The numbers are bleak and -- for anyone who cares about the vibrancy of the American economy or the importance of an educated citizenry -- deeply worrisome: the United States has fallen to 17th in the world in high school graduation rates and 7th in college-going rates, and is the only industrialized country whose rates are falling.

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'Good Day' for For-Profit Colleges

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