Redoing Pell

Arthur Hauptman proposes a reset for the U.S. government's main financial aid program, to restore it to its initial purpose of assuring the neediest students that they will have funds for college.

January 24, 2012

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.


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