Pell Grants (Broadly and Narrowly Defined) Revisited

By Richard Vedder

I read that George Miller and Buck McKeon, the chair and leading minority representative on the House Education and Labor Committee, are cosponsoring a bill that would allow students to receive full Pell Grants even if the stated tuition is less than the grant. The argument for this is that the current system encourages students to go to higher cost schools, since the government gives greater aid. By giving full Pells to students going to low cost community college, we encourage community college attendance, and lower per student total higher education costs by switching some students from the higher to lower priced alternatives. In general, that is a strategy I advocated in my tenure on the Spellings Commission.

But incentives cut both ways. If nearly everyone at low cost college X is on a Pell Grant, the college has enormous incentive under the Miller-McKeon plan to raise tuition fees to the full Pell Grant amount. Community colleges are the one relatively lean and mean segment of higher ed, and this gives them incentives to adopt the practices of their more affluent four year counterparts. Moreover, the proposal will cost taxpayers more money, and force reductions ultimately in either other forms of government spending or private expenditure (assuming, correctly I think, that government spending ultimtely crowds out private spending through some mechanism --tax increases, interest rate hikes, more inflation).
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Three cheers to Alex Davidson of Forbes. He asked me whether, in effect, students really gain little or nothing from federal student aid programs, since colleges, which administer the aid, merely adjust their own institutional support to take account of federal grants. I think that is by and large true. Although it is a complicated issue with several nuances I will not get into now, it is my suspicion that the practice of tuition discounting has been greatly accentuated by government grant programs growing rapidly after about 1980. As a student gets a Pell Grant, she gets less institutional aid --and the school may raise its tuition a bit more because a third party is picking up more of the bills. Indeed, I am beginning to think the big winners from the student financial aid explosion are not the students, but rather the institutions and their staffs --and falling teaching loads, rising non-faculty hires, and bigger salaries are all consistent with this view. Stay tuned.