Don’t Make the Pell Grant an Entitlement

by Andrew Gillen and Richard Vedder

For many months Congress has been considering a vast overhaul of federal student financial aid programs. Matters are coming to a head, as Democrats try to fold student aid changes into the health care bill. A key provision is to make the main program helping lower income students, the Pell grant, an entitlement and increase the maximum award every year at the rate of inflation plus one percent (Note, there are reports this morning that the plus one has now been dropped, but the specifics are hazy, and it's not clear if any changes in the entitlement provisions were made). This seemingly meets a real need: After adjusting for inflation, the average Pell award in the late 2000s was roughly the same as it was in the 1970s. Meanwhile tuition has exploded, so the average Pell grant now covers less of the cost of a college education.

Pell grants are essentially vouchers for higher education, and both of us have praised Pell grants in the past, one recently testifying before the Senate that they are the “crown jewel” of federal aid programs, and the other a signatory of the Spellings Commission report recommending Pell Grant expansion as part of a simplification of our current Byzantine system of federal student financial aid. Nevertheless, we feel that making the Pell grant an entitlement is a big mistake.

Entitlements Are Forever

Most importantly, once the Pell grant becomes an entitlement, it will be untouchable. This would be a continuation of what Gene Steuerle calls “fiscal sclerosis — setting future national priorities in stone long before the future has arrived.” While the Pell grant is the best existing federal aid program (it serves egalitarian objectives, is simple, and is directed towards empowering students, not institutions), possibly even better programs could be designed in the future. What happens if, several years from now, we want to give larger Pell grants to students maintaining a high GPA, or to students majoring in STEM fields?

Recall that efforts to reform Social Security by former President Bush, and the more recent efforts of President Obama to cut wasteful spending from Medicare were misleadingly attacked as craven attempts to starve and kill grandma. The lesson is obvious – once a program is made an entitlement, we are stuck with it. Once the Pell grant is an entitlement, most money available for financial aid will be earmarked to it, and the program would be nearly impossible to reform or discontinue. This would lock us into a potentially inferior program long after it has outlived its usefulness, possibly making Pell grants the 21st century equivalent of the mohair subsidy. We like the Pell, but we’re not ready to commit to it for the rest of our lives.

It’s Unrealistic

Our existing entitlement programs have already created huge structural problems for the federal budget. Bruce Bartlett has calculated that the “total unfunded indebtedness of Social Security and Medicare comes to $106.4 trillion.” Without substantial cuts to benefits and/or sharp increases in the taxes imposed to fund these programs, we are already headed for a serious budget crisis. Arguably, we are already there - in 2009, all federal revenues were devoted to meeting past “mandatory” promises.

Making the Pell grant an entitlement would add to these already unsustainable commitments, and when combined with recent calls to expand college enrollment, this could severely aggravate the already precarious long term outlook of the budget. The chart below shows the actual and projected spending (based on the latest CBO figures publicly available) of the program. It is estimated that in 2009 dollars, we will breach the 30 billion dollar mark in 2012, the 40 billion dollar mark in 2018, and the 50 billion dollar mark 2025 (the last five years of the CBO estimate was used to extrapolate out to 2030).

Sources: College Board, Bureau of Labor Statistics, Congressional Budget Office, and authors’ calculations.

To be clear, we’re in favor of increased funding for Pell grants. But we’d like to see a plan for how to pay for it before we start making costly promises for the future. The main source of funding that is being proposed is to end the FFEL program for student loans, which is both dubious fiscally and otherwise highly undesirable, for reasons we have discussed elsewhere. But even ignoring these issues and assuming that we do realize all the real and imaginary savings from killing the FFEL program, the savings probably only gets us through 2016, maybe 2018 if the awards grow more slowly. After that, we’ll need other sources of funding, which will be increasingly difficult since Social Security shifts from surplus to deficit at about the same time. Given the choice between funding the country’s past or its future, we fear the decision politicians will make.

Moreover, other programs that have been indexed to the rate of inflation have come under criticism and calls for reform to slow their increase, in large part because the Consumer Price Index overestimates true inflation. Thus, in the long run, trying to have benefits increase at the rate of inflation is probably unsustainable, and increasing them faster than the rate of inflation is simply delusional.

One of the main reasons the Pell is a good program is that it is one of the few that succeeds in providing financial aid for the disadvantaged without contributing importantly to the explosion in tuition. Most research, including our own, has shown that the current Pell grant program does not contribute to the tuition explosion, largely because the awards are modest in size and the income restrictions ensure that the money goes to the truly disadvantaged. However, as the awards grow in size, there will likely be erosion in income restrictions, much as we have seen with student loans, where more than a third of students from families making more than $100,000 receive a federal Stafford loan. Great expansion in the program thus will almost certainly aggravate the already severe increase in student college costs.

To sum up, the Pell grant is the preferred approach for the government to provide federal aid, and expanding this program is defensible even in times of fiscal stringency. But making it an entitlement and setting it to increase at the rate of inflation (or more) is a huge mistake.