Now Here's an Idea I Fully Support!

by Jonathan Robe

Over at the Quick and the Ed, Ben Miller has had a couple of very good posts (here and here) on the subject of Pell Grants and the effect they have (or rather don't have) on college affordability. I highly encourage you to read both of them, if you have not already.

An excerpt from his second post (my emphasis):

Providing several thousand dollars annually to students is a very expensive undertaking... If advocates want to strenuously argue for keeping Pell, then other options should be on the table—things like tax credits that are less effective public policy anyway. And schools need to do a better job highlighting why Pell matters. Colleges need to publish graduation rates of Pell students, there needs to be better documentation of why it matters at a personal level. Just continuing to say we need to spend money on Pell to spend money on Pell won’t work anymore.

Now there's an idea which I can fully embrace! We can tell how much money the Pell program is pumping into schools and how many students receive Pell funding, but we can tell precious little about whether the taxpayer investment in Pell Grants is actually worth all that colleges would make it out to be. Take City College of CUNY as an example (albeit an extreme one). According to the NCES, a majority of City College undergraduates (55%) receive Pell Grants, yet only 6% actually graduate within four years! If we extend the window to six years, still only 35% of students graduate from City College. Thus, at a school where the majority of students receive Pell Grants, a majority of students don't even graduate within six years. (Of course, I suppose I should add here the obligatory caveat about difficulties with the report graduation figures, but the point I'm making here is, I think, largely correct.)

How many of those students who don't graduate are the same ones receiving Pell Grants? We don't know, but we ought to know. Colleges owe it to taxpayers to be accountable for how they use all of the tax funds they receive, particularly from the Pell program. And Miller is right; colleges should do this on their own and with gusto, not dragging their feet until they are required to do so.

The Real ICA Scandal

By: Matthew Denhart & Michael Malesick

As the college football season is getting underway, all the talk recently has focused on reports that college players attended a Miami Beach party thrown by 49ers running back Frank Gore at which professional agents were present (and perhaps helped fund). If true, this of course would be a violation of sacrosanct NCCA policies that forbid amateur college athletes from financially benefiting from their sports participation. But who cares? We have argued that by-and-large, major college athletics have greatly deviated from their "amateur" ideal and that players should be paid for their services anyway.

Data provided by USA Today and the U.S. Department of Education suggest that the real intercollegiate athletics (ICA) scandal is the amount of money used to subsidize sports in the first place. CCAP has argued this subsidy acts as a tax on scarce educational resources and that serious reform is needed.

Increasing college access to lower income groups through Pell grant assistance is a major national objective. Yet, how serious is this commitment relative to subsidizing ICA? We have explored this question, and our findings are not very encouraging.

Dividing ICA subsidy outlays by Pell grant outlays for 2008 (the most recent year data are available) shows that at the 99 public FBS schools, the average ratio was 59 percent. This means that, on average, more than half as many resources are devoted to ICA than to funding Pell grants for students. In a sample 108 schools from the FCS and "No Football" divisions, the ratio is even worse at 108 percent, meaning that at these schools, on average, more money is devoted to subsidizing athletics than to Pell grants.

Some schools are worse than others. Listed below are the top 10 most egregious offenders in the FBS and FCS/No Football:

FBS
1. U of Virginia (289%)
2. U of Wyoming (240%)
3. U of Nevada-Reno (186%)
4. Miami U (OH) (161%)
5. Louisiana Tech U. (146%)
6. U of Alabama-Birmingham (138%)
7. Eastern Michigan U. (127%)
8. U of Maryland (124%)
9. U of Connecticut (123%)
10. Ball State U (122%)

FCS/No Football
1. Citadel (667%)
2. U of Delaware (564%)
3. College of William & Mary (490%)
4. James Madison U (486%)
5. Manhattan College (415%)
6. VMI (386%)
7. Longwood U (325%)
8. U of New Hampshire (268%)
9. Delaware State U (251%)
10. Coastal Carolina U (244%)

Topping the FBS list is the University of Virginia, where Pell grant outlays were only $4.1 million compared to ICA subsidies close to $11.9 million. At the nation's oldest public institution, William and Mary, ICA subsidies were over $9.5 million while Pell grant outlays were much lower at around $1.95 million.

While America's political and academic leaders espouse the noble goal of increased access, their funding priorities do not match the rhetoric. As college tuition continues to climb, funding for athletics has likewise grown. Perhaps the NCAA should be investigating this scandal rather than fretting over the partying habits of college athletes.

How Many Cheers?

by Andrew Gillen

I’ve got some mixed emotions about the bill that was just signed (Note I’m ignoring health care completely and just focusing on the education side.) Inside Higher Ed has a good breakdown of who won and who lost in the edusphere.

The main winners were Pell grant recipients, and the main losers were private lenders in the late FFEL program. There were a few other secondary winners and some collateral damage (open courseware took a hit, which is bad, and the higher ed lobby took a hit, which was good) but lenders and Pell grants were the primary show.

I’ve backed larger Pell grants, and I’ve favored the abolition of FFEL, so I’m happy with the actual outcome as regards these two issues. But my happiness is muted somewhat by the realization of how close we came to getting both of them wrong.

From what I’ve read, killing FFEL would have required reconciliation even if it wasn’t attached to health care, because it didn’t have 60 votes in the Senate. I find this highly discouraging. If we were starting a lending program from scratch, and someone proposed anything resembling FFEL, they’d be thought sadistic for deliberately inflicting unnecessary pain on the country. Once we had it, the only reason to adhere to it was the difficulty of transitioning to a better system. Many of these, such as job losses for those involved, carry a bit more weight when the unemployment rate is hovering around 10%, but are still not reason enough to keep FFEL, IMHO. So the fact that killing FFEL couldn’t get 60 votes has some pretty scary implications to me.

For Pell, while we ended up with a good outcome (more money, no entitlement), that was not the goal aimed for. The goal was to make the Pell an entitlement and increase it at the rate of inflation plus one. As Rich and I noted last week, this would have been a huge mistake.

I don’t know exactly how close we came to setting that mistake in stone, but it was pretty close. Had the Senate not sat on the bill so long that it resulted in a lower score from the CBO, and had they not needed to use some of the money from killing FFEL to pay for health care, I think it is very likely that we would have ended up achieving these misguided goals.

The Obama administration comes out of this with mixed evaluations. They ended up doing the right thing on both FFEL and Pell. For FFEL they deserve kudos - their position was correct, and they dragged everyone else kicking and screaming along with them. For Pell they don’t - their position was incorrect, and they were dragged kicking and screaming by reality into backing a better policy.

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.

Rising College Costs: A Federal Role?

The NY Times Room for Debate forum today asks the questions:

Is there a connection between federal education aid and the inflation rate in higher education? More broadly, what can Washington do, if anything, to improve the effectiveness of its programs and reduce the costs of college?

Richard Vedder opines:

President Obama wants more and bigger Pell Grants to help relieve rising college costs, along with revamped student loan programs. I think he has it backward: federal student financial assistance is more a cause than a consequence of rising college costs.

Work done at my research center reinforces findings of others that exploding student loan programs have contributed to higher tuition charges, and if Pell Grants grow more inclusive and generous, the same effect will occur with them.

The president joins many Americans in wanting to equalize college participation for all. Yet the root cause of low college attainment among poor people is not a lack of resources. It is dysfunctional living arrangements and abysmal academic preparation in our mostly free public secondary schools, particularly those located in inner cities. Indeed, Pell Grant recipients on average are less likely to graduate within six years from college — despite generous financial aid — than others, in large part because of prior educational deficiencies.

It is an inconvenient truth that a larger portion of college students were from low-income backgrounds in 1970, before Pell Grants, than today. No doubt the rise in college costs relative to family incomes makes more believe that higher education is something for the affluent, not everyone. But the cure — federal student aid — is causing (at least in part) the disease.

The demand for higher education grows with rising federal financial assistance, but the supply grows less rapidly, pushing up prices (tuition fees). Supply is comparatively rigid because the so-called best schools attain their lofty reputation by turning away customers: college rankings are enhanced by taking very qualified bright kids who likely will graduate (and are disproportionately affluent). Dropping money out of airplanes over the houses of college students (or its equivalent) is not the solution.

The three “I”s of higher education reform are incentives, information and innovation. Colleges must provide incentives for their staff to want to cut costs and be efficient, they must provide better information on outcomes and finances to consumers, donors and taxpayers, and they must embrace innovation in the forms of labor-saving technology. That, not more student financial aid, is the key to making colleges more affordable.

Arthur Hauptman also offers some interesting analysis:

Unlike Pell Grants, as part of the aid packaging process, colleges have some control over how much students borrow as loan amounts. Moreover, just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow.

As does Pat Callan:

But recent increases in Pell Grants during the Bush and Obama administrations and higher levels of federal expenditure for the program have had little, if any effect, on improving college access and affordability. As additional Pell dollars are absorbed by steep tuition increases, the effect is to shift costs from colleges and states to students and the federal taxpayer, with little or no net gain in higher education opportunity.