How Colleges Abuse Pell Grants

A paper out by the New America Foundation today argues that despite Pell grants from the federal government for low-income students, and widespread institutional assurances that they attempt to keep college affordable for the poor, colleges, both public and private, are becoming far too expensive. And that’s because colleges seem to be exploiting Pell.

Hundreds of colleges, it turns out “expect the neediest students to pay an amount that is equal to or even more than their families’ yearly earnings.” And so students take on crippling loans. An analysis of American colleges’ net price (what students really pay, not published tuition) reveals that,

There is compelling evidence to suggest that many schools are engaged in an elaborate shell game: using Pell Grants to supplant institutional aid they would have provided to financially needy students otherwise, and then shifting these funds to help recruit wealthier students. This is one reason why even after historic increases in Pell Grant funding, the college-going gap between low income students and their wealthier counterparts remains as wide as ever. Low-income students are not receiving the full benefits intended.

This is ultimately not that surprising, particularly for readers of this publication, but it’s very interesting (and rather chilling) to observe how this happened. Colleges might give lip service to “helping everyone to succeed,” but the reality is that rich students are simply much better for college bottom lines.

Tuition and financial aid departments, which in days past seemed to represent simply the basic price of operating the college and grants provided to a few poor students, have morphed into elaborate offices devoted to “enrollment management,” where colleges hide true cost in an effort to get more rich people in, and keep poor people out.

The report recommends a system of Pell grant “matching,” such that poor colleges would get more money from the federal government:

The carrot is to help schools that simply don’t have the resources to keep down the net prices of the low-income students they serve. The plan would offer Pell bonuses to financially strapped public and private four-year colleges that serve a substantial share of Pell Grant recipients (more than 25 percent) and graduate at least half their students school-wide — with the aim of having these schools use this money to boost their institutional aid budgets and therefore reduce the net prices they charge the neediest students.

And rich colleges would have to supply more of their own cash:

The stick is for wealthier colleges that have chosen to divert their aid to try to buy the best students so they can rise up the U.S. News rankings. These schools, which generally enroll a relatively small share of low-income students but charge them high net prices, would be required to match at least a share of the Pell dollars they receive.

Would that work? Well, perhaps, but part of the problem is that this proposal doesn’t really go far enough in promoting a change in college behavior.

Offering Pell bonuses to poor colleges and requiring Pell matching of rich ones won’t really make college dramatically more affordable over the long term if schools continue the enrollment management strategy of hiking tuition to garner more funds.

If a college costs $35,000 year and Pell provides $5,645 a year, requiring the school to provide $3,000 of its own money might help students a little, but there’s nothing to stop the college from charging $38,000 the next year, even if Pell (funding for which is determined by Congress) stays the same.

For low-income students the effectiveness of Pell doesn’t stem from the precise chunk of change they receive in their federal aid package but, rather, how far that aid goes to cover the real cost of attendance.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer