Memo to Colleges: Don’t Leverage Pell Grant Funding Away

The student loan legislation that President Obama signed into law last week will boost spending on Pell Grants by nearly $40 billion. The aim is to help millions of low- and moderate-income students whose ability to enroll in and complete college are restricted by ever-growing tuition costs. But will the new law be effective in achieving this mission? The answer to that question rests, in large part, in the hands of colleges, which have the power to either help or hinder this vital public policy goal.

At issue is whether colleges will use the infusion of Pell Grant funds to supplement their own institutional financial aid to insure that these students don’t have unmet financial need (and therefore don’t have to take on unmanageable levels of debt to pay for college)? Or whether they will use the new funds to replace institutional aid dollars, which they will then spend on other priorities such as providing "merit" aid to attract wealthier students whose parents can afford to pick up the rest of the tab?

Based on past experience, the outlook is not particularly encouraging. Indeed, two recent reports by the National Association of College and University Business Officers (NACUBO) and Education Trust show just how skewed colleges’ priorities have become.

The NACUBO report, which was released last week, focuses on the financial aid practices of private colleges and universities. As part of an annual survey of its membership, the group found that these schools are providing record-high levels of institutional aid. However, the largest share is being awarded to students without regard of their financial need.

According to the report, private colleges in 2008 awarded nearly 42 percent of their institutional aid dollars using “non-need” criteria, such as academic merit. In comparison, just 36 percent was used strictly for need-based aid, while the remaining 22 percent was distributed using both need and non-need criteria.

NACUBO officials tried to put a positive spin on the data, noting that “a high percentage of institutional grants were awarded based at least partially on students’ demonstrated financial need.” While that may be true, it’s pretty disheartening that these colleges are devoting only a little more than a third of their aid budgets for the exclusive purpose of covering students’ financial need.

Although the report doesn’t go into specifics, it’s clear that many of these colleges, under the sway of enrollment managers, are leveraging their financial aid budgets to buy students who could afford to attend without their help. In many cases, these institutions are trying to lure in top students who will help them improve their rankings in the U.S News & World Report so they can enhance their prestige and marketability. In other cases, their goal is simply to bring in rich kids in order to maximize their revenue. [After all, it’s more profitable for schools to provide four scholarships of $5,000 each for affluent students whose parents who will be able to pay off the balance than it is provide a single $20,000 grant to one low-income student, as the Atlantic Monthly described in a groundbreaking article it ran on enrollment management in 2005.]

As bad as these practices are, what’s even worse is that they are not limited to private colleges.
In January, the research and advocacy group Education Trust released a report showing that public flagship universities and other top four-year state colleges are spending nearly the same amount of their institutional aid dollars to attract upper-middle-income and wealthy students as they are using to fill the financial need of low-income and working-class students.

The report’s authors found that in 2007, public research-extensive universities (which include the flagships as well as more than 50 other prominent state universities) spent $761 million on “merit aid” to students from families with annual incomes of more than $80,000, with a little less than half going to students from families making $115,000 or more. Comparatively, these institutions spent about $782 million on aid to students from families earning under $80,000, with the lowest income students (those from families earning $30,000 or less) receiving a little bit more than half of that amount.

The report also found that that the average unmet need (what’s owed after all grant aid is taken into account) of students from families making $30,000 or less at these institutions is about $10,500. Meanwhile, students from families making more than $115,000 had an average of $17,500 in “overmet need.” As a result, it’s little surprise that the proportion of Pell Grant recipients at flagship universities dropped from about 22 percent in 2004 to around 20 percent in 2007, while the share of high-income students increased from 27 to 30 percent during approximately this same period of time.

So what can the Obama administration do to make sure that this huge infusion of Pell Grant funding has the biggest bang for the buck?

First, it should use its bully pulpit to warn colleges that business as usual is no longer acceptable. Back in the Clinton administration, Education Secretary Richard Riley had some success with this approach when he urged schools not to reduce institutional aid for students who received Clinton’s Hope tax credits. Arne Duncan should take a page from his predecessor’s playbook.

Second, the administration and Democratic Congressional leaders should make clear that they plan to revive prior efforts to lift the veil on colleges’ financial aid packaging policies. In 2008, college lobbyists successfully warded off proposals, included in early versions of the Higher Education Act reauthorization legislation, which would have required schools to provide more detailed data about their institutional aid policies. The U.S. Department of Education and Congress should revisit and expand on those proposals — because a little sunshine in this area could go a long way in persuading at least some schools to change their ways.

Given the huge budget deficit, this is very likely going to be the last major infusion of federal student aid dollars for a very long time. We cannot afford to allow this money to go to waste.


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