Building More Equity into Higher Education Funding

Here are four reforms that would be more cost-effective in improving access to higher education for poor and minority students than big-ticket ideas such as doubling the Pell Grant maximum award. And they need not cost more than what federal, state and local governments are already spending.

Since the creation of federal student aid programs more than a half century ago, more than $1 trillion in federal funds have been spent to improve equity in higher education through grants, loan subsidies, work-study, and tax benefits. Yet chronic equity gaps persist. Black and Latino students from low-income families attend and complete college at a much lower rate than White and Asian students from better-off families. Why is that?

One key reason is that despite the rhetoric, state and federal policies often are not well designed to promote greater equity. For example, how states allocate funds to public higher education often favors the wealthiest institutions. In addition, states devote a small (although growing) share of their higher education funds to grants for low-income students.

Meanwhile, although the principal federal role in higher education is to achieve greater equity by providing more aid to low-income students, in fact federal aid programs are often not well targeted on these students. Instead, political calculations often lead to program eligibility leaking up the income scale in order to secure more votes for the programs.

Why Doubling the Pell Grant Maximum Award Won’t Solve the Problem

A popular argument these days is that the best way to improve equity in higher education is to double the Pell Grant maximum award. And Pell Grants have certainly not kept up with college costs — some argue they may have been a cause. But if history is any guide, a big increase in the maximum Pell award will have the perverse effect of many colleges increasing their charges, thus running counter to the goal of making college more affordable.

In addition, under the existing Pell Grant formula, any increase in the maximum award increases eligibility among more middle-income students, which reduces the share of aid going to the lowest income students. For these reasons among others, big increases in the Pell Grant maximum are unlikely to have the intended effect of closing chronic equity gaps.

Four Better Ways to Improve the Equity of Funding in Higher Education

We can do a much better job of promoting equity without spending a lot of extra money. Four such ways are outlined below:

1. Streamline and simplify the student aid application process. Many studies confirm that the complexity of the existing student aid system has been a major obstacle to improving the participation of low-income and minority students. Thus, one way to improve the equity of the system is to streamline and simplify the aid application process. To do this, we should:

• Allow all parents to use their income tax forms to apply for federal student aid. Historically, the Federal Application for Federal Student Aid (FAFSA) form has required families to provide extensive information on their finances. To simplify the system, many have proposed reducing the number of items on the FAFSA and to allowing applicants to populate the forms with income tax information. But it would be more efficient and effective simply to allow parents to apply for aid by indicating that the IRS could share their tax information with the proper authorities.
• Grant full federal aid eligibility automatically to students from families on welfare, Medicaid, SNAP, or EITC. Allowing families to use their tax filings to apply for aid won’t help the millions who do not file income taxes. Moreover, under the existing aid rules, the non-taxable income that many of these non-filers receive in the form of public support reduces the student’s aid eligibility. It makes more sense to go the other way: Students whose families receive public income support should be automatically eligible for full federal student aid benefits.

2. Integrate Pell Grants and Tuition Tax Credits. While we tend to think of Pell Grants as the only major federal non-repayable program, the fact is that tuition tax credits also provide substantial aid to millions of parents every year. But there is little coordination in how these aid sources are awarded and there is a fair degree of overlap in who receives both types of aid. Non-tax-paying families can receive tuition tax credits on a refundable basis as well as receiving federal aid. And as Pell award levels rise, more tax paying families become eligible for both Pell Grants and tuition tax credits. The system could be made more effective and the current degree of overlap reduced or eliminated if we were to integrate the two systems in the following fashion:

• Redesign Pell Grants to cover living expenses for low-income students. Rather than spend tens of billions of dollars to double the maximum Pell Grant and thereby extend eligibility up the income scale, redesign the program to cover only the non-tuition expenses of students and then do a much better job of targeting these benefits on low-income students whose families don’t pay federal income taxes.
• Expand Tuition Tax Credits for Middle-Income Students. The best way to help middle-class families afford higher education is to expand tuition tax credits as the primary form of aid for students from middle-class families who do pay income taxes. This way, the benefits lost by tax-paying families who currently receive modest Pell Grants could be replaced by increases in the tuition tax credits for which they also qualify.

3. Encourage more early intervention by states, community groups and other NGOs. Early intervention efforts that provide mentoring, last-dollar financial aid and other services to groups of economically disadvantaged middle school and high school students have been extraordinarily effective in lifting the college participation and completion rates for these at-risk students. But despite this record of success, there is little public funding for such efforts. To rectify this, the federal government could enact a program that would match the funding that states and NGOs spend on early intervention. There is good reason to believe that even moderate funding of this approach would be much more effective in helping disadvantaged students enroll and succeed in college than much bigger funding increases in Pell Grants.

4. Provide incentives to institutions to enroll and graduate more low-income and minority students. College completion rates in the U.S. historically have been relatively modest compared with many other countries which have more selective higher education systems. Recent efforts to improve U.S. college completion rates have concentrated mostly on providing more grant aid to students. But a more effective way to increase the college completion rates of low income and minority students may be for both the federal and state governments to provide greater incentives for institutions to increase their completion rates. Such a shift in policy focus to institutional behavior has the potential to be much more effective than simply providing more financial aid to students. The student aid approach has not provided sufficient protections against institutions reducing their own aid in response increased government funding of student aid. Here’s how to combat that:

• The federal government could change how funds are distributed in the long-standing campus-based student aid programs. Historically, funds in these programs are distributed to institutions based on the estimated financial need of their students. Institutions then are obligated to use these funds to provide aid to needy students. (The efficacy of this approach is questionable, however, as ‘grandfathering’ provisions mean well-endowed schools tend to receive a disproportionate share of these funds)

It would be better if federal campus-based aid were distributed based on the number of Pell Grant recipients enrolled at each institution, which then would be allowed to spend these funds as it best saw fit rather than limit them to just providing financial aid. Accountability would be ensured as funds in the future would be based on the number of Pell Grant recipients who enroll at and graduate from each institution.

• Over the past two decades, a growing share of state higher education funds have been tied to graduation rates. To achieve better equity, this performance-based funding could be tied to the performance of low-income students specifically. The result would be a growing share of state funds being distributed to public and private institutions based on the number of Pell Grant recipients who enrolled at, and graduated from, these institutions.

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Taken together, the four steps outlined above could have a significant effect on improving equity in American higher education by closing chronic gaps in college participation and completion of traditionally underserved populations. And these steps would not require as much new spending as big ticket items such as doubling the maximum Pell Grant or making college tuition free. In fact, properly designed, these four steps would not require any more funding than the $200 billion that federal, state, and local governments already annually spend on higher education.