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Why Federal Officials Should Require Some Colleges to Match Pell Grants

Published:  February 5, 2013

Yesterday at Higher Ed Watch, I argued that a federal solution is needed to ensure that colleges use their institutional aid resources to keep higher education affordable for low- and moderate-income students. But why should the federal government get involved?

The reason is simple: the government is already involved, way involved. It spends nearly $40 billion on the Pell Grant program each year to try to remove the financial barriers that prevent low-income students from enrolling in and completing college through the Pell Grant program. Yet colleges are increasingly undercutting the government’s mission by using their institutional aid dollars to try to attract the students they desire rather than to meet the financial need of the low income students they enroll. Worse yet, there is compelling evidence to suggest that schools are capturing a significant share of the Pell Grant funds they receive and using them for other purposes, such as providing non-need-based aid to recruit high achieving and wealthier students. This is one reason why even after historic increases in funding, the program’s impact is so limited: students and families are not receiving the full benefits as intended.

The enormous growth in non-need-based, or “merit” aid, at four-year colleges over the last two decades has come lately at the expense of the neediest students. Low-income students who attend these institutions often face high levels of “unmet need,” defined as the difference between the cost of attendance and the amount of financial aid they receive. Unmet need forces students to take on significant amounts of debt, including risky private student loans. Financially strapped students also frequently engage in activities that lessen their likelihood of completing their degrees, such as working full-time while attending college or dropping out until they can afford to return.

Certainly many colleges have small endowments, making it extremely difficult for them to provide adequate support to students with the greatest need. It is often the poorest schools that enroll the largest proportion of Pell Grant recipients and charge these students high net prices because of their limited resources. In our Rebalancing Resources and Incentives in Federal Student Aid report, we recognize this and propose creating Pell bonuses for such schools, as long as they graduate at least half their students.

However, it is not simply a question of wealth. Some of the country’s most affluent colleges are the stingiest with need-based aid. These institutions tend instead to use their financial aid as a competitive tool to reel in students to help them improve their standing in the U.S. News rankings or maximize their revenue.

To help put an end to colleges’ financial aid arms war, we propose in our student aid reform report to create a new Pell Grant matching requirement for  four year public and private non-profit colleges that enroll a relatively small share of low-income students but charge them high net prices. Under the plan, schools at which Pell Grant recipients make up less than 25 percent of the student body would have to match a share of the Pell Grant disbursements they receive if they charge students with annual family incomes of $30,000 or less a net price exceeding $10,000. These institutions would be required to use the additional money to supplement the aid that the neediest students receive.

Under the proposal:

  • High net price colleges that enroll less than 15 percent Pell Grant recipients would be required to provide a 100 percent match;
  • High net price colleges that enroll between 15 and 20 percent Pell Grant recipients would have to provide a 50 percent match;
  • High net price colleges that enroll between 20 and 25 percent Pell Grant recipients would be required to provide a 25 percent match.

The proposal would not require colleges to spend any additional money. Rather institutions that meet the criteria would be encouraged to reallocate their existing institutional aid.

Colleges could reduce their required match amount by increasing the share of Pell Grant recipients they enroll, or eliminate it altogether by lowering the net price charged to the lowest income students below $10,000. Meanwhile, colleges that decline to make the match would lose eligibility to participate in the federal student aid programs.

The proposal would, however, include exemptions for colleges that don’t currently have the resources to provide a substantial amount of institutional aid to students. Under the plan:

  • Schools required to make a 100 percent match are exempt from the mandate if the total amount of money they receive in Pell Grant funding exceeds the amount they give out in institutional aid;
  • Schools required to make a 50 percent match are exempt if they receive twice as much money in Pell Grant funding as they award in institutional aid; and
  • Schools required to make a 25 percent match are exempt if they receive four times as much Pell Grant funding as they give out in institutional aid.

With the government making such a huge investment in the Pell Grant program each year, federal officials can no longer sit idly by as colleges undermine the program. Our Pell matching proposal should go a long way in ensuring that colleges are bolstering the government’s mission of making college more affordable and accessible for low-income students, rather than hindering it by diverting their resources to so-called merit aid.

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