A new report from the Pell Institute provides a comprehensive overview of various indicators of equity in access to higher education in America. One statistic in particular has been making the rounds in the media: Pell Grant awards have not been keeping up with college costs. It is a striking point—but, while rising tuition is certainly a problem, boosting Pell Grant spending may actually be counterproductive.
Pell Grants, which have existed in some form since 1965, are a federal program that provides funds to colleges to help pay the attendance costs of students from low-income backgrounds. The chart displays the increase in maximum awards on Pell Grants next to the concurrent increase in college costs. At first glance, the chart demonstrates a failure of federal student aid to keep up with the rising cost of higher education—to the detriment of students, who must then fill the gap with loans, wages or savings.
The bulk of the economic evidence indicates that college cost inflation over the past few decades is partially a result of Pell Grants themselves.
That is the conclusion reached by Pell Institute senior scholar Tom Mortenson, who argues in a supplementary essay that in order to keep up with tuition inflation, Pell Grant maximum annual awards should increase to $13,000, more than double the 2016-17 maximum of $5,815.
The cost of college has indeed increased exponentially. At public four-year institutions, the cost of attendance (including tuition, fees, room and board) has increased 148% over the past 40 years. At their private counterparts, cost of attendance has risen almost as much, 144%. But Mortenson’s preferred policy prescription confuses cause and effect. Indeed, the bulk of the economic evidence indicates that college cost inflation over the past few decades is partially a result of Pell Grants themselves.
One study, published by the Federal Reserve Bank of New York, found that each dollar of additional Pell Grant aid increases sticker-price tuition by around 40 cents. This cost increase filters down to low-income students who might not be paying full tuition. According to the study, Pell Grants also lead colleges to reduce institutional financial aid.
When the federal government increases Pell Grant generosity, colleges “capture” some of those additional funds by raising tuition. When students can pay more, colleges charge more , which partially cancels out any benefits to students.
If maximum Pell Grant awards were increased from $5,815 to $13,000, average tuition would rise by at least 40% of the difference, or about $2,900. That is just tuition—it does not take into account any effects of Pell Grants on other college costs such as room and board, which have also been rising.
By the logic of the proposed policy, therefore, Pell Grant awards would have to rise again, to around $15,000, to keep pace with cost of attendance. But that increase would again cause tuition to rise, which would necessitate another Pell Grant increase, and so on.
Now, Pell Grants are certainly not responsible for all the inflation in college tuition—much of that honor lies with federal student loans—but the economic evidence should raise a red flag against further large increases in award generosity.
In addition, the benefits of such increases in Pell Grant generosity are not evenly distributed. According to Columbia University economist Lesley Turner, selective nonprofit colleges (which tend to have higher tuition) capture 69 cents on every dollar of additional Pell Grant funds, far more than the average. This means that students attending the priciest colleges will benefit much less from higher Pell Grant spending than their peers who attend inexpensive institutions. In other words, those who need more help paying for college will get less, and those who need less help will get more.
Two other consequences of Pell Grants are worth noting. First, award amounts go down when the student’s family has more savings. This “implicit tax” reduces family assets by 7% to 12%, according to a paper by economics professor Jessica Wolpaw Reyes of Amherst College. Finally, Pell Grants are, unsurprisingly, expensive. The Congressional Budget Office estimates the program costs taxpayers almost $30 billion per year. While many would argue that education is priceless (courses on Miley Cyrus and selfies notwithstanding), we ought to look at a program’s effects before deciding to double it.
Pell Grants help many lower-income students afford higher education. But they do come with some rather nasty side effects.
Pell Grants help many lower-income students afford higher education. But they do come with some rather nasty side effects. Instead of increasing Pell Grant generosity to keep up with rising tuition—a fruitless endeavor—policymakers ought to consider a broader set of reforms.
Between Pell Grants and student loans, the federal government has a near-monopoly on college finance options. Below-market interest rates on federal student loans and a lack of regulatory clarity for some private college-finance arrangements conspire to crowd out private actors. That is a shame—private investors could say no to colleges whose benefits do not exceed their high costs, restoring some market discipline to the higher-education sector. Moreover, private investors would be more receptive to new and lower-cost education providers than is our current system. Under present law, a college must be accredited to receive federal aid—but it is hard to earn accreditation and even harder to lose it.
Some subsidy for higher education may be appropriate. But excessive and poorly-designed subsidies drive up costs. The real question is not whether to spend more money, but how to spend it better.
This piece originally appeared at Forbes