Target Aid to Students Most Likely to Succeed

The cost of college has been rising at an unsustainable rate. The federal government has tried to soften the impact of these increases on families and students by providing more assistance in the form of loans, grants, and tax credits. For the academic year 2011–12, a total of $173 billion was spent for these purposes, according to the College Board’s Trends in Student Aid. The largest items were spending on loans ($105 billion) and grants ($49 billion), with most of the latter going to Pell Grants. Another $18 billion was devoted to tax subsidies. With the nation facing severe fiscal constraints, it’s only a matter of time before these amounts face greater congressional scrutiny. In addition to their effect on deficits and debt, we should be asking what exactly we are getting for the large sums being spent. And are there more effective ways to spend the money?

Right now a college degree is very valuable in the market. The premium that graduates earn is substantial, comparing favorably to what one could earn on most alternative investments. Not surprisingly, then, enrollment rates in higher education have risen sharply over the past few decades. That’s the good news. The bad news is that college graduation rates have hardly budged. Overall, only about 60 percent of those who enroll full time in a four-year school graduate within six years. Success rates at community colleges are even lower, and roughly half of all enrollments are in open-access community colleges (40 percent) or private for-profit institutions. Students drop out for many reasons, including the difficulty of combining college with a job or family responsibilities. Still, very high dropout rates raise questions about whether these students are ready for college. Another indicator of this lack of preparation is the large amount spent on remedial education, especially at the community-college level, where such spending is estimated at $2 billion annually. Frustration at having to spend time and money on remedial classes is also likely a factor in a student’s decision to drop out of college. Perhaps it’s time to make financial aid a little more conditional on a student’s readiness to go to college. Doing so would have a number of positive benefits, including 1) making sure that the taxpayer dollars devoted to this purpose are being spent on those most able to benefit, 2) encouraging students to work harder during high school to prepare themselves for college, and 3) increasing what students actually learn as opposed to the amount of seat time they acquire.

These potential benefits should not be exaggerated. Moreover, they have a downside: depending on how they are structured, they might screen out a large number of less-advantaged and low-performing students who deserve a chance to go to college.

Whatever one’s views on these matters, it is time to ask some fundamental questions about federal financial aid and its purposes. To get the conversation started, let me put forth an idea. Suppose we devote a larger proportion of federal aid to those who otherwise wouldn’t have an opportunity to go to college but also made it more conditional on performance. Specifically, we could shift some of the federal aid budget to performance-based grants and make the assistance a student receives more conditional on both income and performance. Families with incomes above $100,000 a year, for example, who now receive tax subsidies to offset the cost of higher education, might be asked to forgo some of this assistance. At the same time, students whose performance on the ACT, the SAT, or the new Common Core State Standards is below a certain level might be denied assistance, and those who do particularly well might get extra help.

According to 2009 National Assessment of Educational Progress (NAEP) data, only a small fraction of high school seniors are at or above proficiency in math and reading: 26 percent and 28 percent, respectively. This lack of preparation makes it difficult for them to do college-level work. For example, of younger students enrolling in college in 2003–04 with a high school grade-point average (GPA) below 2.0, only 16 percent had received a degree six years later, while 84 percent had not. The question we need to ask is whether taxpayers should foot the bill for students whose odds of success are so low.

The President’s New Proposals

President Barack Obama has already spoken about the need to tie financial aid to performance. Compared to other countries, the U.S. is in the middle of the pack in terms of both how our students perform on various tests and the proportion who graduate from college. (We are currently number 12 among 24 Organization for Economic Co-operation and Development (OECD) member countries in the proportion of 25- to 34-year-olds with college degrees.) The president’s goal is to once again make the United States number one in college graduation rates by 2020. To achieve the president’s goal will require that students who need it be provided financial aid. But it will also require that they be prepared to do college-level work.

The president, along with many other Americans, sees a college education as the way to improve social mobility. As he said in a speech in Buffalo, New York, on August 22, 2013, “higher education is still the best ticket to upward mobility in America.” Unfortunately, education in the United States has not been a mobility-enhancing enterprise. Quite the opposite. Test-score gaps between high- and low-income students have been growing, as has the gap between the college enrollment rates of children from more- and less-advantaged families. Indeed, as documented in several recent studies, a well-qualified student from a low-income family has a lower chance of going to college than a poorly qualified student from a high-income family.

Improving social mobility implies maintaining or even increasing access to higher education. But students who drop out, many of whom are burdened by large amounts of debt, are not helped by this process. Nor are taxpayer dollars being spent in as cost-effective a way as they might be. Finally, there is already some evidence that employers are discounting the value of a college degree from an open-access school. Unless that degree is valued by employers and associated with an enhanced ability to do the job, it will do little to improve productivity and earnings over time. Given these conflicting imperatives between maintaining access and improving performance, what should we do?

In his speech, the president talked about creating a new rating system for colleges that would be unveiled in 2015. It would provide students and their parents with better information on what different colleges have to offer. In addition, starting in 2018, the rating system would affect how much aid a college received from the federal government. Right now that assistance is based on enrollments and not the number who graduate, much less on what students learn. States, which have been cutting back on aid to higher education, would be encouraged to make the same kind of performance-based decisions. Students attending higher-performing colleges would receive larger Pell Grants and more-affordable student loans. Performance ratings would be based on outcomes (such as graduation rates and graduates’ earnings) as well as on access (e.g., the proportion of the student body receiving Pell Grants) and affordability (tuition net of scholarship aid). In my view, these are all good and welcome ideas from the president. He plans to propose them as part of the reauthorization of the Higher Education Act. But they are just a start.

What Does Federal Financial Aid Accomplish?

As noted above, most of the $173 billion we currently spend on federal financial aid is in the form of loans and tax credits. Under current budget-scoring rules, loans impose no costs on the taxpayer, but grants and tax subsidies do. Tax credits are available to families with an adjusted gross income (AGI) of up to $90,000 ($180,000 if married filing jointly). They do little to help those at the bottom of the income distribution, since they are not refundable. Subsidized loans are targeted similarly, with about 60 percent of the loans to dependent undergraduates going to families with an AGI under $60,000. Pell Grants are less than one-third of the total amount of federal aid, accounting for about $35 billion in spending. They are the most targeted form of assistance, focused on students with family incomes of less than about $60,000, with the bulk of the dollars going to people with family incomes of around $30,000. For the 2013–14 school year, the maximum award is $5,645. Pell Grant spending has grown rapidly in recent years but mostly because of increased enrollment and not because the grants are particularly generous. Indeed, the awards have declined in value relative to the costs of college.

Unlike Pell Grants, there is no evidence that loans and tax credits have increased enrollment. In fact, they may simply be raising tuition levels. Granted that higher education is expensive, but does it make sense in an era of fiscal constraints to be spending so much on the middle and upper-middle classes? While the political imperative to do so is completely understandable, it may not be good policy. Some funds could be moved into Pell Grants by tightening up on tax subsidies that mainly benefit the relatively well-off. The idea would be to provide more money for Pell Grants but gradually tie them more closely to academic performance. More counseling would be needed as part of any such scheme since, according to researchers Caroline Hoxby and Sarah Turner, many lower-income but academically qualified students don’t know what they are eligible for and don’t apply to selective schools (see “Expanding College Opportunities,” research, Fall 2013).

Should We Condition Aid on Performance?

Currently Pell Grants are not at all conditioned on readiness to do college-level work. All one needs is a high school diploma or to pass a General Educational Development test (GED). Contrast this system with those in many other countries, where access to college is heavily subsidized but also tied more closely to achievement. Granted there are many thorny questions about how to measure performance (SAT, ACT, proficiency on Common Core, high school GPA, etc.). I defer to those in the education field to design a sensible set of academic standards that would balance the need to motivate students to work hard in high school with the need to preserve access for those who succeed. Moreover, it would be best to test students no later than the beginning of high school so they can be counseled on what they need to achieve to be prepared by the time they apply for college. Test-score gaps open up early, so sending a message to students that readiness for college requires studying hard and mastering certain material has to be part of the program. Such a program would combine high expectations with a very concrete reward for achieving them.

The goals would be to encourage students to work harder during their high school years and to put more emphasis on achieving national benchmarks such as the Common Core State Standards. Another goal would be to make our tax dollars go further by reallocating existing funding toward those students most likely to benefit from college-level work. Any such policy should be introduced gradually so that students already far along in their school careers would not be penalized. In the early years of the program, there would be carrots (bigger Pell Grants) for those whose academic achievement in high school met certain standards and, over a period of years, a gradual denial of assistance to, say, the bottom-scoring 20 percent of applicants. However, because such a policy is likely to be controversial in a country dedicated to open access, and might have unintended effects, it would be best to test it out in a small-scale program, under a state waiver as allowed by the president’s proposed Race to the Top Fund for higher education. In the early years it would take the form of a significant bonus on top of the usual Pell Grant, paid for out of savings from current tax subsidies for higher education.

These ideas can be improved, I’m sure. My purpose in writing about them is to encourage more creative thinking and debate about how we use our limited resources to advance the twin goals of equity and excellence.