More College Aid for Low-Income Families, Please

When individuals seek higher education, why should all of us have to pay? After all, individuals decide whether to seek a college degree based on their own calculations of expected costs and benefits. That taxpayers must bear the burden of financial aid to these individuals seems unfair.

Given the billions of dollars governments pay individuals to help finance their college expenses, taxpayers must be assured that their investment is not wasted.

In short, we would rather not be sucked dry to pay for C students — whose weak academic preparation makes them unsuited for higher education — just so they can party hard for four or five years.

In a policy paper released this week, Andrew Gillen, the research director at the Center for College Affordability and Productivity, says he has the solution to creating rationality in our messy and unaccountable financial aid system.

Most of us agree that the underlying purpose of government financial aid, by means of the federal Pell Grant, government sponsored loans, and state scholarship programs, is to provide the opportunity of going to college to those who couldn’t even dream of it without government help. The principal rationale of these programs is that the government subsidy is justified on the basis of equal educational opportunity — that Americans from poor and modest backgrounds should not be denied the opportunity to seek higher education because they can’t afford it.

Thus, financial aid should be based on need. Gillen points to evidence that enrollments for otherwise excluded individuals are rising because of government help, but he acknowledges that college completion rates for financially needy students have been “disappointingly low.” That has virtually nothing to do with equal opportunity, Gillen argues. Rather, low-income students don’t complete degrees largely because they lack the academic skills to do so.

He writes: “I would argue that the lion’s share of responsibility for the low completion rates of low income students is the readiness obstacle–too many of them are simply not ready for college level academics…That many of them are not able to succeed once in college is primarily due to inadequate readiness, which financial aid can do little to address.” But Gillen’s conclusion about access versus completion for low-income students is completely contradicted by a considerable body of evidence. This evidence shows that one’s ability to pay for college matters significantly throughout the college-going pipeline, from planning for college right through to graduating with a degree.

In fact, a series of path-breaking studies over the past few years by the Congressional Advisory Committee on Student Financial Aid has pinpointed exactly the effects of academic preparation versus financial need. These studies have demonstrated beyond doubt that millions of college-qualified, well-prepared students from lower- income families are not enrolling in college nor completing bachelor’s degrees because they lack the ability to pay, despite current levels of financial aid.

For example, in a June 2010 report to Congress, “The Rising Price of Inequality,” the Advisory Committee drew upon several large-scale data sets to determine the college-going behaviors of academically qualified students from different socioeconomic backgrounds.

Anticipating the claims of critics such as Gillen, the Committee  writes, “While the view is nearly unanimous that financial barriers can be harmful to students at earlier stages of the access and persistence pipeline, the extent to which concerns about college expenses and financial aid negatively affect the enrollment decisions of academically qualified high school graduates has remained an open question.”

The Committee’s data evidence overwhelmingly contradicts the common opinion that financial aid is at least adequate to ensure initial enrollment in a 4-year college by qualified high school graduates. In fact, just 58 percent of lower-income students with relatively high financial need actually apply for college. That’s compared to an 80 percent application rate among wealthier students, who have relatively low financial need.

What’s more, the Committee discovered that financial need and academic preparation were entangled in surprising ways. One’s likelihood of taking college-preparation courses in 11th and 12th grades is heavily influenced by the family’s financial need, the study found. In other words, high-need families continue to discount the chances of a child’s college success as he or she passes through the pipeline. These low parental expectations are realized when their children do not submit college applications, do not enroll, do not persist, and therefore do not complete a college degree.

And yet, even when lower-income students are well prepared — even more academically prepared than their wealthier peers — financial barriers suppress their once-high expectations to complete at least a bachelor’s degree.

Better to Be Rich Than Smart

One eye-opening finding came when the Committee looked at high-school course–taking in math–among the most important indicators of academic preparation. Students in the lowest income quartile who had completed at least trigonometry had almost the same percent going on to a 4-year college as students from the highest income quartile who completed no higher than basic Algebra. So when it comes to having the opportunity to achieve at least a bachelor’s degree, one is far better off to be rich than smart.

When we look at net prices of college that different income groups must pay — defined as college costs less scholarships and grants — it’s not hard to understand how powerful the financial constraints can be on lower-income families. At present, low-income students at 4-year colleges pay net prices averaging about 41 percent of family income. Students from families of modest means pay net prices equal to 22 percent of family income. That’s compared to the net prices of between 10 percent and 12 percent paid by high-income families. The Student Advisory Committee predicts that given trends in college costs and financial aid, low-income students will face net prices equal to 52 percent of family income by 2016.

The economic losses resulting from inadequate financial aid is costing and will continue to cost society untold sums in economic development and well-paying jobs. According to the advisory committee’s estimates, for the decade ending in 2009, some 3 million young people who were qualified for college did not complete bachelor’s degrees due to financial barriers alone. These losses are expected to be even higher during the present decade.

But even on this score, Gillen discounts the degree to which education spending creates returns (“externalities” in academic jargon) significantly greater than the direct returns to individuals in wages and salaries. Where externalities really do exist, then let’s isolate those and subsidize them, he says.

“Sadly, this … is a significant departure from the current system,” Gillen writes. “Directly linking subsidies to positive externalities would result in three revolutionary departures from current practice: awards would no longer be uniform across disciplines, would not be need-based, and should be merit-based.”

According to several studies that Gillen cites, the evidence for significant uncaptured external benefits to education spending is mixed. But many of those studies were based on older econometric techniques. According to economist Walter W. McMahon, writing in the International Handbook on the Economics of Education: “Standard estimates of social rates of return include only a portion of the total social effects of education.”

For example, immigrants to the United States from less developed nations understand as a matter of faith that they will earn higher wages upon immigration. The higher-wage structure of the U.S. economy is partly a function of the dynamically growing nature of education spending, which leads to the enhancement of democratic institutions, technological innovation, cultural amenities, and many other social and economic returns.

When the total value of education externalities are estimated with dynamic models, what Gillen sees as trivial, based on static models, now becomes formidable.   McMahon suggests that the total value of education externalities currently runs about 37 to 45 percent of the total returns to education spending. In other words, individuals and society are considerably better off investing in education than in government bonds paying a 10 percent return on the initial investment.

For Gillen’s part, he argues that we need to identify external benefits to education spending and subsidize those. In his view, this means government should subsidize college costs for only students who choose lucrative and high-demand occupations, and do so on the basis of “merit,” not financial need. But this device is a useless attempt to monetize what is already accounted for by the market. The private benefits students are likely to realize in the labor market already internalize what Gillen calls externalities.

That government may decide to provide further incentives for students to enter such high-demand occupations could be done in a number of ways. But discriminating against other students through the financial aid system — while arguing that Pell grants and such are all the subsidies such students deserve — completely ignores the wonderful truth: Even when government subsidizes students studying less lucrative occupations, we are still getting a big bang for the buck.

Gillen’s reforms, on balance, would place severe limitations on government subsidies for higher education, limitations that will ultimately lead to higher net prices for college, excessive financial burdens on students from families of low and modest means, fewer college graduates, and therefore diminishing social and economic benefits we all reap that are over and above the private returns to education.

Over time, this impoverished state of mind and policy will lead to the deterioration our current stock of human capital, as well as the economic and political institutions of the larger society that we have built up from human capital investments from generation to generation, each generation growing from the foundation left to us by the previous generation.

Yes, most observers agree with Gillen that the financial aid system is a mess. It’s a confusing puzzle that even experts have trouble grasping, let alone parents and students trying to figure out how to negotiate the maze of laws, rules, and government forms.  

But no, government need not pick and choose winners and losers by deciding whom to subsidize.   In fact, government plays the role of rainmaker in higher education investment. That some individuals will gain more than others is a given. Regardless, the societal returns are often incalculable, yet large, far larger that prevailing government subsidies would suggest.  

In the end, efforts to redistribute the existing pool of financial aid won’t fix anything, and would in fact exacerbate the real problem with the financial aid system.

The real problem is that it’s inadequate for the need and the talent we have already lost to that unmet need. We are underinvesting in higher education to a significant degree. How much? Consider the 3 million college-qualified students between 2000 and 2009 who didn’t go to college for financial reasons alone. That’s a pretty good, rock-bottom estimate of what we have lost already.