Goldilocks and Pell Grants

It's hard to make everyone happy on federal financial aid. Postsecondary institutions and state legislators decry the declining value of the Pell Grant over time. They're right; it does buy less than it used to. But, federal legislators argue the Pell, the primary vehicle for student aid for low-income students, has been regularly increased and it is tuition increases that have caused its value to decline. For a vibrant discussion on whether colleges and universities desperately need new federal funding or simply absorb it, see the comments section from this article. The only group that's left out of this discussion is students.

In February I wrote about a smart new proposal in President Obama's budget that would have guaranteed Pell Grant funding and indexed them to the consumer price index (CPI), a Bureau of Labor Statistics calculation based on the change in price of common goods and services, plus one percent. I wrote that such a step would curtail political debates and ensure stability for a program that should not be subject to annual haggling. And the one percent above the CPI is an allowance that higher education suffers from Baumol's cost disease and thus faces some additional costs that other industries might not.

Yet, somehow, no one seems to be fighting for this proposal. Congress doesn't like it because it takes away their annual authorizing power (even though they've already given away much of their power by approving non-discretionary tuition tax credits that primarily benefit middle- and upper-income families). Tax hawks don't like it because it makes another program an entitlement, even if it's one we approve every single year anyway.

Most puzzling, voices representing colleges and universities, and their interests, have been mostly silent. Until today, that is, when the Chronicle of Higher Education ran an article titled, "Even Under Obama's Plan, Pell Grants Trail Tuition." In says even the Obama plan, which would raise the Pell one percent more than the consumer price index would still lag behind the cost of tuition, fees, room and board. It says, instead, "A simple solution would be to index the maximum award to tuition growth." Simple, yes. Smart, no.

The chart below shows the Pell's actual value over time and what it would have been had it been indexed to inflation, compared to tuition increases by sector. Had the Pell been indexed to inflation, it would indeed be higher than it is today. But it would not have been nearly enough to cover college tuition costs, because those have outpaced inflation by enormous amounts. Unlike the article would have us believe, that's not the fault of the Pell, or federal legislators. It's the fault of colleges and universities that have been unable and unwilling to control costs.