Currently, Pell Grants are discretionary spending - while Congress hasn't let the program run out of money in the past, keeping Pell on the discretionary side of the federal budget gives Congress control over the amount of money that is distributed and leads to uncertainty for students and their families about whether the Pell Grant money will be there for them when they enter college. Tax credits, on the other hand, which go to more moderate and middle-income students, are not discretionary - every family and student who deducts their tuition or checks the box for the Hope tax credit are guaranteed to get that money. There is no worrying about whether the IRS will just stop giving the credits, and no rush to send tax returns in early to ensure the money is available.
And this isn't just an arcane federal budget issue. I previously worked with high school students who were applying to college, and it was a common refrain among the primarily low-income students and parents that they had to get their federal aid applications in early or else Pell Grant money might not be available anymore. This uncertainty added stress and confusion to the aid process. And it stood in stark contrast with my tax filings, which I have used over my life for tuition deductions, Hope credits, Lifetime Learning credits, and student loan interest rate deductions. I'm not low-income, but I've gotten a lot of federal aid to go to school and I've never worried about whether it would be available.
And it's not just me. The General Accounting Office released a report in 2007 showing the income distribution of different aid programs - how many low-income and high-income people got various grants, loans, and tax credits. The data is from 2003-04 and the total amount spent on the three primary tax benefits - the Hope Credit, the Lifetime Learning Credit, and the Tuition Deduction - exceeded the total amount spent for Pell Grants. But the three tax credit programs are not nearly as well targeted.
Below is a chart showing the distribution of aid dollars through the tax credit programs and the Pell Grant program. Pell grants are very clearly targeted to the lowest income students - nearly all of the aid dollars go to students in the $0 - $40,000 income range, and grants drop off sharply for students with income above $40,000. The same is not true, however for the tax credit programs - and particularly for the tuition deduction, where 37 percent of recipients make $100,000 or more in income.
If we are going to continue to guarantee middle and high-income families help with paying for college, the least we can do is make the same promise and commitment to low-income families.
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While I agree with every word in this blog, there are a few more words that need to be added. The chart shows only the federal contribution to students' financial aid packages. State and institutional aid, which often exceed if not overwhelm the federal components, can have a larger effect on the progressivity or regressivity of the entire financial aid package. It is the whole package that determines college affordability, not just the federal contribution toward it.
Moreover, the process is dynamic, not static. Federal aid is largely first dollar; states and institutions can move their money after the federal amounts are determined. After Congress established tuition tax credits and deductions for the middle class, several institutions reduced their institutional aid for this population and targeted it to the financially needy. But that was the exception. The history of the past two decades shows that when the federal government increases first dollar aid to the low income, institutions more typically respond by shifting their aid to "merit" programs, largely benefiting those whose access and retention are not at issue.
As the New York Times pointed out this week in a feature article on financial aid packaging, this process is "secret". Institutions fight hard to keep it secret even though there is already legislation on the books (Student Right to Know) that could take the process out from behind closed doors. If Secretary Duncan is successful in increasing Pell grants and making their funding mandatory, his next step must be to make sure that the intended recipients actually benefit.
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