The Problems With Pell Grants

I admit it, I get uneasy feelings when people congratulate Obama for increasing Pell Grants. I don't see it as the universal positive that many others do. For three reasons.

First, Pell grants are politically cheap. Increasing funding for Pell grants takes little courage and comes with no political cost. Who disagrees with more funding for poor people to go to college? Certainly only the heartless. Whats more, it doesn't come out of Obama's own pocket, it's after all, the tax payers money. And what politician doesn't like being generous with other peoples money?

Second, it can make the problem worse. Richard Vedder, director of the Center of College Affordability and Productivity and professor of economics at Ohio University explains:

Work done at my research center reinforces findings of others that exploding student loan programs have contributed to higher tuition charges, and if Pell Grants grow more inclusive and generous, the same effect will occur with them...

The demand for higher education grows with rising federal financial assistance, but the supply grows less rapidly, pushing up prices (tuition fees). Supply is comparatively rigid because the so-called best schools attain their lofty reputation by turning away customers: college rankings are enhanced by taking very qualified bright kids who likely will graduate (and are disproportionately affluent). Dropping money out of airplanes over the houses of college students (or its equivalent) is not the solution.

Normally, this shouldn't be a difficult concept to understand. After all, who doubts that the spread of low cost mortgage financing helped fuel the housing bubble? Its the same concept here: low cost Pell grants, and especially low cost student loans, are a primary cause of University tuition increases. It's standard subsidy economics.

Third, it crowds out the private sector. The more the government funds it the less private donors will feel the need to, and thus, you replace private charity with public charity. And because public charity is less scrupulous than private charity, you make the grants less efficient. Which helps to explain why most pell grant recipients do not earn a college degree.

Arthur M. Hauptman, from the Center For American progress, explains:

Instead, we should worry more that increases in Pell Grants may lead institutions to reduce the amount of discounts they would otherwise have provided to the recipients, who are from poor families, and move the aid these students would have received to others. This possibility of a substitution effect is supported by the data showing that public and private institutions are now more likely to provide more aid to more middle-income students than low-income students.

In short, I see Pell grants as a way for Obama to escape real education reform by throwing us crumbs, just enough for us to shut up, and many do.

For more on this see this see here and here. (Originally published: 2/10/2010)