Federal Student Loan Programs Subsidize Waste and Redistribution to the Wealthy

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Forbes
By: Jay Schalin
May 6, 2013

The student loan crisis has been all over the headlines lately--$1 trillion in loans with a default rate that's high and getting higher. But direct grants, or scholarships, by the federal and state governments have just as big an effect on the world of higher education and on the nation. They, too, are in need of reform.

Both the federal government and state governments provide aid to college students. Some, like the $35.6 billion (in 2010) federal Pell Grant program, are based entirely on need. Anyone who meets the income limits and who enrolls in a college can get a grant, with no academic requirement.

In contrast, states sometimes provide merit aid. For example, the state of Georgia provides scholarships to all students who get a B average in high school, with little consideration for family incomes.

Each type of aid--need and merit--brings its own set of trade-offs--and both are costly to taxpayers. Pure need scholarships tend to fund failure--many recipients never graduate--and thus are very wasteful. In contrast, pure merit scholarships generally redistribute wealth from the working class to more prosperous families--something most people find inherently unfair.

There is an easy solution at hand--replace them with a system in which merit and need are both used to determine grant eligibility.

The federal Pell grant program is a good example of how wasteful need scholarships can be. The program was started in 1970 and has grown from 176,000 to 9.6 million recipients in 2010. There is a strong correlation between Pell Grants and a failure to complete school. For instance, at Southern University of New Orleans, which has the country's worst four-year graduation rate at 4 percent, 76 percent of students get Pell Grants.

A closer look at the numbers confirms that leaving drive, talent, and preparation out of the formula for determining scholarships yields predictably grim results. According to 2009 National Center for Educational Statistics data, well-qualified Pell Grant recipients with SAT scores above 1140 graduate within six years 73.7 percent of the time. Only 34 percent of their counterparts with SAT scores below 850 did the same (the College Board that administers the SATs suggests that 1020 is the minimum required for college-level work).

It's worse for the 15.8 percent of Pell Grant recipients (using 2008 figures) who have SAT scores below 700--only 12.9 percent of them earn bachelors degrees within six years. Not funding such highly predictable failure could cut roughly $5 billion from the program.

When students have little hope of completing an academic program, subsidies are not just a waste of taxpayers' money, but a waste of these young people's time and effort at a crucial age. Too often, they drop out with a sense of failure, poor work habits, and perhaps a sizeable debt.

At the other end of the spectrum are pure merit scholarships. Based on high school grades and standardized test scores, they make sense only if restricted to truly talented students. Yet, many states now have programs that have grown too large because the eligibility standards are too low.

Georgia's Hope Scholarships fit that description. A "B" high school average is enough to qualify; that means that at many high schools, the average student is eligible. Since the only income limit is that families cannot make more than $140,000 per year, a large government subsidy is directed largely to middle or upper-middle income families that need no such help to provide opportunities for their children.

The demand for Hope Scholarships has rapidly outstripped the resources; the total cost of the program reached $748 million in 2010. The state has been forced to introduce another program called Zell Miller Scholarships. In order to get the full amount originally intended for Hope recipients, students must now meet the much more stringent merit standards required by the Zell Miller program (for one, an "A" average), while Hope recipients receive lesser amounts.

The best way to address both of these dilemmaName

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This page contains a single entry by CFED published on May 7, 2013 7:40 PM.

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