Washington -- Last month, the National Bureau of Economic Research published an important paper demonstrating how colleges and universities "game" federal student financial aid, essentially taking it away from financially needy students. This gaming is prevalent in private, non-profit institutions but is also taking over public four-year institutions.
It is a prime cause of the the trillion-dollar student debt crisis, which not only threatens individuals and their families, but is a significant drag on the nation's economic recovery.
The NBER paper corroborates the 2012 work of Lesley Turner, who estimated that billions of Pell grant dollars are lost annually to these gaming practices. It is likewise good to see the Congressional Budget Office take note of the Turner study. These studies confirm the findings and warnings of many of us over the years.
Some college administrators are facing up to the situation. Catharine B. Hill of Vassar, who is also a higher education economist, has written cogent op-eds about how the federal government must provide the correct incentives to eliminate gaming. (She is still too much the college apologist, however, in ascribing the problem to the widening societal gap between the rich and the poor, disingenuously failing to acknowledge that colleges themselves widen the gap when they move billions of dollars of federal funds, intended for the needy, to the non-needy.)
Henry E. Riggs of Stanford and Harvey Mudd is more forthright in acknowledging what is going on and what should be done about it:
Any sweetening of (a) Pell Grants or (b) other state- or federal-government financial-aid awards serves to offset institutional funds. To the extent these offset funds are used for merit scholarships, the Pell Grant program's objectives are being thwarted: Some or all of the funds may in fact be going to non-needy students. This is certainly not an appropriate use of taxpayer dollars. Governments should restrict their granting of need-based scholarships to those colleges that do not "buy" students by granting merit scholarships.
Riggs continues with a prescription for private charities as well:
When generous donors restrict their gifts to the support of need-based student financial aid, they are really making "unrestricted" gifts. That is, their gifts replace the institution's own financial-aid funds, and those funds can then be used for any—that is, unrestricted—purposes. Donors of student-aid funds, then, would be wise to insist that their funds add to the total of need-based aid and are not used for merit scholarships, either directly or by substitution.
Last week I was guest speaker for a meeting of a charity dedicated to aiding low income students. The charity is concerned that the funds they raise are being gamed in the same way Pell grants are gamed, and they are right. They want to know what can be done.
That will be the subject of the next "Three Capitals."