ACE and "Siphoning Off" Federal Student Aid

March, 2016

Washington -- The American Council on Education (ACE) is getting so defensive about college pricing that it has published a misleading monograph to try distract attention away from recent research on the subject. ACE is clearly uncomfortable with many new studies that show federal aid to students is not always helpful in reducing net college prices, because of the way colleges respond to student aid by manipulating both their list and net tuition charges.

The thrust of the ACE paper is to try to downplay the situation. Early on, the paper highlights this sentence as a featured pull-quote:

The higher education system as a whole siphons off a rather small fraction of the federal aid.

But the first question should be, why is any of the aid being siphoned off? The paper explains the siphoning as a tax on student aid to benefit colleges. Where is this tax authorized in federal statute? Nowhere, of course. Some of us believe the Secretary of Education should stop the siphoning by removing schools from Title IV federal student aid participation if they tax aid that is meant for students.

Another question must be, what is meant by "a rather small fraction"? Federal student aid, in all its grant, loan, and tax expenditure manifestations, is a huge annual dollar figure in the scores of billions. A small fraction, therefore, is at least a few billion, maybe several billion, maybe even many billion. This is in fact the dimension of the siphoning estimated by, among others, Turner (2012,2014) and the New York Fed (2015), the latter of which puts the college taxation of Pell grants at 55 cents on the dollar. Based on my own work (1997), I think that's somewhat high, but the point is that we are not talking here about de minimus amounts. We are talking in terms of billions of federal taxpayer dollars annually.

What is infuriating about the ACE paper is that it does not consider the human costs associated with the siphoning. In many if not most cases, when a college taxes student aid in any form, students wind up with higher student loan debt. While economists debate whether or not there is a full-blown national student loan crisis, actual flesh-and-blood people are suffering from being forced to drop out of college and from getting behind on their loan payments. The national default rate, by any of several measures, is unconscionably high.

The next pull-quote:

The Pell program is irrelevant for the list price, and it has no effect on the net price many middle- and upper-income families actually face.

The ACE paper does not back this up, other than stating it twice. I looked at this question (2002) and found that in many cases, the amounts of Pell siphoned off by colleges (away from the low-income) were then spent on recruiting students from middle and upper income families, affecting their net price. Three papers by Burd ("Undermining Pell, Volumes I, II, and III") substantiate a movement of institutional aid out of help for the low-income in favor of the higher-income. Burd's theoretical framework is the same as ACE's but he comes to a much different conclusion.

The next pull-quote:

There is no general support in this enrollment management process for the idea that federal aid automatically pushes up list price tuition.

Not to nit-pick this paper to death, but these kinds of sentences should be flagged before they discredit the whole publication. What does "no general support" mean: that there is some other kind of support? Well, there is. Many colleges have increased list price tuition in order to have more institutional aid to use as a tool to tax federal aid. Please, who's kidding whom? And what does "automatically" mean? Of course the process is not automatic, it is intentional. Colleges pay good money to hire enrollment management consultants to siphon off federal aid.

Then there is a section on What Does the Evidence Tell Us?, wherein appears this passage: "This review tells us a number of things. First, there is no clear answer that has emerged. If you look around, you can find any result you want."

Yes, how true, and how this paper proves the point. My objection to this section is that it dredges up old studies that (a) were not all that good in their own time and (b) were written before the advent of the enrollment management movement, all in order to claim some kind of equivalence with newer, much better research. Actually, there is a clear answer that has emerged, and ACE just doesn't like it.

There is something redeeming about this paper, however. It provides a good discussion of how modern enrollment management works, how colleges actually accomplish the siphoning. This is a step forward for ACE, whose position for years has been that these things just never happened.

It is once again time to reflect on what might have been had the billions of siphoned aid been spent more wisely by Congress on programs that were less susceptible to abuse. Had Congress put these funds into SEOG and SSIG, student grant programs that require institutional and state matching and maintenance of effort, we would have better institutional and state support for the cause of college affordability and much less student debt. It is not too late to reverse course. Perhaps this ACE paper will raise enough disgust to make that happen.