Time to Act, Mr. Secretary

September, 2013

Washington -- In the previous post, I described new research on how colleges move around billions of dollars in students' financial aid packages, to the great disadvantage of the financially needy. With these practices, colleges thwart the purpose of federal and private charitable grant aid, balloon student debt, exacerbate the growing gap between our society's rich and poor, and drag down our nation's economic recovery.

Many college administrators admit to the practices but are afraid to break away from the pack, fearful of what it might do to their own individual institutions. Likely as not, many of these colleges have strategic plans to increase ranking and prestige, using sophisticated enrollment management models to convert supposedly restricted federal and private grant aid to unrestricted use. With such unrestricted revenues, the institutions embark on merit aid and campus amenity programs that impress those who value rankings and prestige. This is being done on the backs of low income students who must take out loans and at the expense of federal taxpayers, whose elected representatives have exhibited an astonishing lack of oversight.

The Secretary of Education could take two steps immediately to end these abusive (and unethical) practices.

1. Send Department of Education "program reviewers" to a few representative colleges. Upon finding abusive practices, put the colleges on notice that their continued participation in federal Title IV financial aid programs will be handled as appropriate by existing Limitation, Suspension, and Termination (LS&T) powers of the Secretary.

2. Announce that the existing Student Right to Know Act (SRTK) requires Title IV participating institutions to advise students about how all financial aid funds are packaged. Colleges (and their enrollment management contractors) have long maintained that this is proprietary information. Sunshine is a powerful disinfectant and will help enable students, their families, charitable donors, federal taxpayers, and others with an interest in financial aid packaging to make sure that grants given to financial needy students are indeed used to reduce their work and loan burdens, rather than being manipulated by the colleges for their own purposes.

If the Secretary would take these two actions, a shockwave would go through the higher education community immediately. Enrollment managers would have to eliminate abuse of the low income as a tool in strategic planning. Private charities would have a new tool to ensure that the students they want to help will actually benefit (which will also serve to assure prospective donors that their contributions are being put to good use). Colleges themselves will not have so much reason to raise tuition in order to have sufficient institutional aid funds to mingle and manipulate in financial aid packages. Ethical voices in colleges and universities will be heard. Student financial aid administrators, many of whom chose a career in what they hoped would be a helping profession, would potentially be freed from the oppression of admissions directors and enrollment managers whose only goal is an institutional ranking uptick that looks good on their resume.

And federal taxpayers will have a sense that the President and the Secretary actually care about making sure federal programs work as intended.

Research In, Opinion Shifting

September, 2013

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."