How to Fund Pell

We’re now over a month into the 2011 federal fiscal year and Congress still hasn’t passed a single spending bill. And as Congress returns for a lame duck session preceding the Republicans taking control of the U.S. House of Representatives, many higher education advocates are starting to get nervous about the fate of the Pell Grant Program.

That’s because the stimulus dollars that boosted the maximum award for two years are now gone, meaning that providing the same level of discretionary funding will be insufficient to keep the grant at its level of $5,550.

In response, many higher education groups are upping the rhetoric around the need to preserve Pell, talking about how there is a Pell shortfall that must be closed, and even referring to the program in NCLB-like terms as needing to “fully fund” it.

Ideally, all this discussion would raise important questions about the outcomes and effectiveness of this money (like which colleges do a good job graduating Pell students). That conversation should also recognize the pitfalls that arise from funding an expensive entitlement program through the discretionary process.

But setting aside those important and worthwhile questions, here are four things Congress could do to find money for Pell. These fixes might solve the program in the short term, but without more long-term thinking, the program is going to continue down its unsustainable track.

1) Don’t Extend the American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) was promised during President Obama’s campaign. Created as part of the stimulus, it is a more generous version of the HOPE Scholarship Tax Credit, which it replaced. The maximum credit is bigger, it can be used over four years instead of two, and it is partially refundable so that low-income students can derive at least some benefit from it.

But even though it’s a better tax credit than other options, it’s still a tax credit, bringing it with it all the flaws that make it a less than ideal source of public policy. Higher education tax credits are confusing, requiring lots of paperwork, recipients often make mistakes on them, and they disproportionately benefit higher-income people who have tax liability. The AOTC actually was even worse in this regard—with higher income limits it provided over $5 billion to people with incomes over $75,000 last year, as my former colleague Jason Delisle pointed out. (By contrast, very very few Pell awards go to anyone at that income level.)

And now, the AOTC is set to expire at the end of this year unless it is extended. At a cost of $18.2 billion in 2009, finding money to continue that tax credit, instead of funding Pell is a clear admission that wealthier individuals are a higher priority than lower-income students.

2) Get Student Benefits Out of the Tax Code

More broadly, continuing to spend money on student assistance through the tax code is not the best way to carry out policy for all the reasons outlined above. In addition, it doesn’t work from a timing standpoint. Students pay their tuition, then must wait several months to file their taxes and a few weeks after that to get a refund (in the case of a credit). They still need to have the money upfront and it’s a good bet that by the time they get the benefit, it probably goes to other purposes.

These tax credits and deductions are a significant amount of money—$4.69 billion plus whatever amounts are spent on the AOTC. That right there would make up a big chunk of the money needed for Pell.And moving that money from backdoor tax spending to a clear direct grant for other students would be much better from a policy standpoint.

3) Change Eligibility

Because of the way Pell awards are calculated, each increase in the maximum award makes some students at the margin eligible for the minimum grant award, while also increasing the awards given to everyone else. Every increase thus makes Pell Grants slightly less targeted toward the lowest-income students.

One way around this would be to change the eligibility formula so that a student’s access to a Pell Grant is determined around a specific award level—say $5,000. Once all awards are determined based on that amount, any dollars remaining could be distributed equally to all recipients. For example, say setting eligibility based on a $5,000 award cost $16 billion produced 8 million recipients, and had $1.2 billion left over. Each student would then get an increase of $150 to their award ($1.2 billion divided by 8 million). Alternatively, you could set it so only the absolute lowest income students split the leftover money, making the award even better targeted.

4) Reevaluate Year-Round Pell

The Higher Education Opportunity Act changed the regulations around Pell, allowing students to receive more than one award in a year. Not surprisingly, providing multiple awards also contributes to the increase in costs. When cost cutting is on the line, it’s worth evaluating whether we would be better off only giving one award to students or offering two awards of smaller size to some students plus one smaller award to others. This requires taking a closer look at what types of students took out year-round Pell, where they went, what courses they took, etc.

Time to Be Frank

Providing several thousand dollars annually to students is a very expensive undertaking. And the fact that it’s done through discretionary funding, rather than a mandatory program like other entitlements, means that increases in costs are subject to annual politicking and the appropriations process. On the one hand, this makes it an inconsistent program that is open to cuts from year to year. But it should also present an opportunity. If advocates want to strenuously argue for keeping Pell, then other options should be on the table—things like tax credits that are less effective public policy anyway. And schools need to do a better job highlighting why Pell matters. Colleges need to publish graduation rates of Pell students, there needs to be better documentation of why it matters at a personal level. Just continuing to say we need to spend money on Pell to spend money on Pell won’t work anymore.

UPDATE: Or you could end the in-school interest subsidy, as Ed Money Watch discusses here.