As a country, we have (rightly) decided that we want to subsidize education. But does it matter whether we give the money to students to spend or directly to colleges? Yes.
Most of the incentives in the current system encourage a college to spend as much money as possible to try and become a “better” version of itself. To the extent that the methods of becoming “better” are in conflict with the public policy rationale for the subsidy, the trail of funding matters. If the money is given directly to the students we want to help, the colleges must serve those students if they want the money. But if the money is given directly to colleges, the college can pursue its own agenda, which may or may not align with public policy goals.
A case in point concerns low-income students. The goal of Pell grants is to promote equality of opportunity by providing additional funding for lower-income students. What would happen to those students if that money was given directly to colleges instead, as Jordan Weissmann and Sara Goldrick-Rab recently advocated?
A good starting point to determine the answer is to examine what colleges have done in the past when their direct funding has increased. The chart below shows the change in state appropriations per student from 2001-02 to 2008-09 (a good proxy for the change in direct government funding) and the change in the percent of first-time, full-time students receiving federal grants (a good proxy for the percent of low-income students since the bulk of federal grants are Pell) from 2001-02 to 2008-09 at four-year, public universities.
Colleges that received larger increases in direct funding tended to reduce the percentage of low-income students they educated (the effect is small but statistically significant). In other words, if we converted Pell grants into direct funding of colleges, the most likely result would be fewer low-income students in college.
This result may seem counterintuitive, since colleges with more direct funding have more resources, meaning they could enroll more low-income students. But the unfortunate reality is that colleges haven’t done so. Colleges prioritize their resources on things that move them up the academic ladder. Enrolling more low-income students won’t do that. Rhetoric to the contrary aside, actions speak louder than words—enrolling more low-income students is a low priority at many colleges.
The moral of the story is this: If you want to enable low-income students to attend college, give the money to the students. Don’t give the money directly to colleges and then hope the colleges will enroll those low-income students, because if history is any guide, they won’t.