By Peter Sacks
Some critics have called for a near-total rollback of the government's involvement with higher education, including the end of subsidies to low-income students. Last month, for instance, Jarrett Skorup of Michigan Capitol Confidential.com suggested that state and federal governments should quit subsidizing higher education altogether because the aid fails to improve individual economic prospects or the nation's economic vitality.
Similarly, Richard Vedder argued here that even liberals should support eliminating public financial aid for low-income students because "on balance (it) has increased income inequality in the United States." And, of course, there is Ron Paul, who once told NBC News that federal financial aid for needy students should eventually be terminated "because there's no authority to do this...they're a trillion dollars in debt, we don't have any jobs for them, the quality of education has gone down. So, it's a failed program."
As warnings of a "higher education bubble" abound, doomsayers tell us that taxpayers are subsidizing greedy institutions that impose skyrocketing tuitions on indebted students. As Vedder speculates, "A huge proportion of recent college graduates have both substantial loan debts and lousy jobs, and they disproportionately almost certainly come from lower-income backgrounds."
The Single Best Path to the Middle Class
Are things really that bad? Where's the credible social scientific evidence indicating that government should quit aiding low-income students? There is only one rationale for a viable college financial aid system: according to the prevailing social compact, it's in the nation's interest to create realistic opportunities for educational and career advancement to Americans who would otherwise be stuck at the economic bottom. According to most credible economic evidence, earning at least a bachelor's degree is, at a minimum, the single best way to achieve and sustain a middle-class life in the United States. Obviously, it's no guarantee. But odds are the a degree holder will: 1) earn more money than a non-college counterpart; 2) be unemployed less often; 3) be more likely to vote; 4) be less likely to go to prison; and 5) be more likely to have a family and raise children who go on to college themselves.
Here are five of the many reasons to support such aid programs:
One: Decimating the federal interest in ensuring equal educational opportunity is simply un-American.
For almost 50 years, the bedrock principle of the nation's social compact on higher education is that no citizen should be denied the chance to pursue higher education for lack of money. The framers of this compact -- from Abraham Lincoln to Harry Truman to Richard Nixon to Lyndon Johnson -- saw the need to transform the higher-education system from a members-only club for children of elites to a quasi-entitlement, available to any studious citizen with the gumption to pursue a college degree.
Without realistic opportunities for people to better themselves through education, a healthy democratic capitalism would be impossible to sustain. And, without a complete toolset of financial aid for students who would not otherwise be able to afford college, any goal to democratize economic and educational opportunity would amount to nothing more than empty Orwellian rhetoric.
Can't we agree that allowing only the free market to allocate educational opportunities might not be in the best interest of a democratic society, of its international economic competitiveness, or even of conservatives themselves?
Why Alienate Rising Groups?
Two: It's political suicide for conservatives to take an agnostic position on proposals to eradicate federal involvement in higher education.
The most recent presidential election showed that extremist notions coming from the far right of the Republican Party have increasingly alienated a broad swath of the American electorate -- particularly voters among the fastest-growing demographic groups -- the infamous 47 percent.
In fact, the anti-government perspectives on higher education run exactly counter to the sentiments of growing segments of the U.S. population. In a recent opinion survey of "engaged" voters -- those who follow current affairs, financial, and education issues -- published by Hart Research Associates, 84 percent said they believe post-secondary education is either "essential" or "very important" in today's economy. Among African Americans and Hispanics, the figures were 95 percent to 97 percent. When asked whether a college degree was worth it, considering the money and time involved, 87 percent of all voters and 96 percent of Hispanics and African Americans said yes.
To be sure, the engaged voters in the survey broadly agreed that insufficient numbers of college-goers were actually completing their degrees, and that the financial-aid system needed to change in order to increase completion rates. Clearly, however, Americans are not willing to throw the financial aid baby out with the bath water. The study states that 53 percent believe it's common that individuals from low-income families and communities of color are motivated to enroll in college but are kept from doing so by financial challenges, and 48% think that is true of the middle class as well.
Fully 85 percent of African Americans and 63 percent of Hispanics agreed that government must "make sure that individuals from communities of color can better afford a college education." And, 83 percent and 72 percent of African Americans and Hispanics, respectively, said government must "make sure that students of low and moderate means can better afford a college education."
Understand How Capitalism Works
Three. Anti-government critics of higher education lack awareness of how capitalism really works, including the fundamental and historical relationship between capitalism and government.
The logic of dynamic, long-term economic growth is this: Human innovation has spurred increasingly complex human societies, bearing no resemblance to the simple tribal cultures of the past. Human innovation led to greater economic growth, which fueled demands for more sophisticated abstract thinking skills, which has led to more innovation, more growth and more demands for more talented and technologically creative individuals.
In a virtuous, dynamic feedback loop, human intelligence causes economic growth and growth leads to leads to technological change, which leads to further specialization of firms and workers and greater demands for workers who have more specialized knowledge and skills.
Demands for schooling are driven by demands of technological complexity which, in turn, is driven by demands of social and economic institutions, including producers and manufacturers. If not for the demands of capital for more skilled workers, there would be no demand for more schooling, nor for more talented workers capable of working in a complex society. Efficiently, the public sector has evolved as the primary means to provide more schooling to workers The notion of schooling itself is the response to demands of organizations in a capitalistic society that require more intelligent and skilled workers. And, fundamentally, public education in general, and higher education in particular, amounts to a direct government subsidy to capitalistic enterprises.
As Brink Lindsey noted in his book, "Human Capitalism: How Economic Growth Has Made Us Smarter--and More Unequal," over time, we have created a system of "human capitalism," in which the lion's share of wealth is increasingly concentrated in families with an abundance of human capital. Hence, the growing socioeconomic divide is a consequence of growing disparities in human capital between well-schooled children from affluent and educated families and those who are not well schooled, typically from less affluent, less educated parents.
The Economy Demands It
The economist Gary Becker has estimated that "70 percent of all the capital in the United States today consists of investments in health, knowledge, and skills." These economic and social arrangements have yielded a grand bargain: In exchange for government subsidies to capitalistic enterprises and their demands for well-schooled workers, the public enjoys the benefits of employment, income, wealth and a greater public good. But to participate in that greater public good, individuals must be well schooled.
Reminding us of such fundamentals is necessary to counter such dubious claims that, for instance, government-sponsored investments in human capital in Year One have no detectable impact on gross domestic product in Year Two.
"The correlation of public higher education spending with lower economic growth is questionable, bordering on specious," says Travis Reindl, director of State Policy Analysis and Assistant to the President at the American Association of State Colleges and Universities, citing Vedder's work specifically. Reindl argues that Vedder's overly narrow research methodology artificially limits the estimated impact of public investment. Reindl goes on: "The simple fact is that higher education in the United States is both a public and a private good....policymakers should be appropriately skeptical of theoreticians peddling solutions that call for disinvestment in education by any party, particularly when they are beneficiaries of the very system they are seeking to dismantle."
Indeed, we actually do know what a higher-education system looks like when the government pays no heed to the plight of people who can't afford to further their education. We know what it looks like to decimate the federal role. We know such a place, and it's called sub-Saharan Africa. Is that model of higher education suitable for a democratic society?
Four: Anti-government critics who want to dismantle government subsidies in order to "fix" the financial aid system are misdiagnosing the problem and avoiding the real solution.
The elephant in the room that many policymakers would rather ignore at is that the real shortcomings of the financial aid system -- and the solutions that would actually make a fundamental difference in completion rates for low-income students -- boil down to plain arithmetic and straightforward economics.
The black-and-white economics of the problem of low-completion rates are that the net prices for low and moderate-income families -- college costs minus less offsetting grants and other low-income subsidies -- have been dramatically rising in recent years.
Net Price Is Climbing
The Congressional Advisory Committee on Student Financial Aid has been monitoring these trends for several years, providing an annual report to the U.S. Congress. The key methodology of the advisory committee has been to compare the educational outcomes of students from different income levels, but only students who are qualified for college. The effect of this methodology is to control for academic preparation and isolate the effects of financial need on enrollments and completions.
Between 1992 and 2008, the net price for low-income students for attendance at a four-year public institution rose from 41 percent of family income to about 48 percent, according to the Advisory Committee. For middle-income families, the net price at public universities climbed less sharply, from 22 percent to 26 percent between 1992 and 2008,
With higher net-price burdens, low-income families and students have become much more concerned about college finances and the importance of federal financial aid. In 1992, about one-half of low-income families expressed concern about college finances and 84 percent said that financial aid was "very important" in their decisions about college enrollment and completion. By 2004, 62 percent of low-income parents of college-qualified students stated that financing college was a major concern and almost 90 percent said financial aid was critical in their college-going decisions. Concerns about finances and financial aid also shot up among parents with moderate incomes--63 percent said financial aid was a critical factor in 1992, and 77 percent said so in 2004.
In fact, the more worried families are that financial aid won't be enough to offset college costs is inversely related to family income. Rocket science, this isn't. According to the Advisory Committee's 2010 report to Congress, "The Rising Price of Inequality," in 1992, 54 percent of college-qualified high school graduates from low-income families enrolled in a four-year public college or university and 38 percent went on to earn a degree. In 2004, the enrollment rate dropped to 40 percent, and degree-earners to 31 percent.
These numbers tell us that increasing net prices and insufficient government subsidies have already resulted in huge losses to the economy. Completion rates are taking big hits. The Advisory Committee estimated that of the 3.1 million high-school graduates in 2004, almost 900,000 came from low-income families. Of those, about 593,000 passed requisite courses to qualify for college-level work. Of that number, just 185,000 earned a bachelor's degree, a completion rate of 31 percent.
Hence, of the 593,000 college-qualified low-income students, fully 69 percent did not complete a bachelor's degree, a total of more than 409,000 students. Over a 10-year period, the American economy lost an estimated 4.1 million bachelor's degrees as a result of low-income students not being able to afford the cost of higher education. When students from moderate incomes are thrown into the mix, a grand total of some 8.5 million college-qualified students did not complete college due to financial need.
Mend It Don't End It
Five: Public spending on financial aid to low-income students actually works, but it could work better--and must.
Among respected economists who specialize in the economics of higher education, there is now virtually no debate that government grants and loans work, because consumers of education, especially those with low and modest incomes, are quite sensitive to prices.
Donald E. Heller, Dean of Education at Michigan State, is one such economist. In a 1997 paper published by the Journal of Higher Education, Heller completed an exhaustive review of literature on the effects of financial aid on student enrollment. The consensus among the studies hereviewed is that every $100 increase in tuition results in a drop in enrollments of 0.5 to 1.0 percentage points across all types of institutions. And declines in financial aid also cause enrollments to drop, particularly for lower-income students. The amount of enrollment decline depends on whether the financial aid is in the form of grants or loans. According to the evidence, students are far more sensitive to changes in grant amounts than they are to changes in loans, work-study, or other forms of financial aid.
Thus, Heller's study suggests that the policy debate worth having is not whether subsidies work, but whether the national shift of financial aid policy in recent years from a grants-based system to a loans-based system is really the best kind of aid.
"As federal financial aid policy continues its shift from grants to loans, many in the higher education community are increasingly concerned about the impact on college access," Heller concludes. "In addition, as states move away from their historical commitment to low public tuition levels and toward increasing the responsibility of students for the financing of their postsecondary education, those least able to afford to attend college are likely to be disproportionately impacted by the combined effects of changes in federal and state policy."
Does Aid Matter?
Susan Dynarski, a University of Michigan professor and faculty research associate at National Bureau of Economic Research, is another higher education economist whom other economists and policymakers listen to carefully. In a paper published by the Kennedy School of Government at Harvard and NBER, "Does Aid Matter? Measuring the Effect of Student Aid on College Attendance and Completion," Dynarski measured the impact of Congress's eliminating the Social Security student benefit program in 1982, which at its peak provided grants totaling $3.9 billion a year. She found that "college attendance of the affected group dropped by more than a third, and schooling by two-thirds of a year." She concluded that eqch $1,000 of grant aid increases the probability of attending college by 3.6 percentage points and years of completed schooling by a tenth of a year.
"Getting more low-income kids into and through college is, in my judgment, the defining goal of federal student aid," Dynarski told senators in her July 2012 testimony to the U.S. Senate Committee on Finance. She pointed to increasingly daunting gaps in educational attainment along class lines: "We are in danger of devolving into a rigid, caste society, in which the children of the poor are destined to low education and menial work."
Just as Heller raised concerns about the growing emphasis on student loans, instead of grants, Dynarski told senators that huge tax expenditures on programs that primarily benefit middle and upper income families also have proven to be counter-productive in the effort to raise college completion rates for lower-income students. For example, Dynarski compared the effectiveness of the federal Pell Grant to the American Opportunity Tax Credit (AOTC) in terms of targeting students whose enrollment decisions are highly correlated to financial aid. She told senators that just 15 percent of Pell Grant recipients come from families earning more than $40,000 a year, and just 3 percent come from families earning more than $60,000. By contrast, almost a third of AOTC recipients have incomes over $75,000. Some 16 percent have incomes over $100,000.
In terms of government spending, the Pell grant is far more efficient. The 58 percent of Pell recipients who have incomes of less than $20,000 account for 62 percent of all government expenditures on the program.
American Dream 2.0
On the other hand, AOTC is horribly inefficient at targeting the students who should be the focus of federal need-based aid. According to Dynarski, the 28 percent of AOTC recipients with family incomes of less than $20,000 account for only 15 percent of government spending on the program, while the 17 percent of AOTC recipients with incomes over $100,000 account for 22 percent of AOTC expenditures.
The flaws in the federal financial aid system are fairly obvious, and a number of recent reports and white papers have proposed some highly specific ways to make federal subsidies more effective. According to the collective wisdom of virtually all these reports, the nation needs better-educated citizens who can fully participate in our economic system. Too, these groups believe that federal subsidies are necessary to raise college access and completion rates for Americans who are not likely to pursue college degrees without financial aid. For the most part, the differences among these mainstream researchers and experts are in the details.
For example, in a report released this month, "American Dream 2.0," a coalition of luminaries in higher education finance and economics emphatically argued that the present system lacked accountability on the part of both students and colleges. To raise completion rates, the coalition recommended the system link grant aid with financial incentives for students and colleges. In another report, the National Association of Financial Aid Administrators recommended that Congress should provide a "Pell Promise" to lower-income families, which would inform them about Pell Grants and notify them of how much Pell funding their children will be eligible for. With such a promise, families would be able plan for college, and students would have all the more reason start thinking about college far earlier.
One of most common complaints about the current system is that it's far too massive and complicated for the average low-income family to understand. Applicants for the AOTC tax credits must wade through an 87-page document explaining the program, so relatively few families, except for the lucky few who can hire tax accountants, are inclined to apply for this type of aid.
"Families can't respond to a price subsidy if they do not understand it," says Dynarski. She pointed to experimental programs showing that simpler procedures cause college enrollments for lower-income students to climb 7 percent.
Along these lines, the Institute for College Access & Success released a white paper this month. Its message: Scrap the overlong and complicated Free Application for Federal Student Aid (FAFSA) and allow families to calculate eligibility for aid based on tax filings and W-2 forms. "This one change would dramatically simplify the process for both students and schools, and tell students how much aid they can expect before, rather than after, they apply to colleges."
All this streamlining, simplifying, and incentivizing of the current system may be necessary, but these steps are not sufficient to really attack the fundamental problem of the current system, which is that net costs of college are continuing to price out post-secondary opportunities for millions of students. In order to attack that problem seriously, some very big numbers must be moved around. That's where the Institute for College Access & Success's recommendations part company with many of their peers in the policy community who are more prone to tinker with the system than fundamentally change it.
The Institute points to billions of dollars in federal aid programs, including billions of tax expenditures to fund middle-class education subsidies, which should be eliminated, with the savings re-directed to the neediest students. In order to attack the problem of growing college costs, the minimum Pell Grant of $5,500 should, at a minimum, be doubled to $11,000, the group contends.
Ironically, in this sense, the Institute's "radical" suggestions about doubling the Pell Grant are more similar to the equally radical solutions of the anti-government critics who call for the eventual elimination of all federal subsidies. In my view, the fundamental difference between both approaches boils down to whether one believes that markets work like markets, or like magic.
Peter Sacks is an author, economist, essayist and social critic. His most recent book is Tearing Down the Gates: Confronting the Class Divide in American Education.