Our Broken University Financial Aid System

Felix Salmon draws our attention today to a new study by Stephen Burd of the New America Foundation about Pell Grants and low-income college students. The news is grim. More and more universities, he says, have joined the “high tuition, high aid” brigade:

In theory, the structure should work well. Rather than charge every student the same amount, have a high rack rate, paid by the richest students, and then use the proceeds to put in place a generous scholarship system which will help support the poorest students.

In practice, however, that doesn’t happen. The scholarships go towards “merit aid”, which is often, dismayingly enough, a polite way of saying that the college is helping to pay for wealthy kids to attend, even if they’re not particularly smart. Some 20% of students with GPAs below 2.0, for instance, receive merit aid. And at the same time, the “need aid” is carefully calibrated so that poor kids won’t take the colleges up on their offers

Apparently this called “gapping,” or “admit-deny,” which is the practice of offering “a financial-aid package that is so rotten that you hope they get the message, ‘Don’t come,’” Mark Heffron, a senior vice-president at the enrollment management firm Noel-Levitz, told The Atlantic Monthly back in 2005. ‘They don’t always get the message.’”

More and more, the whole structure of Pell Grants, and financial aid in general, looks broken. Increased financial aid doesn’t make college more affordable for poor students, it just allows universities to charge ever higher tuition rates. So what’s the solution? Burd recommends a carrot-and-stick approach:

The carrot is to help schools that simply don’t have the resources to keep down the net prices of the low-income students they serve. The plan would offer Pell bonuses to financially strapped public and private four-year colleges that serve a substantial share of Pell Grant recipients (more than 25 percent) and graduate at least half their students school-wide.

….The stick is for wealthier colleges that have chosen to divert their aid to try to buy the best students….These schools, which generally enroll a relatively small share of low-income students but charge them high net prices, would be required to match at least a share of the Pell dollars they receive.

I’m not sure this is enough, but it’s a start. One way or another, this is a broken system that needs to be fixed. It’s great for universities, and it’s pretty good for upper middle-class and wealthy families. For everyone else, it just doesn’t work.