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How colleges take from the poor, give to the rich

Published: Saturday, May 25 2013 8:20 a.m. MDT

Updated: Tuesday, Sept. 30 2014 2:28 p.m. MDT

A new report shows that many four-year colleges and universities play a shell game with federal Pell grant money meant to cut college costs for low-income students.

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Federal Pell Grants were supposed to make college affordable for students whose parents couldn't afford tuition. They were meant to serve as a gateway to the middle class for motivated people from low-income backgrounds. For much of the past 50 years, it worked.

Now, though, many four-year colleges and universities are cheating the Pell program's mission through "an elaborate shell game" that takes from the poor and gives to the rich, says a new report from the New America Foundation, a Washington, D.C., fiancial think tank focused on new solutions for 21st-century challenges covering a wide range of issues.

The "Undermining Pell" report, released this month, analyzed little-examined U.S. Department of Education data that show the net price students pay at thousands of individual colleges after their grant aid has been exhausted. It concluded that hundreds of public and private colleges expect their neediest students to pay an amount for a year of college that approaches their families' annual income. (Pell Grants are given according to a formula, with family incomes topping out at around 50,000. Most of the money goes to families earning less than $20,000 per year.)

It's an increasingly common scenario with unfortunate results.

"Low-income students have to take on a significant amount of debt or work full-time jobs while they are in school, or they have to stop out of school for periods of time while they work and save," said report author Stephen Burd, a senior policy analyst for New America Foundation.

The shell game

Perhaps the most disturbing news from the report is its explanation for why Pell grants aren't serving their purpose of making college affordable for students whose families qualify.

"The federal government commits all of this money for Pell grants with the expectations that this is helping low-income students gain access and succeed at college," Burd said. "Instead, colleges have been redirecting their institutional aid toward wealthier students. To get the best and brightest, and to get full-paying students, they are taking the Pell money in one hand, then giving institutional money to students who have more means to pay."

Now you see it, now you don't. Like a carnival conman duping an earnest mark, colleges are using Pell grants to take the place of institutional aid they would have given to needy students, then shifting those funds toward recruiting wealthy ones through "merit aid." So, even after historic increases in Pell Grant funding, the college attendance gap between rich kids and poor kids is as wide as ever, the report said.

Although much of the so-called merit aid goes toward attracting students with high grades and test scores, a significant amount goes to low-performing students. For instance, 20 percent of college freshman with grade-point averages of less than 2.0 received merit aid, according to a 2011 report from the U.S. Department of Education's National Center for Education Statistics.

The analysis found that the highest hurdles for needy students are at private nonprofit colleges. A few dozen exclusive colleges meet the full financial need of low-income students they enroll, but nearly two-thirds of those analyzed charged a net annual price more than $15,000 to families that make less than $30,000 per year.

"I've known for awhile that there's been this movement toward merit aid," Burd said. "I didn't quite realize how far it had gone in the private college sector."

The problem isn't as bad at public universities, but it's worsening as more states cut funding for their higher education systems. In the 1995-96 school year, 8 percent of freshman students received merit aid, while 13 percent receive need-based aid. By 2007-08, the situation had reversed — 18 percent of public college students received merit aid, while 16 percent receive need-based aid, all according to NCES.

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