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.

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.

"It was surprising to see how much the public colleges appear to be increasingly mirroring the private colleges," Burd noted.

The watering down of the Pell Grant program has been underway since the 1980s, said Ronald Ehrenberg, director of Cornell University’s Higher Education Research Institute and co-author of a 2005 report about Pell Grants and merit scholarships.


Federal Pell Grants — named for Rhode Island Sen. Claiborne Pell — began in 1972, and were meant to serve as a foundation of needy students' aid packages, with other aid to be added by the institution and other sources up to a student's financial need. The basic public policy of the day was to provide everyone access to higher education through cheap public tuition, Ehrenberg said.

"The government basically made a deal with public institutions: if you will accept students without regard to financial need, we will provide a base of financial support for doing this through Pell Grants, and work-study and loan programs," Ehrenberg said.

Selective schools with huge endowment coffers, like Harvard University, Stanford and Princeton, continue even today to give generous aid packages to needy students — because they can. However, in the mid-1980s, universities ranked just below the most selective universities began offering merit money to attract top students, thus improving their positions on college ranking lists, and their ability to draw donations, Ehrenberg said. At those schools, institutional help for needy students declined, and other schools followed suit.

A second incentive for redirecting institutional aid toward wealthier students is to fill empty seats as cheaply as possible. As the "Undermining Pell" report points out, "It’s more profitable for schools to provide four scholarships of $5,000 each to induce affluent students who will be able to pay the balance than it is to provide a single $20,000 grant to one low-income student."

The aid landscape for needy students continues to worsen, and the problem involves more and more schools, Ehrenberg said. That’s because institutions squeezed by diminishing state support have such rich incentives for attracting full-paying students with parents likely to donate, and none for attracting needy students looking for a ladder to a better future.

Sly enrollment strategies have developed on college campuses to protect bottom lines. More than one-third of public colleges and nearly two-thirds of private ones take a passive-aggressive approach toward recruiting low-income students through a tactic known as "gapping," according to a 2012 Inside Higher Ed survey. The schools offer needy students aid packages much too small to meet their needs, deliberately underfunding them to discourage enrollment.

Another common strategy is the popular “high tuition, high aid” approach, in which schools raise prices with an expectation that they will provide more aid. The “Undermining Pell” report says that’s a failure for low-income students.

“I think what happens sometimes is that states go to the high-tuition model but don’t follow through on the high-aid side of the equation,” Burd said. “It also appears to be the case that the high aid is not necessarily going to low-income students — but is instead being redirected toward wealthier students.”

One worrisome outgrowth is that the nation’s most selective schools — those that still provide sufficient need-based aid — are becoming divided societies filled with students whose families have vast wealth and those from poverty-stricken homes, Ehrenberg said. Middle-class students, unable to afford such schools, are being segregated into public colleges. And needy students who can’t get into the nation’s few top schools that still provide generous need-based aid are increasingly shut out of the chance for a college education.

Burd, author of “Undermining Pell,” is concerned about that opportunity gap.

“At a time when we are really worried about economic inequality in this country, I find these to be pretty worrisome trends,” he said. “I’m afraid we’re shutting down what’s long been a path to the middle class for low-income students.”

The “Undermining Pell” report has lists that detail the net costs for needy students at many U.S. colleges and universities, and those can help families avoid schools that play the Pell grant shell game, Burd said. The report can be accessed at The New America Foundation’s policy recommendations for reforming Pell Grants take a carrot-and-stick approach, he said.

The “carrot” is to offer Pell bonuses to colleges whose populations include at least 25 percent Pell grant recipients, and who graduate at least half of their students. Schools could then use the money to boost institutional aid budgets, allowing them to reduce net prices charged to their neediest students.

The “stick” would be to require wealthy colleges that divert their aid away from needy students to match a share of the Pell money they receive with institutional funds.

“I feel like there haven’t been any strings attached to Pell Grants,” Burd said. “Right now, all the incentives are for colleges to get the wealthier students. I think the government has (a) role in increasing incentives for colleges to help low-income students.”

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