How effective is student aid?

Our system of college financing is a mess. Within the present system, it is hard to put downward cost pressure on universities, which has resulted in a cost explosion. Acquiring a college degree — although usually a lucrative move — requires some risk, and that risk is not properly spread out. The problems could go on.

Analysts of various sorts have put forward a number of solutions to this mess. Matt Yglesias has suggested a lump-sum cash grant to all individuals as they graduate high school, whether they are headed to college or not. Mike Konczal has put forward a public option approach in which the government funds free public universities, one effect of which will be keeping private university costs down via competition. Finally, I have endorsed a single-payer approach funded via tax surcharges on those with college degrees.

What most of the reform ideas have in common is a focus on affordability, cost containment, and individual risk reduction. The present system of student aid does poorly on all of these fronts, even some of the programs that we tend to think of as effective.

What colleges often do is adjust the amount of aid they give to students based on how much federal aid they receive. So for instance, recent research found that private college students that receive Pell Grants have their other student aid reduced such that they only actually receive 21 percent of the grant’s value. The college absorbs the rest. The same story is found with the American Opportunity Tax Credit: the aid adjustments schools make to those who receive these credits end up sapping around 80 percent of the value from them.

What this means is that a considerable amount of federal student aid does not actually go to help those who receive it. Colleges just reduce the aid they would give to those students, and the student only actually gets a fraction of the grants’ benefits. This reality shows that piecemeal approaches we have tried so far do not work. Comprehensive college financing reform — not just scattered grants and credits — is necessary if we want to achieve cost containment and affordability goals.