The Faux Equity Campaign on Pell Grants—Myth vs. Reality

The for-profit lobby’s “equity” campaign to restore the Pell Grant boost for their schools has advanced on two fronts. First, advocates claimed that excluding for-profit schools from the Pell increase would disproportionately harm low-income, minority students who chose to attend for-profit colleges, a view amplified by an op-ed placed in a series of Black newspapers. Second, they claimed that the exclusion unfairly singles out and punishes for-profit institutions, reflecting Democrats’ purported “ideological” opposition to colleges profiting from educating students.

Those equity claims are not merely canards—they constitute a complete departure from traditional conservative positions about strengthening accountability in higher education and preventing the waste of taxpayer dollars at career preparation programs with lousy outcomes.

Start with the notion that a Pell boost at for-profit schools would be a boon for low-income students. That claim can be tested empirically in several ways. One threshold test for assessing if this is true is to examine whether for-profit schools effectively reduce tuition for students after receiving increases in federal aid, or instead raise their tuition to “capture” or pocket the additional government aid.

The history of the aid-capture debate dates to 1987, when conservative icon and Secretary of Education William Bennett proposed, in a New York Times op-ed, the so-called Bennett Hypothesis: Increases in federal student aid, Bennett argued, “enable colleges and universities blithely to raise their tuitions.”

Ever since, conservatives and libertarians have cited the Bennett Hypothesis to assail the federal aid program as a government boondoggle that undermines private loan markets, diverts government funding intended for students to institutions, and propels student debt. The more student aid the government provides, the more institutions raise their tuition, conservatives contend—until for-profit colleges have an opportunity to get more Pell Grant dollars.

A series of empirical studies has has found mixed or weak evidence for the Bennett Hypothesis at public universities and private non-profits. But in one sector—the for-profit sector—Bennett was prescient. Studies there show that for-profit schools do raise their tuition to capture additional federal student aid.

As George Washington University economist Stephanie Cellini recently summarized in The Hill, “in the for-profit sector, the research is clear: tuition rises when federal student aid increases.” Instead of passing along Pell Grant increases to “the low-income students who so critically need it,” Cellini notes, “for-profit institutions are likely to raise their tuition to capture any aid increases without benefiting the students they serve.”

Moreover, if—and it’s a big if—excluding for-profit schools from a $550 bump in the maximum Pell Grant award actually deterred a sizeable number of the 900,000 students on Pell Grants at for-profit schools from sticking with their career education programs, history suggests that all but a small number of those students would enroll instead in much cheaper community college programs and public universities that don’t leave so many of them saddled with unaffordable debts.

A rigorous study of much stiffer federal sanctions—which led to cutting off federal student aid altogether to over a thousand for-profit schools with high student loan default rates during the 1990s—found that nearly all enrollment declines at for-profit schools from the sanctions were offset by enrollment increases at nearby community colleges. As professor Cellini wrote in The Hill, “students can and do find other educational options when aid is withheld from for-profit colleges and these alternate options tend to have better student outcomes.”