Guest Post: Bolder Steps are Needed to Help Low-Income Students Avoid Debt

By Mark Kantrowitz

While the Obama Administration’s proposal to index the maximum Pell Grant to one percent over the inflation rate is a step in the right direction, it would not do enough to increase the number of low income students enrolling and graduating from college. Congress needs to take much bolder steps to enable and encourage the pursuit of a college education, such as eliminating debt from the financial aid packages of the lowest income students.

Contrary to popular opinion, low income students do not get a free ride. Pell Grant recipients are forced to borrow more for their education than non-recipients even though they have a greater aversion to debt. Moderate and upper-income families don’t like debt, but it doesn’t prevent them from enrolling in college. Among low-income families, however, the prospect of debt can have a chilling effect on enrollment, retention and graduation rates.

According to the U.S. Department of Education’s latest student loan borrowing data, Pell Grant recipients in 2007-08 who obtained a bachelor’s degree were 73 percent more likely to graduate with debt than their more-affluent peers, and their average total debt load was $3,405 higher. In fact, only 13.1% of Pell Grant recipients who obtained a bachelor’s degree graduated without debt, compared with 49.8% of bachelor’s degree recipients who never received a Pell Grant. Middle and upper income students were almost four times more likely to graduate without any debt than Pell Grant recipients.

Let’s consider the out-of-pocket cost expressed as a percentage of total income among students graduating with a bachelor’s degree. (Out-of-pocket cost is the net cost of attendance after subtracting grants.) The out-of-pocket cost represents 61.3% of total income for low income families earning less than $50,000 a year, compared with 22.9% of total income for middle income families earning $50,000 to $100,000 a year and 13.8% of total income for upper income families earning more than $100,000 a year. Among students from families with exceptional financial need (earning less than $25,000 a year), the out-of-pocket costs represent 78.6% of total income. Imagine spending more than three-quarters of your family’s total income paying for college!

The federal student aid system currently expects low income students with exceptional financial need to assume more debt for their education than their parents earn in a year. Nearly 90 percent of bachelor’s degree recipients who applied for federal student aid and whose families have total income less than $25,000 graduated with an average of $24,959 in cumulative education debt in 2007-08 ($26,830 if Parent PLUS loans are included). One-third graduated with more than $25,000 in student loans.

A decade ago Princeton University adopted a “no loans” student aid policy, replacing loans with grants in the financial aid packages of low income students in 1998-1999. The rest of the Ivy League followed their lead, along with more than five dozen elite colleges with large endowments (about two-fifths of colleges with endowments in the billion-dollar-plus range). After they implemented no loans policies, many of these colleges have experienced substantial growth in the number of low income students enrolling and graduating.

To eliminate loans from the financial aid packages of Pell Grant recipients nationwide would require doubling the maximum Pell Grant to $10,600 in 2009-10. Increasing the maximum Pell Grant by $5,000 would cost an additional $35 billion a year. Congress appears to lack the political will to pursue such a change. But perhaps there’s a less expensive approach that will increase bachelor’s degree attainment by the most financially needy of Pell Grant recipients, namely students with a zero Expected Family Contribution (EFC). These are students whose parents earn so little money that the federal government doesn’t expect them to contribute any money to their children’s education.

Congress could establish a supplemental annual $2,500 grant for zero-EFC Pell Grant recipients that would be contingent on the college agreeing to replace all loans with grants in the financial aid packages of students who received this grant. Such a policy would challenge colleges to increase the amount of need-based institutional aid they provide to students with exceptional financial need. The availability of these funds would encourage zero-EFC students to enroll at colleges that adopted no loans policies, putting pressure on colleges with less generous financial aid policies. It would also encourage elite colleges that already have no loan policies to increase the number of Pell Grant recipients they enroll.

This proposal is similar to the idea of providing colleges with a bounty for graduating Pell Grant recipients (as Robert Shireman, the Deputy Undersecretary of Education, proposed in The Chronicle of Higher Education in 2004, and officials at the California State University System are currently championing), but would provide an intermediate and up-front reward for colleges that improve their retention of Pell Grant recipients, would focus aid on the neediest of the needy, and would leverage increases in institutional need-based grants. Depending on the number of colleges that adopted such no loans policies, this would cost between $1.8 billion and $7.0 billion per year.

How would Congress pay for the new program? Part of the cost could be obtained by eliminating the subsidized interest on federal student loans. Subsidized interest does not increase access to higher education because the benefit is mostly realized after the student graduates and enters repayment. Providing supplemental aid to Pell Grant recipients would be a much more effective means of encouraging low-income students to pursue a college education since it would provide the financial aid up front when students need the money to pay their college bills.

Mark Kantrowitz is the founder and publisher of FinAid.org, a leading source for financial aid information, advice and tools; and publisher of FastWeb.com, a free scholarship matching site. He has written extensively on issues surrounding financial aid and student debt. His most recent book, FastWeb College Gold, is a step-by-step guide for students and their families to pay for college. His views are his own and do not necessarily reflect those of the New America Foundation.