Targeting Campus-Based Aid

Now that Congress has completed work on legislation to reauthorize the Higher Education Act, momentum is growing among student-aid experts and some policymakers for a fundamental redesign of the federal student aid system. A key question they are asking is whether the federal campus-based student-aid programs are still needed.

The campus-based programs — College Work-Study, Perkins Loans, and Supplemental Educational Opportunity Grants — are intended to supplement Pell Grants for low-income students and to provide aid for students who just miss the cutoff for the grants. Unlike Pell Grants, which are awarded directly to students, campus-based aid is distributed to colleges, which add their own dollars to the programs and then give the money to students.

By requiring colleges to provide matching funds, these programs have long played an important role in enticing colleges to spend their own money to help support low- and moderate-income students. The programs, however, are no longer serving the neediest students well. The formula the government uses to distribute the aid overwhelmingly benefits elite private colleges and public flagship universities, even though low-income students predominantly attend community colleges, state colleges, and trade schools.

Of particular concern are the disparities among colleges participating in the SEOG program, which is meant to supplement Pell Grants for the most financially-needy students. Under the program, which received $758 million from Congress this year, colleges are required to award SEOG funds first to Pell Grant recipients who need more money to pay for school and then to other students who are deemed to have “exceptional need.” Because they receive a disproportionately small share of funding, many community colleges are forced to ration SEOG funds — and often run out of money before they are able to provide awards to all their students who are eligible for the maximum Pell Grant. In contrast, wealthier schools sometimes have to return excess SEOG funds to the government because they don’t have enough students on their campuses who fit the “exceptional need” designation. [In 2003, a group representing 31 elite private colleges tried to persuade Congress to relax the rules so that they could use the money to provide awards to less needy students.]

The roots of these disparities date back over 40 years. In the campus-based aid programs’ first couple of decades, the federal government set aside money for each state. Regional boards reviewed applications submitted by colleges for the funds and made decisions based on the students’ financial need as reported by the schools. Over time, federal officials became concerned, however, that wealthier institutions were benefiting disproportionately because they tended to employ savvy aid administrators who were particularly skilled at grant writing.

To address these concerns, Carter administration officials called for a new method of allocating the funds. That plan, dating to the late 1970s, phased out institutional shares, or “base guarantees.” The entire pool of money was to be awarded based solely on the financial need of the students attending the colleges

But this new method threatened high-priced private colleges and public flagships that were poised to lose significant sums. So lobbyists for these schools pushed Congress in 1980 to reverse the Carter administration’s action and to guarantee that participating institutions would continue to receive the same proportion of aid money they had received since the start of the program.

The results of this law continue to be felt today. Because funds are distributed based largely on the formula set in 1980, a choice group of institutions, many of them wealthy and elite, benefit the most. An astounding two-thirds of funds appropriated each year for SEOG go to colleges that have dominated the programs for decades, leaving little money for the schools that enroll a much larger share of low-income students. This problem has been compounded in recent years, as the program’s budget has stagnated.

For these reasons, the SEOG and Perkins Loan programs are attractive targets for those looking to redesign the federal student-aid system to make it more equitable.

Leading the charge are Bush administration officials in charge of the U.S. Department of Education. They have told college leaders that they hope to issue recommendations for overhauling the federal student aid programs before President Bush leaves office. Speaking last month at a Department summit on higher education, Sara Martinez Tucker, the under secretary of education, said that the recommendations would include proposals to eliminate the SEOG and Perkins Loan programs and use the money saved to increase spending on Pell Grants. According to Inside Higher Ed, she estimated that the savings derived from terminating these programs, as well as others, would be enough to raise the maximum Pell Grant, which is currently $4,731, by $370.

Also considering these issues is a group of higher-education researchers and student-aid experts, known as the Rethinking Student Aid Study Group, that has been meeting for about 18 months to develop recommendations for revamping the federal financial aid programs. The group, which was assembled by the College Board, plans to release a report in October outlining its proposals. It’s unclear whether these analysts will back the Bush administration’s proposal to eliminate the two campus-based aid programs, but it’s widely assumed that the group will call for an overhaul of these programs.

At Higher Ed Watch, we certainly believe that the federal student aid programs need to be made more equitable. But we’re not sure that the Bush Administration’s plan is the best way to go. After all, a $370 increase in the maximum Pell Grant doesn’t seem like a big enough bang for the buck.

Tomorrow, guest blogger Rupert Wilkinson, author of Aiding Students, Buying Students: Financial Aid in America, will offer an alternative proposal for revamping the campus-based aid programs that we believe is worthy of consideration. Stay tuned.