The administration asked for $49.7 billion in discretionary spending increases for the Department of Education for the 2011 fiscal year, up from $46.2 billion in the current year. Those figures do not include mandatory spending on programs that require no annual Congressional appropriation, a category that includes Pell grants for college students. The administration’s budget includes an additional $34.9 billion request for Pell grants. (NYtimes, “Administration Outlines Proposed Changes to ‘No Child’ Law”).
Ah . . . is this such a good idea?
Well, it depends. Some see Pell Grants and other types of student loans as the only way college degree seekers can afford college in the face of rising tuition costs. But, say others, that’s exactly the problem.
Two professors of economics at the University of Oregon, Larry D. Singell Jr. and Joe A. Stone, decided to test the “Bennett hypothesis.”
What the Heck is the “Bennet Hypothesis?”
The “Bennett hypothesis” was a warning put forth by William J. Bennett who was the secretary of education during the 1980′s. He predicted that increasing the availably of student loans, and raising the amount that students could borrow, would wind up making a college education less affordable because colleges and universities would just raise their prices (i.e., tuition) to increase their revenue. It is like the neighborhood store that finds itself in the middle of an area that is growing wealthier. The store owner will gradually raise his prices, especially on high profit margin products. This is called the “wealth effect.”
But, we digress. So — was Bennett right? The goal of the Federal Pell grant program is to protect low income college students from high tuition costs. But are these loans are fairly easy to get. That makes these loans “easy money” for the colleges. Could they actually be causing the very problem they were designed to solve?
Singell & Stone say yes:
Mr. Singell and Mr. Stone found that public colleges’ tuition for in-state students did not rise in tandem with Pell Grant levels. But private colleges’ tuition, and public colleges’ out-of-state tuition, increased by roughly $800 for every $1,000 increase in Pell recipients’ average grants.
Singell & Stone provide good evidence that colleges have increased costs as Pell grant money has increased. However, if they’re right, this isn’t the traditional “wealth effect,” i.e., all this money isn’t coming from college students or their parents who have been getting wealthier — it’s all borrowed money, there’s a lot of it, and more and more ex-students are failing to pay it back.
Pell Grants Versus Other Types of Educational Loans
Pell grants may not be the culprits they’re made out to be. Pell grants are means tested loans. They are capped independent of the type of college they’re used to fund. Other types of student loans, however, have their maximum amount set by the college the student wants to attend. The higher the tuition, the higher the loan amount the student needs. Says Arthur M. Hauptman, a public policy consultant specializing in higher education finance:
. . . just as one couldn’t imagine house prices being as high as they now are if mortgage financing were not available, it is difficult to believe that colleges and universities could have increased their charges so rapidly over time without the ready availability of students’ ability to borrow [more and in higher amounts].
As evidence, Hauptman says that the money that’s poured into these types of student loans has increased by close to a factor of 10 over the last 30 years. During the same time period, tuition has steadily increased by twice the rate of inflation.
Singell & Stone found that “private colleges’ tuition, and public colleges’ out-of-state tuition, increased by roughly $800 for every $1,000 increase in Pell recipients’ average grants” but this could simply be Pell grants trying to chase rising tuitions driven higher by these other, non-Pell grant, types of student loans.
Higher Education? For the Rich Only
In the end, it matters little, practically speaking, whether Pell grants have contributed to the problem or not. With new proposed federal caps on maximum Pell grant amounts and tuition costs continuing to spiral ever upward, low income students who qualify for Pell grants are losing ground in the fight to obtain an affordable college education.
To Make Matters Worse . . .
Not only are young people are carrying record amounts of student loan debt, they are also carrying even more credit card debt. A study conducted by Sallie Mae found that in 2009, the average undergraduate student had $3,173 in plastic debt, a record amount.
If a mountainous student loan is the first punch that causes newly ex-students to start financially reeling (especially given the current 9.1% unemployed labor market), credit card debt is often the knock out punch to pushes them into default.
We Can Only Help Ourselves
There’s a lot of noise and promises coming out of Washington D.C., but don’t expect much relief. The only way, really, to save ourselves is to . . . well, save ourselves, and the best way to start doing that is to take action now.
So what do we do? Well, we can’t do anything about the sucky job market, the student loans we’ve taken out, or all the plastic we’ve burned through, but we can get smarter about debt going forward. A recent post on this blog asked: “Personal Finance Blogs Are Making Us Smarter But Will The “Smarts” Last?” and I think the answer is yes. From personal loan consolidation, to learning how to improving our credit scores, to learning how to get rid of debt once and for all, we can take back our financial future.