To Save Pell Grants, Cut the Programs That Pad College Budgets

Pell Grants—the federal government’s most effective tool for helping low-income students afford college—are heading toward a fiscal cliff that could force cuts to aid or restrict eligibility in the coming years. The Congressional Budget Office estimates the gap could reach $17 billion by 2027 and as much as $132 billion over the next decade. Unless Congress acts, students who depend on Pell will bear the cost.

Created to expand access to higher education, Pell Grants currently provide up to $7,395 per year to low-income students, with smaller awards as family income rises. The program has long enjoyed bipartisan support: progressives value its focus on need, while conservatives appreciate that it functions as a means-tested voucher, giving students flexibility to choose where to enroll.

The problem lies in how the program is financed. Pell relies on a mix of mandatory and discretionary funding that Congress must continually replenish. When other spending priorities crowd out Pell, the program faces shortfalls—shortfalls that are coming due now.

There is a straightforward fix. Over the past century, federal higher education policy has accumulated programs that have outlived their usefulness or never lived up to their promise. The common thread running through many of them is that they enrich colleges rather than aiding students by giving institutions both the incentive and ability to capture the benefit through higher tuition or reduced aid of their own.

These programs effectively siphon money from programs that work, like Pell grants, to finance misguided programs that benefit institutions at students’ expense. Ending these programs and redirecting those funds to Pell would shore up the program for the next generation of low-income students without raising taxes or cutting aid to students.

At the top of the list is the Federal Supplemental Educational Opportunity Grant (FSEOG) program, which shares Pell’s purpose—to provide financial assistance to low-income students—but is far less well-targeted. Whereas the federal government chooses the recipients of the Pell grant, colleges choose FSEOG recipients, even though the federal government typically pays for 75 percent of those grants. Moreover, FSOEG funds are not distributed among colleges based on how many needy students they enroll, but rather disproportionately flow to richer colleges with more political power. The result is a textbook case of money intended for students being redirected to benefit institutions instead.

The combination of college discretion and non-need-based allocation results in a program that is much less effective than Pell grants in supporting students from low-income households. The savings from dropping this aristocratic and arbitrary program and redirecting those funds to Pell over the next 10 years would be around $9 billion.

Work-study provides another example of a program that has been obsolete for decades but persists, nonetheless. Started during the Great Depression with a goal of keeping students in college and out of the labor force, the program was the wrong solution to the high unemployment of the era and is certainly no longer a desirable aim for policy. Like FSEOG grants, the federal government typically pays for 75 percent of work-study awards, yet colleges, not the government, choose which students receive the aid. In the best-case scenario—which is still bad policy—the government is heavily subsidizing on-campus jobs for college students.

In the worst-case scenario, colleges are destroying value by creating jobs that create less value than their overall cost. Eliminating work-study would save $12 billion over the next 10 years.

The federal tax credits and deductions follow the same pattern: money nominally aimed at students that colleges routinely intercept. These tax benefits have not lived up to their promise, largely because colleges have responded strategically to their introduction by raising their prices and cutting other financial aid. When a college responds to a $1,000 tax credit by raising tuition by $1,000 or cutting other financial aid by $1,000, it is the college, not the student, that benefits from the tax credit. The two biggest tax credits, the American Opportunity Tax Credit and the Lifetime Learning Credit, account for $132 billion in tax expenditures over the next 10 years—and because colleges have captured that benefit already, eliminating them would cost students far less than the headline number suggests. Indeed, their elimination could cover the entire projected Pell shortfall over those same 10 years.

Pell Grants are worth saving—and they can be saved. The money is already in the system; it’s just being spent on programs that funnel dollars to colleges, while students see little of it. Congress doesn’t need to find new money. It just needs to stop sending the old money to the wrong place.