Pell Grants and Data-Driven Decisions

I am a big proponent of making data-driven decisions whenever possible, but sadly that isn’t the case among many policymakers. Recently, in an effort to reduce costs, Congress and the Obama Administration agreed to reduce the maximum number of semesters of Pell Grant eligibility from 18 to 12 (which is in line with the federal government’s primary graduation rate measure for students attending four-year colleges). However, this decision was made without considering the cost-effectiveness of the policy change or even without a good idea of how many students would be affected.

Today’s online version of The Chronicle of Higher Education includes a piece that I co-authored with Sara Goldrick-Rab on this policy change. We’re both strong proponents of data-driven decision making, as well as conducting experiments whenever possible to evaluate the effects of policy changes. We come from very different places on the political spectrum (which is why we disagree on whether the federal government can and should hold states accountable for their funding decisions), but there are certainly fundamental points that are just a part of an effective policymaking process.

Need-Based Financial Aid and College Persistence: Experimental Evidence from Wisconsin

This afternoon, the Institute for Research on Poverty at the University of Wisconsin-Madison released our new paper on the effects of the Wisconsin Scholars Grant on Pell Grant recipients attending public universities in the state of Wisconsin. In short, we find that randomly assigning some students additional financial aid yields modest positive effects on college retention rates, but getting to that result has been extremely complicated.

Read the paper here and let me know what you think!  We have submitted this paper to a journal and hope to get good news in the next couple months.

Is College Cost Certainty a Possibility?

There are only a few certainties in life, such as death, taxes, and Murphy’s Law holding true at the most inopportune times. For nearly everyone, however, knowing the cost of college more than a few months in advance is definitely not one of those certainties. But given the high sticker price of attending college (which is not tremendously useful for most people), what can be done to provide cost certainty for students and their families over the course of several years?

As a part of a nifty series of essays on possible ways to overhaul the college experience, Beckie Supiano of The Chronicle of Higher Education takes a quick look at what has been done to provide better cost information. She focuses on a useful goal—being able to provide students with the net price of education (tuition less grant aid) over the course of several years. While this is a great idea in theory, it quickly runs into several problems in practice:

(1)    Colleges only control a fraction of grant aid, especially for financially needy students. Most federal need-based grants require that a student be eligible to receive the Pell Grant; if family income rises by a small amount, the loss of aid can be devastating. This also makes forecasting net price nearly impossible for middle-income families.

(2)    Most colleges cannot forecast their available resources several years in advance. Public colleges are at the whims of economic circumstances and the state government, while many private colleges rely on a combination on endowment revenue and rear ends in seats in order to make ends meet.

(3)    Colleges, like most of us out there, tend to be what economists call risk-averse. In English, that means that we don’t like being exposed to uncertainty. Students and their families currently bear the brunt of the uncertainty with respect to higher education pricing, but locking in a price regardless of the economic circumstances would shift that risk to the college. Most colleges would likely set a very high initial price in order to account for this uncertainty.

A small number of states have experimented with guaranteed tuition plans through prepaid tuition programs, which helps provide at least some certainty (although they do not guarantee set amounts of financial aid). Alabama’s program ran out of money during the financial crisis and is currently closed to new enrollment while facing legal challenges. A similar program in Illinois is also drastically underfunded, which is a common theme in the Land of Lincoln.

The article makes a key mistake in discussing cost certainty—it ignores the fact that known cost increases still represent cost certainty. If a college guarantees that tuition will go up by five percent per year for the next five years, students and parents can still have an idea of what college will cost in the future. The State University of New York system took a similar path in 2011, allowing each university in the system to raise tuition by up to $300 per year for five years. This proposal is quite useful as it puts increases in dollar terms, which are easier to understand than percentages.

I am interested in providing more information on cost certainty, but my research focuses on the financial aid side of the cost equation instead of the tuition side. I am currently working on two studies examining whether students and their families can receive earlier notifications of their financial aid, with results hopefully to come in the next few months. It is far from perfect, but it does help provide a little more information in an uncertain world.

Sticker Shock in Choosing Colleges: What Can Be Done?

Very few items are priced in the same manner as a college education. While the price of some items, such as cars and houses, can be negotiated downward from a posted (sticker) price, the actual price and the sticker price are usually in the same ballpark. However, the difference between the sticker price and the actual price paid can be enormous in higher education. This has posed a substantial problem to students and their families, especially those with less knowledge of the collegegoing and financial aid processes.

Until recently, students had to apply for financial aid to get an idea of how much college would actually cost them. The latest iteration of the Higher Education Opportunity Act, signed in 2008, required that institutions place a net price calculator on their website by last October. This calculator uses basic financial information such as income, household size, and dependency status to estimate a student’s expected family contribution (EFC), which would then give students an idea of their grant aid.

The need for more transparent information on the actual cost of college is shown by a recently released poll conducted by the College Board and Art & Science Group, LLC. These groups polled a nonrandom sample of SAT test-takers applying to mainly selective four-year colleges and universities in late 2011 and early 2012 and found that nearly 60% of low and middle-income families ruled out colleges solely because of the sticker price. This is in spite of generous need-based financial aid programs at some expensive, well-endowed colleges.

Given that the survey was conducted right as net price calculators became mandatory, it is likely the case that more students are aware of these tools by now. But it is unlikely that net price calculators have been used as much as possible, especially by first-generation students. To make the net price more apparent, the Department of Education has put forth a proposed “Shopping Sheet” that can be easily compared across colleges. This proposal has advocates in Washington, but there are reasonable concerns that a one-size-fits-all model may not benefit all colleges.

As an economist, I hope that better information can help students and their families make good decisions about whether to go to college and where to attend. However, I am also hesitant to believe that requiring uniform information across colleges will result in something useful.