Give This Subsidy a D-
Before Bill Clinton starts
looking for ways to pay for the new aid to college-bound students he's
proposing--or Congress returns to its budget-cutting fervor--both ought to take
a refresher course in the perversities and absurdities that abound in our
current student-subsidy programs. There's big money to be saved. Just two
programs--Pell Grants and subsidized student loans--made up $22 billion of the
Department of Education budget (about two-thirds), and a lot of that money is
spent in dubious ways.
About 10 percent of that $22
billion goes down the rat hole to students who, either because they lie about
their qualifications or because the government makes a mistake, don't, in fact,
qualify. Another few billion goes to students whose major qualification is that
their parents are divorced. Billions more send middle- and upper-class kids to
expensive private schools. Still more millions subsidize such odd groups as
single mothers with rich parents.
To be
fair, Clinton inherited this mess. But he also made a big deal out of reforming
it. His accomplishment? He's stopped banks from taking advantage of the system
to skim a few hundred dollars off the top of each new student loan. Meanwhile,
the system's other, much bigger abuses (some created on Clinton's watch)
continue unabated.
Silly Social
Incentives
The Department of Education has the common-sense idea that
if parents have the means, they ought to help their kids with their college
costs before taxpayers are asked to assist. But Congress has created a handful
of handy ways to ditch rich parents. Follow these rules to become an
independent student, and no matter how much your parents make, the government
will consider you poor and in need of aid.
Tie the knot: Suddenly
parents' income and assets no longer count toward determining whether or not a
student is poor. Of course, young marriage is the most likely to end in
divorce.
Do nothing: If a kid sits
around till he's 23, he becomes an independent student, too, not because his
parents kicked him out of the house, but because, well, just because. And, for
the kid who can't quite get his or her act together, the government is willing
to pay for up to six years of undergraduate education. Has this subsidy
contributed to an increase in the number of years it takes to graduate? Today,
fewer than 40 percent of college students graduate in four years; a quarter
century ago the number was 50 percent.
Have an illegitimate child:
This special qualifying factor, added by Clinton and the 103 rd
Congress, is solely for the benefit of upper- and middle-class single mothers,
who are now allowed to disregard their parents' income in applying for loans
and grants. Remember, getting married already separates college students from
their parents in Washington's eyes, and poor kids are already eligible for Pell
Grants and subsidized loans. As a result of these and other ways to make
students legally independent of their parents, the number of independent
students has skyrocketed--in the '70s, fewer than 20 percent of undergrads were
independent; today more than half are.
Dump dad:
The granddaddy of all the stupid social incentives isn't for kids, it's for
dads. If you're a middle-class dad who can't afford to send your child to
college, divorce your wife. The taxpayer will end up sending your kid to school
because divorced fathers' income isn't counted under current rules. (Even
though married dads aren't legally required to pay for their kids' college
either, their income is always counted by the feds.) This policy helps explain
why there are 50 percent more kids with divorced parents among student-aid
recipients (more than a million in total) than among the general student
population, according to the Center for Education Statistics. Private schools
count the father's income in determining if his kids are in need--Uncle Sam
should, too.
Waste
In 1993, a National Research Council study
found that more than 10 percent of all federal financial aid was awarded in
error. This was the 10 th study since 1975--and all studies showed
similar problems. A 1993 General Accounting Office report showed the breadth of
incompetence in financial-aid administration--between 1982 and 1992, 43,519
ineligible students received subsidized loans. Between 1989 and 1993, 48,000
students received Pell Grant overpayments; 35,000 received Pell Grants from two
separate schools simultaneously; and 101,000 students, ineligible for Pell
Grants because they had defaulted on federally guaranteed loans, received them
anyway.
Consider
just the Pell Grants for students who have already defaulted on past loans:
That one mistake cost $210 million.
Money Games
When is a dollar not a dollar? Well, that's complicated--in
terms of being in need, here's the list of dollars that don't count as
dollars:
If parents made less than
$50,000 last year, none of their assets count as available to help pay for
college.
Dollars invested in a
house--even a $5 million house--don't count (this also brought to you by
Clinton in 1993).
Dollars in retirement
accounts, including deferred salary, 401K plans, and IRAs don't count.
Dollars put in the names of
other kids in the same family don't count.
What
difference do all these rules make? People who know how to use them (usually
not the poor) can makes themselves look awfully pitiable. About 15 percent of
undergraduates whose parents have incomes in excess of $50,000 get federal
grants and subsidized loans, costing the government, on average, $4,000--which
is several hundred dollars more than is spent for those whose parents earn less
than $50,000.
Money Games: Take
Two
Need doesn't depend only on how parents arrange
their income and assets. It also depends on where students want to go to
school. If Bobby Middle-class decides to go to State U., the feds will offer no
help. But, if he wants to go to Harvard, well that's a different story. What
the Department of Education really measures with its financial-aid programs is
relative need. If the same rules were applied to food stamps, here's how it
would work: Take the food stamps into a store and pick out hamburger and canned
green beans, the stamps are worth a dollar. Pick out lobster and truffles, and
the food stamps are worth $20.
The Department of
Education's statistics speak for themselves: At two-year public colleges, which
Clinton says all Americans should be able to afford, 20 percent get financial
aid. At private four-year colleges, 45 percent get help from the taxpayer.
This strategy is even more
costly to nonsubsidized students than to taxpayers. Consider the incentive the
financial-aid system sends even low-cost colleges--the more you charge, the
more aid your "needy" students will get and, since "need" is determined
relative to cost, the more "needy" students you will have. It's hard to find an
economist who doesn't believe this is a recipe for inflation. And indeed, since
the mid-'70s, the cost of attending college has more than quadrupled in real
terms.
So here's today's lesson for
both Congress and the president: Whether you want to save money on federal
education aid or add benefits for more needy students, the way to come up with
the needed dollars is to stop subsidizing a stupid system.
