Restrict Pell Grants to the Neediest Students

The Federal Pell Grant Program is the largest source of federal grant aid to low-income students for under-graduate education. Grant recipients enroll at a variety of educational institutions, including four-year colleges and universities, for-profit schools, two-year community colleges, and institutions that specialize in occupational training. (Pell grants are not available to students pursuing graduate or professional degrees.) For the 2016–2017 academic year, the program will provide $28 billion in aid to 7.8 million students, the Congressional Budget Office estimates.

A student’s Pell grant eligibility is chiefly determined on the basis of his or her expected family contribution (EFC)—the amount, calculated using a formula established under federal law, that the government expects a family to contribute toward the cost of their student’s postsecondary education. The EFC is based on factors such as the student’s income and assets. For dependent students (in general, unmarried undergraduate students under the age of 24 who have no dependents of their own), the parents’ income and assets, as well as the number of other people (excluding parents) in the household attending postsecondary schools, are also taken into account. Families with a high EFC generally have less financial need than those with a low EFC and thus are expected to contribute more to their child’s education.

Since 2008, funding for the Pell grant program has had discretionary and mandatory components. The discretionary component is the maximum award amount set in each fiscal year’s appropriation act. The maximum award for the 2016–2017 academic year is $4,860 per student. One mandatory component is the funding stemming from the Higher Education Act that is dedicated to supporting the discretionary program. The other mandatory component supports the “add-on” to the maximum award set in appropriation acts. The add-on for the 2016–2017 award year is $955, resulting in a total maximum award of $5,815. Under current law, the add-on is indexed to inflation through the 2017–2018 academic year and remains constant thereafter.

This option would tighten eligibility criteria to generate savings in the program. Under current law, students with an EFC exceeding 90 percent of the total maximum Pell grant award (that is, an EFC of $5,234 or greater for the 2016–2017 academic year) are ineligible for a grant. One version of this option would lower that threshold and make students with an EFC exceeding 65 percent of the total maximum Pell grant award ineligible for a Pell grant. Under that approach, the least needy Pell grant recipients as determined by the EFC formula—about 6 percent of recipients in recent years—would lose eligibility. Assuming that in future years the maximum discretionary award amount remained at the $4,860 amount specified in the most recent appropriation act, CBO estimates that this option would yield discretionary savings of $4 billion and mandatory savings of $1 billion from 2017 through 2026.

A stricter version of this option would limit eligibility to those students whose EFC is zero. Under that version, about 34 percent of Pell grant recipients in the 2014–2015 award year would have lost eligibility. That approach would yield discretionary savings of $65 billion and mandatory savings of $25 billion through 2026, CBO estimates.

A rationale for this option, applicable to both versions, is that it would focus federal aid on students who, on the basis of the federally calculated EFC, have the greatest need. Students who lost eligibility under the first version of the option would probably still be able to afford a public two-year college: Tuition and fees at public two-year colleges for the 2014–2015 academic year averaged about $2,955, which is below the EFC of students who would lose eligibility under that version of the option. In addition, most students whose EFC was in the affected range under either approach would be eligible for $3,500 or more in federal loans that are interest-free while they are in school. Furthermore, a few studies suggest that institutions responded to past increases in the size of Pell grants by raising tuition and shifting more of their own aid to students who did not qualify for those grants, which suggests that they may respond to the tightening of eligibility criteria for Pell grants by shifting some of their own aid to those students who lose eligibility.

An argument against the option is that many Pell grant recipients with an EFC above zero have educational expenses that are significantly greater than the family’s expected contribution and are not covered by aid (grants, loans, and work-study programs) from federal, state, institutional, or other sources. In the 2011–2012 academic year, for example, 63 percent of students with an EFC above 65 percent of the maximum grant at the time and 76 percent of students with an EFC between zero and 65 percent of the maximum grant incurred educational expenses that were not covered by those sources. Denying Pell grants to those students would further increase the financial burden of obtaining an undergraduate education and might cause some of them to pursue less postsecondary education or to forgo it altogether. The amount of postsecondary education received is an important determinant of future wages. In 2015, for example, the median wage for workers between the ages of 16 and 64 who had a bachelor’s degree was about 76 percent higher than the median wage for those who had only a high school diploma or GED certification.