Rethinking How America Invests in College Students: How the Pell Grant is used matters!

In the USA, nearly six thousand institutions offer higher education programs to students. 

Many receive private support for their mission through donations from social impact investors, alumni, and foundations.

All of them receive some federal or state funding to support attendance partially. 

Financially qualified students attending any of these institutions are eligible for Federal Pell Grants. They are generally at the lower end of income earners and asset owners.

The Pell Grant is a laudable attempt by the Federal Government to provide college cost relief to the financially challenged.

Here’s why and how those federal investments can do much better.

“An investment in knowledge pays the best interest.”

Benjamin Franklin

What is the purpose of the Pell Grant?

The purpose of the Federal Pell Grant is to provide financial assistance to low-income undergraduate students to promote access to postsecondary education. (1)

Critical aspects of the Pell Grant’s purpose include:

1. Helping students with exceptional financial needs pay for college expenses, including tuition, fees, room and board, and other educational costs.
2. They are increasing college affordability and accessibility for students from low-income backgrounds.
3. Unlike loans, it provides need-based grants that do not typically require repayment.
4. It supports undergraduate students who have not yet earned a bachelor’s degree and certain post-baccalaureate students enrolled in teacher certification programs.
5. It is a cornerstone of federal student aid, established by the Higher Education Act of 1965 to help make higher education more attainable for those with limited financial resources. (2)

The Pell Grant aims to bridge the gap between a student’s expected family contribution and the cost of attendance at their chosen institution. 

By offering this financial support, the program seeks to reduce barriers to higher education and provide opportunities for students who might otherwise struggle to afford college.

While Pell Grants aim to do a social good, policymakers and the taxpayers who fund them usually want to see their money put to good use and have a positive social impact.

The premise for supporting college attendance is that it leads to higher incomes and benefits the economy. One would expect to see higher taxes generated by these higher-paid college graduates.

Are those assumptions based on fact? 

Do all college degrees return higher incomes and higher taxes?

How can policymakers evaluate the Pell Grant as an investment?

Do Pell Grants generate a high social benefit at every degree and institution?

A Model for Evaluating Pell Grants

We have developed a comprehensive model that quantifies the potential social impact of college investments and provides a consistent and normalized approach for evaluation.

On the government side, we assume the maximum Pell Grant of $7,395 for each of four years for a student. The total cost to the government is $29,580.

The total grant funds are a part of a student’s four years of full-time attendance (assuming that is the time for graduation).

We can estimate the value of each student’s education at their respective institution by calculating the Net Present Value of their Lifetime Federal Taxes generated (NPVLFT). 

We can calculate the NPVLFT for the median college student nationwide and a benchmark or base model for the median high school graduate who does not attend college.

The student could have graduated from high school and gone to work, so the marginal impact is the incremental difference between the value created by a high school graduate and the Pell Grant.

In other words, it represents the additional value that the Pell Grant brings to the student and society compared to the scenario in which the student does not attend college.

The Pell Grant returns are the Incremental Net Present Value of Taxes created, divided by the total Pell Grant investment.

The Harvard Example:

The Department of Education provides data on Pell Grants awarded by Institutions, and the latest data shows that 1,251 Harvard students received $5,602,695 that year. (3)

The Harvard average total four-year costs are $353k, and an NPV of $292k. While the average Pell grant is about $4.5k, we will assume the maximum grant for simplicity, so the $29,580 funds 10% of a student’s cost.

The Net Present Value of the Lifetime Taxes for a median Harvard Graduate is $352k per student.

A median high school graduate who does not attend college creates an NPV of $111k in taxes.

Enabling this student to attend Harvard instead of going straight to work creates an incremental net present value of $241k in taxes per student ($352k-$111k).

Remember that Pell only funded 10% of the Harvard Education. So, the total marginal value created for that funding is $24.1k each (10% of the $241k). This investment return is well below the original Pell Grant ($29,580), which was invested in that student and generates a negative return of 18%.

Harvard is a great institution; its graduates are well-rewarded in the marketplace and receive very high salaries.

They generate a significantly higher average tax benefit to the nation. However, Harvard is costly, and the Pell Grant only funds a small portion of a student’s attendance.

Thus, investing in Pell Grants at Harvard is a losing proposition for taxpayers.

Indeed, Harvard can provide funding to all its students without Pell Grants.

The University of Phoenix Example

The University of Phoenix is one of the largest for-profit institutions providing four-year degrees in the United States.

According to the 2017-18 DOE reports, it is also the third largest recipient of Pell Grants. That year, $197,213,991 was spent on 51,990 students. 

Maximum Pell Grants at the University of Phoenix for four years fund 43% of full costs. But because the median salary is only $37,769 the student generates lower taxes over their lifetime than a High School Graduate.

The Pell return is -123%!

That means many students would be better off working after High School than getting a degree here.

They will make more money (NPVAT) and pay more taxes. Taxpayers would avoid the expense of the grant, and the government would receive more taxes.

The marginal returns from Pell Grants in the top schools are generally bad propositions, though better than those of the median college graduate at a disastrous -66%!

We have determined that the median college graduate (earning below the median salary and paying above the median costs) generates subpar returns to the median high school graduate. 

You may have noticed that several schools generate a positive return for Pell Grants. Why is that?

When the Pell Grant funds a degree that generates exceptional salaries at lower costs, the return on the Grant can be positive.

This disconnect demonstrates the challenge of famous institutions. These institutions generate high value for the individual student. However, their costs are so high that fewer can attend and are fundable with a specific donation or grant.

Could other schools better balance costs while generating high student values, allowing comparably high donor investment returns?

A high-return hidden investment gem

For the Pell Grant Returns to be high, the student must attend a college that is more affordable than those profiled and produce students whose value is also dramatically higher than that of the high school graduate.

One such institution that stands out is Baruch College, a part of the City University of New York System. Full disclosure: Baruch is my alma mater, and I am on the Board of the College Fund.

With its low attendance fees and high median student returns, it presents a unique opportunity for high returns on donor investments.

Due to its relatively low cost and high returns to graduates, Baruch excels.

The Maximum Pell Grant pays for 50% of a student’s tuition, and the marginal return is a whopping 110% over the original investment.

Yes, you read that right. The social impact return of donors’ investments in Baruch is almost eight times that of MIT, blowing away the results of the other schools profiled.

In our earlier chapter reviewing donor returns, we showed the many other comparisons that establish why Baruch College is a gem. It would be worth your while to review those again. 

Implications for Policymakers

Pell Grants aim to help low-income high school graduates attend college.

However, depending on the chosen field of study and college, the student return could vary dramatically.

The Pell Grants are better used to fund students in reasonably priced institutions that generate good salary outcomes for their students.

Reference Sources

1. U.S. Department of Education Federal Student Aid. ”Federal Pell Grants.” Studentaid.Gov.  Accessed July 12, 2024. https://studentaid.gov/understand-aid/types/grants/pell.
2. Pell Grant. (2024, May 3). In Wikipedia. https://en.wikipedia.org/wiki/Pell_Grant
3. U.S. Department of Education. ”Distribution of Federal Pell Grant Program Funds by Institution.” Www2.Ed.Gov. Accessed July 12, 2024. https://www2.ed.gov/finaid/prof/resources/data/pell-institution.html.