Biden does have a lot to like in his plans for higher education, but I thought it would be useful to focus on a couple of parts that could likely be improved. Last Friday, I talked about some possible changes to his plan to provide free tuition for all students from families making less than $125,000, and today I thought I would talk about his plan to expand Pell Grants by doubling the maximum amount.
Pell Grants are nice because they are need based and effectively target a lot of money on students who need the most help. Unfortunately, there are some problems with this program as well. First, it is overly bureaucratic, where in order to get a Pell Grant students need to fill out a long and complicated FAFSA form, and then they do not find out how much aid they get until after they apply to college and get accepted. This means that even if it helps students from low income families afford college, the bureaucratic complexity imposes a serious barrier to attending college, especially since they have no idea how much aid they might get when they are making the decision to go to college. As a result, some studies have shown that Pell Grants have not been effective in encouraging more students to go to college, though they might be more helpful in keeping students in college once they do actually start attending.
Because of these problems, I would eventually like to reduce our reliance on the federal system of financial aid, and have my own idea about how to provide need based subsidies that accumulate over a child's entire lifetime. The seed of the idea started with the insight that having the government deposit money into college savings accounts each year as a child grows up (where kids in low income families get significantly more) would be incredibly transparent and easy to understand because students would always know how much is in their accounts well before they decided to go to college as they do in Canada. This way students would know they have money waiting for them when they graduate, and would also set the expectations that they will eventually go to college early on in their life. Both features would make it more likely students will decide to attend college, and would be much more administratively simple in some ways since the government could automatically figure out how much to deposit in the account based on income their parents report on their tax returns anyway, thereby requiring no separate form to be filled out. Plus, benefits would be based on a families lifetime income rather than just one year, so there would be a smaller work disincentive for parents who did qualify for aid.
The problem is that individual accounts are administratively costly, especially when you are allowed to decide how to invest the funds in your accounts, and often have low take up rates, which might especially hurt low income families who have more difficulties signing up. In addition, it would take decades for a system of college savings accounts to be fully funded, where the benefits for those graduating from high school right now would be quite small. My key insight is that rather than create college savings accounts for students, instead the government should create a sort of college Social Security plan. One of the most successful tricks that Social Security pulled off is to have everyone believe all their payroll taxes were saved up and used to pay for their own Social Security benefits, when really all the money they put in was used to fund the benefits for those currently retired. Similarly, the government could send out statements showing how much a student will have available to them as soon as they graduated from high school, and those statements would start arriving in the very first year a child was born. The money would not go into individual accounts that could be invested but instead all the money would be used to pay benefits for those currently graduating. The government could then use existing tax data to calculate how much a student graduating this year would have gotten as if the program had been in place from the very day they were born. This means those graduating right now would get a full benefit, while at the same time those growing up would know how much they aid they will get when the graduate based on their income so far and would feel like they have a sense of ownership in the system, even though all the money goes to those graduating this year.
The end result would be a kind of system of college pensions, which are actually government funded need based scholarships, where the government puts money into a fund that is used to pay current benefits, but at each point along the way, students growing up are told how much they will get in the future which depends on the income of their parents growing up. You get the transparency and incentive effects of a college savings account, but the lower administrative costs of SS type system without the decades long delay until the program is fully in effect. If you gave every child born a $1,000 benefit and then topped that off with $200 a year for kids living with parents in the lowest half of the income distribution (so that a low income student would have about $4,600 to spend on college after they graduated from high school), this would cost about $11 billion a year. This would allow you to spend some money on expanding Pell Grants, but perhaps the rest of the funds could be used to pay for this special SS style scholarship program, and if this new type of need based scholarships works well, you could gradually divert more and more money from Pell Grants to make the new system more generous over time. I do think we need to carefully consider how to improve on our current system of financial aid, and this idea offers a new approach and new strategy for providing need based aid that creates a number of important advantages that makes it particularly attractive.
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