More than five years ago, the Bill and Melinda Gates Foundation decided to fund projects and research aimed at doubling by the year 2025 the number of low-income students who graduate from college or from some other post-secondary institution.  The Gates-funded proposals that have come forward in recent weeks share this profoundly egalitarian focus and, if implemented, would have a revolutionary impact on higher education.

While the egalitarian goals are laudable, it is also true that if all the recommendations are implemented, middle-class parents and students will for the most part find it more difficult to pay for college.  The message we receive from these initiatives is that the foundation believes that the nation as a whole is at great risk because too many low-income students are falling behind, and that ameliorating this problem is worth some sacrifice on the part of the middle class.

One such initiative is from the Committee for Economic Development, which proposes that current federal non-loan programs (e.g., Pell Grants) be replaced by need-based federal-state matching programs.  This proposal has received some media attention, but after reading the entire 32-page report, we believe its potential impact has been insufficiently understood.

The CED report argues that the current higher education system is inefficient because too little financial aid goes to those who are most in need.  There is an implicit recognition in the report that “broad-access” institutions will be the most affected, while elite public and private institutions will have to make fewer adjustments.

The report is critical of colleges that regard federally-funded grants and loans as the only means of increasing access to low-income students, meanwhile preferring to use state and institutional funds for the purpose of merit-based aid to high-achieving students who will raise college profiles.  Middle- and even upper-class students who now enjoy merit aid may find that the matching requirements recommended by the CED will dramatically reduce the availability of merit funds.

“Our concern,” the CED says, “is that institutions are engaged in a kind of ‘arms race’ for academically qualified students….This drives an ongoing process of increasing financial aid to students who will go to college regardless of the level of aid they receive.”  One reason for this “arms race” is the focus on student selectivity in college rankings, especially the U.S. News annual best college issue.  Bill Gates has directly criticized this emphasis on “inputs” versus “outputs,” such as improving the skills of under-prepared students.

Clearly the rising cost of attending college has hit low-income students the hardest.  The CED recognizes that state cuts to public colleges and higher operating costs are the principal factors driving higher costs, but sees little on the horizon to change the current lack of public support.  Therefore, the only option is to use student aid funds more efficiently.

The aid funds themselves cannot be increased to cover the increasing costs.  The CED notes that two presidents in a row have funded Pell Grants at record levels (now $35 billion), but the proportion of tuition and fees covered by the grants has gone down.

The specific recommendations of the CED report would transform the college financial aid system, especially grants:

• Grant funds for a state would be determined by the number of low-income young people in the state, not by the number of high school graduates or college students.
• Individual grant aid would be determined by the IRS based on tax returns.
• Grants would be portable across state lines.
• In-state tuition would not increase more than median family income.
• State and institutional grant funds would have to match federal funds at 20 percent.
• Merit-based awards could still exist, but only after this 20 percent matching level has been met.
• States could refuse to participate, but then would lose the 80 percent federal grant contribution.
• The tax credit for families with college students would be eliminated and the $18 billion in savings would be used for incentive programs (using financial aid to increase graduation rates; tying financial aid work-study to local job market).
• Aid applications would be simplified.
• Loans would be repaid based on income.

The report acknowledges that reduced merit aid and the elimination of the college tax credit will hurt middle-income families, but says that some of this harm will be offset by the requirement that colleges could increase tuition and fees only to the extent of any increase in median family income.

The CED says that this requirement will force state legislatures and college administrators to reach “durable” agreements about how much state appropriations may change or about how much tuition and fees might increase.