Wealth-Based Pell Grant Could Reduce Student Debt and Racial Wealth Inequality

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A proposed federal financial aid policy could change the lives of postsecondary students, particularly Black and Latinx students, by allowing them to spend less out-of-pocket for their degrees and prevent the accumulation of student debt, which remains financially crippling for many graduates.

That’s the findings from a new report, released by researchers at the Higher Education, Race, and the Economy (HERE) Lab at the University of California, Merced, in cooperation with The Institute for College Access and Success (TICAS). Their research supports the creation of a wealth-based Pell Grant to supplement the traditional Pell Grant, which offers financial support to students from low-income backgrounds.

The policy incorporates information already collected in the FAFSA form, which is used to distribute Pell Grants. Despite collecting information on family wealth, traditional Pell Grants are distributed based on income and less-so on non-liquid assets like real estate or investments.

“To me, that says that income is running the show when it comes to Pell Grant eligibility, and wealth is in the passenger seat,” said Dr. Christian Michael Smith, an assistant professor of higher education in the Louise McBee Institute of Higher Education at the University of Georgia and a researcher with the HERE Lab.

“We have simulated what would happen if the asset information already collected in the FAFSA were utilized in a more fulsome way,” said Smith. “Without tinkering with the existing Pell Grant, leave it as it is, and on top, we supplement that financial aid with a wealth-based Pell for any students who are low-wealth enough to qualify, awarded exclusively based on asset information and not based on any of the income information.”

The report details just how much impact this could have on students, and just how many students could potentially benefit. If the FAFSA-reported wealth threshold was set at a low of $500, 2.8 million students would benefit, and the majority of those would be students of color. Almost 50% of Black FAFSA filers, around 40% of Latinx filers, and 20% of white filers come from both low-income and low-wealth backgrounds, what Smith calls being “doubly disadvantaged.”

“But in the eyes of the Pell Grant allocation formula, these ‘doubly disadvantaged’ students are not treated all that differently from students who only have the single disadvantage of low-income,” said Smith. “Students in the bottom quintile [of wealth] nearly double the amount borrowed by students from the highest wealth backgrounds.”

In fact, if a student comes from a family with a high-income but little to no wealth, they are often excluded from receiving the existing Pell Grant. The report shows that students who come from these low-wealth backgrounds often struggle in repaying their student loans. Over a decade after receiving their undergraduate degrees, students in the bottom-quintile of wealth still owe 70% on their student loans, 20 percentage points higher than what is owed by students from the top two quintiles.

Despite the fact that the majority of those who would benefit from this new system would be Black and Latinx, the proposed policy is truly race neutral, something critical to legality in the post-SFFA vs. Harvard world, which removed the consideration of race from applications.

“We’re looking at how federal policies can be harnessed to address generational wealth gaps and the racial wealth inequality that we see especially play out in the student loan borrowing rate,” said Michele Shepard Zampini, senior director of college affordability at TICAS. “All federal programs are technically race-blind, and that’s something we’ve struggled with, to get at [racial inequality] in a way that’s still possible in federal policy making that would not only be legally acceptable but could also gain traction among policy makers. This is one answer.”

Zampini said that a wealth-based Pell Grant could actually tackle the crisis of student loan debt at the root, instead of on the back-end, where most student-debt solutions are currently being attempted, like President Biden’s student loan cancellation plans. Zampini said that there is more momentum now on the issue of student debt than there was even a decade ago, but she added the national conversation has not quite moved into the next step yet: “What do we do to stop [student debt] going forward,” she asked.

The most likely deterrent to enacting this policy is the cost, which totals about $17.4 billion. Smith acknowledged that cost seems high, but it is actually “a lot less than numbers we get for a lot of education policies.” Smith said that initial funding could come from a billionaire’s tax, and that the economic and social benefits would make the policy’s total bottom-line decrease.

Smith and Zampini both agree that a policy like this, should it be adopted, could have an immediate impact on minoritized students. Those made aware of a new financial support system might be more inclined to apply for college. Those unaware would be pleasantly surprised to see how much more affordable their education is with this additional level of support.

“We know that a nontrivial deterrent of college attendance among many students is the real and or perceived cost of going to college. That real and or perceived cost can be offset by family wealth for students who have access to family wealth,” said Smith. “A wealth-based Pell means, regardless of your racial background, if you are coming from a low-wealth family, you get the wealth-based Pell Grant.”

Liann Herder can be reached at [email protected].