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Federal Student Loan Programs Subsidize Waste

May 16, 2013

With student loan debt now over $1 trillion, significant and constant attention has been paid to default rates and availability of federal student loans. Less attention has been paid to direct grants and scholarships that are doled out in great sums by the federal and state governments. While the federal student loans programs subsidize waste and wealth distribution, grants and scholarships are in equal need of reform, says Jay Schalin, director of state policy analysis at the Pope Center for Higher Education.

  • The federal Pell Grant program doled out $35.6 billion in need-based grants to anyone who meets the income limits and enrolls in college.
  • Need-based grants are different from merit-based aid, which generally redistributes wealth from the working class to more prosperous families.
  • To fix a system where too many students receive aid, both merit and need should be used when determining grant eligibility.

If merit is left out of the calculation, scholarships quickly become wasteful. According to the National Center for Educational Statistics, 73.7 percent of Pell Grant recipients with SAT scores above 1140 graduated within six years while only 34 percent of their counterparts with SAT scores below 850 did the same.

  • From 1970 to 2010, the Pell Grant program expanded from 176,000 recipients to 9.6 million recipients.
  • Some schools, like the Southern University of New Orleans, have 76 percent of students receiving Pell Grants despite a 4 percent four-year graduation rate.
  • Only 12.9 percent of students with SAT scores below 700 finished school within six years, yet received roughly $5 billion in Pell Grants.

Merit-based scholarships are often extended to students who are not truly exceptional. In Georgia, a student with a B high school average could qualify for a scholarship provided his or her family makes less than $140,000 a year. This high income limit means that many middle- and upper-middle income families receive financial support they do not need.

By considering both need and merit when granting financial aid, much of the waste will be cut from the financial aid system. For some students, this will save them their time and efforts, as well as money.

Source: Jay Schalin, "Federal Student Loan Programs Subsidize Waste and Redistribution to the Wealthy," Forbes, May 6, 2013.


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