Give This Subsidy a D-

The wasteful and unfair federal student-loan programs.

Before Bill Clinton starts looking for ways to pay for the new aid to college-bound students he’s proposing–or Congress returns to its budget-cutting fervor–both ought to take a refresher course in the perversities and absurdities that abound in our current student-subsidy programs. There’s big money to be saved. Just two programs–Pell Grants and subsidized student loans–made up $22 billion of the Department of Education budget (about two-thirds), and a lot of that money is spent in dubious ways.

About 10 percent of that $22 billion goes down the rat hole to students who, either because they lie about their qualifications or because the government makes a mistake, don’t, in fact, qualify. Another few billion goes to students whose major qualification is that their parents are divorced. Billions more send middle- and upper-class kids to expensive private schools. Still more millions subsidize such odd groups as single mothers with rich parents.

To be fair, Clinton inherited this mess. But he also made a big deal out of reforming it. His accomplishment? He’s stopped banks from taking advantage of the system to skim a few hundred dollars off the top of each new student loan. Meanwhile, the system’s other, much bigger abuses (some created on Clinton’s watch) continue unabated.

Silly Social Incentives

The Department of Education has the common-sense idea that if parents have the means, they ought to help their kids with their college costs before taxpayers are asked to assist. But Congress has created a handful of handy ways to ditch rich parents. Follow these rules to become an independent student, and no matter how much your parents make, the government will consider you poor and in need of aid.

Tie the knot: Suddenly parents’ income and assets no longer count toward determining whether or not a student is poor. Of course, young marriage is the most likely to end in divorce.

Do nothing: If a kid sits around till he’s 23, he becomes an independent student, too, not because his parents kicked him out of the house, but because, well, just because. And, for the kid who can’t quite get his or her act together, the government is willing to pay for up to six years of undergraduate education. Has this subsidy contributed to an increase in the number of years it takes to graduate? Today, fewer than 40 percent of college students graduate in four years; a quarter century ago the number was 50 percent.

Have an illegitimate child: This special qualifying factor, added by Clinton and the 103rd Congress, is solely for the benefit of upper- and middle-class single mothers, who are now allowed to disregard their parents’ income in applying for loans and grants. Remember, getting married already separates college students from their parents in Washington’s eyes, and poor kids are already eligible for Pell Grants and subsidized loans. As a result of these and other ways to make students legally independent of their parents, the number of independent students has skyrocketed–in the ‘70s, fewer than 20 percent of undergrads were independent; today more than half are.

Dump dad: The granddaddy of all the stupid social incentives isn’t for kids, it’s for dads. If you’re a middle-class dad who can’t afford to send your child to college, divorce your wife. The taxpayer will end up sending your kid to school because divorced fathers’ income isn’t counted under current rules. (Even though married dads aren’t legally required to pay for their kids’ college either, their income is always counted by the feds.) This policy helps explain why there are 50 percent more kids with divorced parents among student-aid recipients (more than a million in total) than among the general student population, according to the Center for Education Statistics. Private schools count the father’s income in determining if his kids are in need–Uncle Sam should, too.


In 1993, a National Research Council study found that more than 10 percent of all federal financial aid was awarded in error. This was the 10th study since 1975–and all studies showed similar problems. A 1993 General Accounting Office report showed the breadth of incompetence in financial-aid administration–between 1982 and 1992, 43,519 ineligible students received subsidized loans. Between 1989 and 1993, 48,000 students received Pell Grant overpayments; 35,000 received Pell Grants from two separate schools simultaneously; and 101,000 students, ineligible for Pell Grants because they had defaulted on federally guaranteed loans, received them anyway.

Consider just the Pell Grants for students who have already defaulted on past loans: That one mistake cost $210 million.

Money Games

When is a dollar not a dollar? Well, that’s complicated–in terms of being in need, here’s the list of dollars that don’t count as dollars:

If parents made less than $50,000 last year, none of their assets count as available to help pay for college.

Dollars invested in a house–even a $5 million house–don’t count (this also brought to you by Clinton in 1993).

Dollars in retirement accounts, including deferred salary, 401K plans, and IRAs don’t count.

Dollars put in the names of other kids in the same family don’t count.

What difference do all these rules make? People who know how to use them (usually not the poor) can makes themselves look awfully pitiable. About 15 percent of undergraduates whose parents have incomes in excess of $50,000 get federal grants and subsidized loans, costing the government, on average, $4,000–which is several hundred dollars more than is spent for those whose parents earn less than $50,000.

Money Games: Take Two

Need doesn’t depend only on how parents arrange their income and assets. It also depends on where students want to go to school. If Bobby Middle-class decides to go to State U., the feds will offer no help. But, if he wants to go to Harvard, well that’s a different story. What the Department of Education really measures with its financial-aid programs is relative need. If the same rules were applied to food stamps, here’s how it would work: Take the food stamps into a store and pick out hamburger and canned green beans, the stamps are worth a dollar. Pick out lobster and truffles, and the food stamps are worth $20.

The Department of Education’s statistics speak for themselves: At two-year public colleges, which Clinton says all Americans should be able to afford, 20 percent get financial aid. At private four-year colleges, 45 percent get help from the taxpayer.

This strategy is even more costly to nonsubsidized students than to taxpayers. Consider the incentive the financial-aid system sends even low-cost colleges–the more you charge, the more aid your “needy” students will get and, since “need” is determined relative to cost, the more “needy” students you will have. It’s hard to find an economist who doesn’t believe this is a recipe for inflation. And indeed, since the mid-’70s, the cost of attending college has more than quadrupled in real terms.

So here’s today’s lesson for both Congress and the president: Whether you want to save money on federal education aid or add benefits for more needy students, the way to come up with the needed dollars is to stop subsidizing a stupid system.