The Pros and Cons of Short-Term Pell Grants

As a general rule, when the government intervenes in free economic transactions in a market, it distorts that market and makes people worse off. We might not see such negative effects as clearly as we can see the benefits to those whom the government directly helps—the negative effects can be broad and indirect. But such disadvantages are real. Short-term Pell grants are no exception.

First, the context: Pell grants provide college students with thousands of dollars per year based on their ability to pay, the cost of university attendance, and the degree to which a student is part-time or full-time. The ideal Pell student is someone who is smart but poor—someone who would succeed in college but cannot afford it.

The ideal Pell student is smart but poor—someone who would succeed in college but cannot afford it. Unfortunately, however, the Pell program is not effective in determining who will succeed in college. The program provides access on the basis of income but not on the ability to succeed. It doesn’t matter which college you attend so long as you meet that college’s admission requirements. But many colleges have extremely low academic standards for admission or extremely low graduation rates.

Unfortunately, the Pell program is not effective in determining who will succeed in college. Pell students have lower graduation rates than non-Pell students. Partly this is due to affordability hurdles. But Pell students also have lower standardized test scores.

Put these factors together, and it appears that the Pell program massively misdirects resources. Instead, more money should go to a smaller number of better academically qualified students in need—and pay only for college programs with demonstrated success graduating high percentages of Pell students.

In other words, at the margin, there should be less college access. Not everybody should go to college for a bachelor’s degree. Many would be better off in the trades or as entrepreneurs, homemakers, or military recruits. Yet, those who are smart but poor (not just poor) should probably receive more resources to better ensure that, when someone gets a Pell grant, he or she will graduate.

Enter short-term, workforce-oriented Pell grants. This is a quite different kind of grant with a different goal: to get students into a credential and back out into the workforce as quickly as reasonably possible, or at least to mark the credential as a meaningful step on the way to an even stronger one. What regular Pell leaves on the table—lots of recipients without degrees—workforce Pell replaces with targeted, high-quality credentials.

Indeed, high quality is a mark of workforce Pell grants. Demonstrated earnings are core to eligibility. I expect a lot of companies and prospective students across many age groups to figure out that this is a good deal. Companies get government-subsidized training for their employees. Students get the subsidized training and reasonable assurance that the credential will matter. The ability to succeed in a bachelor’s-degree program becomes all but irrelevant.

Well, then, what about the fundamental disadvantages? There are a few.

For one thing, companies are already paying to get training for their employees. Training an employee who is paid more highly represents an even greater value-add for the company—otherwise the company wouldn’t have increased his or her salary so much. The market was already working at an efficient level of capital investment in employees. But workforce Pell persuades companies at the margin—those for whom the extra training of employees did not make business sense—to go ahead and get some employees trained anyway.

Second, students at the margin—those for whom getting a stackable, workforce-ready credential was just out of reach—will now be persuaded to go ahead and get the credential. That’s terrific for the eager but poor student who needs the boost. But the tradeoff or opportunity cost, generally unseen but known by economists, is the number of students who ignored some other opportunity that might have been a better fit, just as with regular Pell.

These two phenomena at the margin distort the labor and education markets. The result of the government pushing its finger into these markets is that the prices of labor and education will not accurately represent the demand. Capital will be misallocated, and a well-meaning government program will—as usual—be at fault.

Students who found ways to afford credentials without Pell will suddenly be able to afford even higher tuition thanks to Pell. Consider what else will happen: Students who were able to find ways to afford the credentials without Pell will suddenly be able to afford even higher tuition thanks to Pell. We already know that colleges raise tuition significantly when more money is made available to pay. This perverse effect is likely in workforce Pell just as with other federal student-aid programs.

Why would any college leave money on the table? Expect tuition for workforce Pell credentials to rise. Then expect more cries to Congress for more access (i.e., more Pell money), and repeat the perverse cycle ad bankruptum.

Why would any college leave money on the table? Next, consider that the Pell subsidies push employees out of training programs at their own companies and into the arms of colleges. Why would the company pay for a home-grown program if the same skills will be costless to the company when that employee learns them at a college?

This issue suggests that, if workforce Pell is to persist, legislators should consider why companies themselves are left out of the equation. Companies that provide their employees with portable skills—that is, abilities not unique to a single company—are taking a risk that the employees will leave and take their skills elsewhere. Yet the provision of portable skills likely looks about the same at McDonald’s Hamburger University as in a business-management program. Why should colleges get the benefit of workforce Pell tuition while businesses that educate similarly receive nothing beyond better-trained employees while increasing their risk that those employees will leave?

Finally, consider that with government money come government rules. Workforce Pell already has several guardrails for protecting taxpayer funds, such as a minimum number of contact hours. Workforce Pell grants are also prorated based on the length of the program compared to the full school year.

The result will be a standardization of credential programs that may be a bad fit for some credentials. Any institution of higher education that wants to participate will have to become a Procrustes, reshaping credentials to fit the government’s idea of an appropriate program, stretching or chopping off aspects of a program that might have been preferable but for the federal rules.

I like short-term Pell for workforce development because it pulls students away from bachelor’s programs when they are not immediately suited for a bachelor’s degree but are suited for a shorter credential that is likely to improve their lives. I like the idea of more highly skilled American workers. But the question is whether the disadvantages are worth such benefits.

To what degree will we see inefficiencies, market distortions, higher tuition, mismatched students, and Procrustean standardization? To what degree will short-term Pell lead to even more central planning of America’s workforce? Time may tell.

Adam Kissel is a visiting lecturer at Trinity College and a board member of the National Association of Scholars.