How Does Increasing Financial Aid Promote Student Economic Success?

A new report shows how additional financial aid can help students reap the rewards of higher education. The Institute for Higher Education Policy (IHEP) analysis focuses on the economic returns to college and tries to gauge how different approaches to increasing funding for higher education would benefit students.

As college costs and borrowing for college have grown, it has become increasingly vital that students earning power is increased enough for them to be economically secure at a time when achieving a life-sustaining income is challenging without education past high school and sometimes even with that education. It is also essential to properly evaluate how different approaches to increasing funding for higher education will help students succeed.

IHEP uses “threshold zero” as its benchmark for determining whether a college provides students with an economic return on their education. This metric is met if, within ten years of graduating, a student earns as much as a high school graduate, plus enough to cover the net price (total cost, minus grants and scholarships) they paid for their education.

Public colleges and universities shine in the report using the threshold zero metric. Ninety-seven percent of public four-year schools provide a minimum economic return for students, along with 89% of public two-year institutions. The majority of colleges that failed to provide students with at least a modest return within ten years were private, for-profit, and non-profit institutions, which tend to be more expensive than public options.

“A college education can and should be a stepping stone to a better living and improved quality of life for students,” said IHEP Vice President of Research and Policy Diane Cheng in the report’s press release.

For-profit colleges fared particularly poorly in the analysis, with only 43% of schools providing students with a minimum economic return on their investment in a college education.

When looking at different approaches to improving funding for higher education, IHEP found that doubling the Pell Grant, something the organization advocates for, would increase the number of schools providing a minimum economic return by 95, compared to an increase of 44 if first-dollar free college were implemented. Recent research has found that most colleges are unaffordable for low-income students, so finding ways to change that is vital.

The Pell Grant is the primary federal grant to help low-income students pay for college. The maximum grant is currently $6,895, which is set to rise by $500 for the 2023-24 academic year. Doubling the grant would put it close to $15,000.

Free college programs, by comparison, aim to make college free at the point of access but come in different forms. First-dollar programs cover tuition and fees up front, allowing students to use the federal Pell Grant and any grant funds from their state or school to pay for books, housing, transportation, and other expenses. Last-dollar programs promise to top up students’ financial aid if federal and state grants do not cover all their tuition and fees. Last-dollar programs are less expensive for states to pay for and, thus, more common.

Free college programs are also meant to make messaging about college simpler. Telling a student that college is free if they are admitted is pretty straightforward; explaining the intricacies of the financial aid system is not.

Most free college programs do not include for-profit colleges, the lowest performers in the IHEP report. However, students attending for-profits use a significant amount of Pell Grant funds at these institutions.

The report provides several policy suggestions for lawmakers. These include combining investments in additional Pell Grant funds and first-dollar free college programs to help students pay for and remain enrolled. The report also calls for better data on earnings for college graduates and those who don’t complete their degrees as a way to help ensure the students who need the most support can get it.

Cheng noted that “today, postsecondary value is not delivered equitably. Improving college affordability can have a marked impact on the value students receive. Policymakers should enact affordability programs that provide a greater return on investment – especially for students who stand to gain the most from the mobility postsecondary education can provide.”