Financial constraints are widely seen as the reason why fewer students from low-income families make it to college than those that are better off. That reasoning has long prompted calls for tuition-free public college education. In fact, the inadequacy of college preparedness among low-income students is a bigger obstacle than financing tuition costs, Wharton doctoral student in finance Mehran Ebrahimian stated in a recent research paper titled, “Student Loans and Social Mobility.”
Reducing inequalities in college enrollment by low-income students has long been a hot-button issue. In the graduating class of 2020, low-income students made up 35% of college enrollment and high-income students accounted for 65%, according to a recent report by the National Student Clearinghouse. The COVID-19 pandemic has hit low-income students the hardest, with postsecondary enrollment by students from high poverty schools falling nearly 33% in 2020, compared to an overall decline of 22%.
The federal government’s outstanding student loans (totaling $1.5 trillion) and rising defaults have also raised calls for forgiveness. The Biden administration appears sympathetic to that plea, and in recent weeks has moved closer to that prospect than Biden was in his campaign.
In order to explore the effectiveness of policies aimed at reducing financial barriers for low-income students, Ebrahimian built a model using panel datasets covering 2.6 million high-school graduates and 1.6 million college students enrolled for the first time in the 2003–2004 academic year. The overriding finding of his research is that “the main reason why we see such a disparity in college education, and education inequalities, is not because paying for costs of college education is more difficult for low-income students.”
Instead, Ebrahimian’s research took him to “more fundamental” reasons. “Maybe low-income students didn’t attend good high schools and are not equally prepared for college. Or, think about the awareness of college opportunities and perceptions of the expected return on college education for lower-income students,” he said. Students that come from neighborhoods that don’t have high-quality high school education may get “conditioned” into believing that they wouldn’t be able to get much value from higher-quality and expensive colleges, he added. All those factors make up what his paper described as “fundamental factors,” as opposed to pure monetary reasons.
“Even if you apply the policy of tuition-free public colleges, the unequal pattern of education would prevail due to the heterogeneity in fundamental factors, or preparedness.” –Mehran Ebrahimian
For sure, students from low-income backgrounds without financial support from their families may find college tuition fees expensive. To make up for the lack of family support, students need to take out private loans, since federal loans are limited in size, Ebrahimian noted. However, even if private loans were a perfect alternative and a costless source of funding, students may still fail to secure admission to good colleges if they lack good test scores, because they didn’t receive a good high school education and/or their parents couldn’t afford to send them to “good test prep classes.”
Therefore, policy interventions like making all public colleges tuition free or expanding federal subsidized loans “would have limited impact” because they try to make changes only in the financial aspects and not in the fundamental factors.
The Consequences of Tuition-free Public Colleges
According to Ebrahimian, making public colleges tuition free “entails social inefficiencies and is a regressive policy.” He estimated the budget cost of making public colleges tuition free at around $57 billion a year, and the increase in the students’ well-being in dollar units at about $40 billion — about $17 billion less than what the government would pay as subsidy.
Furthermore, making public colleges tuition-free would disproportionately benefit wealthier students. “Even if you apply the policy of tuition-free public colleges, the unequal pattern of education would prevail due to the heterogeneity in fundamental factors, or preparedness,” he said. He estimated that students from families in the top income quartile receive around $15 billion more in tuition subsidy annually than those from the bottom income quartile.
Ebrahimian explained why that would be the case: “We observe in the status quo that higher-income students are more likely to go to four-year or expensive colleges. A simple accounting equation would show that if the government pays for the tuition at public colleges, then higher-income students get disproportionately more of that benefit.” He rejected the “common view” that if public colleges become tuition-free, then lower-income students would change their perceptions about college education and enroll in larger numbers.
Ebrahimian’s economic model predicted that unequal enrollment patterns would persist even if public colleges were made tuition free. “Higher-income students are more likely to enroll in expensive colleges and stay in college because of the heterogeneity in college preparedness between low- and high-income students,” he said, adding that they would therefore receive disproportionately more of any tuition subsidy.
Making public colleges tuition-free would be a flawed policy from an efficiency standpoint, too, since it would apply only to public colleges. “If a student in Philadelphia wants to go to Drexel or Penn, a tuition-free program will not cover the fees,” he said. “So in order to be eligible for the grant, the student needs to travel 200 miles away from home to enroll in Penn State, a public university. This inflexibility is a quantitatively sizable source of inefficiency.”
Students would be “much happier” if the government were to give out, say, $10,000 to each, and allow them to use that for tuition in a public college or maybe in a private college in their vicinity.
“The best policy would be to invest that money much earlier in families and neighborhoods to better prepare less-privileged students for college studies.” –Mehran Ebrahimian
Pointers for Policymakers
The model used for the research could help policymakers “evaluate higher education policies aimed at increasing access to investment in human capital,” the paper stated. One alternative to making public colleges tuition-free is to expand the federal Pell Grants. In the case of the 2003–2004 academic year that his paper studied, increasing the Pell Grant cap from its then level of $4,050 to $9,500 would have delivered the same benefit to students of the bottom family income quartile, while costing one-sixth for the federal government, he explained. Pell Grants are need-based and mainly determined by family income background; he described the grant as “a universal basic income for college enrollees.”
The advantages with using the Pell Grants are first, the government does not need to disproportionately subsidize wealthier students — this is a targeted need-based subsidy by definition; and second, students have the flexibility to use the grant to pay for tuition in a public college or in a nearby private college, or pay for living costs during their years in college. The maximum Pell Grant for the 2021–2022 award year is $6,495, according to an explainer by the U.S. Department of Education. Based on Ebrahimian’s findings, this cap could be increased to $15,000 per year to address today’s lower income students’ need at a much lower cost than making only public colleges tuition-free for everyone.
Ebrahimian believes his paper is significant because it boldly takes on conventional thinking about barriers to college education. It disproves the “common public view” that the only reason for education inequalities that contribute to economic immobility is that colleges are not tuition free, he said. By pointing to the need for policies that address the challenges from early childhood, the paper stimulates discussion on them “in a deeper and more fundamental way,” he said.
Although need-based flexible grants are better than tuition-free public colleges, Ebrahimian noted that “at the age of 18, it’s just too late to intervene in the market by changing financing for college. The best policy would be to invest that money much earlier in families and neighborhoods to better prepare less-privileged students for college studies.” Intervening at age 18 is “suboptimal, because the determinants of college preparedness are already made by then,” he said. “You could invest that money much earlier in neighborhoods for elementary school and high-school education, or just in terms of subsidies to families in early childhood stages.”