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Meet the financial-aid program that requires colleges to supplement, not supplant, federal aid

Oldest federal grant program helping low-income students afford college may be on chopping block

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Higher Ed Watch

The federal government’s oldest grant program that helps low-income students gain access to college may be on the chopping block.

No, I’m not talking about the Pell Grant program, which is the government’s primary source of aid for financially needy students. I’m referring to Supplemental Educational Opportunity Grants (SEOG), which go first to Pell Grant recipients who need more money to pay for college and then to other students who have “exceptional” financial need. Unlike Pell Grants, which are awarded directly to students, SEOG funds are distributed to colleges, which add their own institutional aid dollars to the program and then award the money to students.

As Congress begins work on renewing the Higher Education Act, the law that governs federal student aid programs, key lawmakers have called for eliminating the SEOG program as part of a broader effort to simplify the government’s financial aid system. They say that the system is too complex, in that it offers multiple, and sometimes redundant, federal grant, loan, work study and tax credit programs to help students pay for college. They argue that the aid programs should be streamlined so there’s only one program in each category. Under this scenario, the one program would be Pell Grants, which typically go to students with annual family incomes below $50,000.

Related: Obama administration takes big step in simplifying financial-aid application process

It’s not hard to see why these policymakers are taking aim at the SEOG program, which Congress created in 1965 as part of the original Higher Education Act. (For full disclosure, the Education Program at New America, where I work, proposed eliminating SEOG in this 2013 report, which I helped write.) For one thing, the program is exceptionally small. In the 2015 fiscal year, the government spent $733 million on it, compared to the roughly $30 billion it spent on Pell Grants.

For another, the formula that the federal government uses to distribute SEOG funds to schools is outdated, and, as a result, the grants are not well targeted. Elite private colleges receive a disproportionate share of the funding, even though they enroll a much smaller share of low-income students than regional state schools and community colleges. Multiple efforts to make the formula more equitable have met fierce resistance from private college lobbyists and senators representing states that are home to these exclusive colleges.

But before bidding adieu to the SEOG program, it’s important to note that it has one feature sorely lacking in the Pell Grant program: participating colleges must contribute at least 25 percent of the award amounts. In other words, the program requires colleges to spend a portion of their own institutional aid dollars on need-based aid.

In contrast, the Pell Grant program doesn’t require any similar contribution from colleges. Institutions receive the money with no strings attached. As a result, colleges have no obligation to use Pell Grants to supplement institutional aid they are providing to financially needy students. Instead, many colleges appear to be using the federal money to supplant their own aid, and then shifting their funds to recruit more-affluent students. This is one reason why even after historic increases in Pell Grant funding, the college-going gap between low-income students and their wealthier counterparts remains as wide as ever. Far too often, low-income students are left no better off.

Related: Why Sen. Lamar Alexander is wrong about college affordability

At a time when colleges are increasingly using institutional aid to chase after the “best and brightest” students to rise in the rankings, and affluent students to increase net tuition revenues, it may be counterproductive to kill a program that, in the words of Stetson University president Wendy B. Libby, “leverag[es] hundreds of millions of dollars in student aid from colleges and universities.”

“While simplification that reduces cost and redundancy is welcome, eliminating programs that provide significant amounts of funding from colleges for students is not,” Libby wrote in a column for the Orlando Sentinel last December. “Simplification does not help taxpayers when it leads to increased pressure to raise Pell Grant funding because of cuts to state and institutional aid for low-income students.”

Jon Oberg, a former U.S. Department of Education official and researcher, agrees. “Any simplification must favor programs with a track record rather than conforming to mindless legislative talking points about the desirability of simplification for its own sake,” he told me. “SEOG would be a program into which other programs might be folded, not the other way around.”

Oberg, who has spent many years analyzing federal student aid programs, has long argued that the SEOG program provides a better model for supporting low-income students than Pell Grants. “Empirical evidence shows that, for the lower-income population, increases in SEOG are associated with more support from state and institutional matching sources, whereas increases in Pell are associated with less support from states and institutions,” Oberg said. “SEOG, therefore, gives more bang for the federal buck and provides incentives for states and institutions to keep up their investments in this population.”

Related: Leveling the playing field for low-income students

If Oberg had his druthers, Congress would significantly expand the SEOG program. To finance the increases, he would eliminate tuition tax-break programs, like the American Opportunity Tax Credit program, which do little to help low-income students gain access to college, and he would stop providing Pell Grants to students to attend for-profit colleges, many of which have been caught up in scandal.

In addition to growing the SEOG program, he’d overhaul it so that grants from the program “would more closely follow financial need.” In other words, schools like Harvard, which educate a fairly small number of low-income students, would no longer receive a disproportionate share of the money.

Oberg would also require colleges that participate in the program to use the additional funding to reduce the debt burden of low-income students on their campuses. Schools failing to meet this requirement would risk losing eligibility for federal student aid programs.

Related: Changing the incentives for colleges to enroll and graduate low-income students

Lawmakers should consider Oberg’s proposal. It may not simplify the federal student aid programs, but it would likely make them work better. And shouldn’t the ultimate aim of student aid reform be to make the programs more effective?

In a future column, I will take a closer look at the SEOG funding formula and proposals to revise it.

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Stephen Burd is a senior policy analyst in the Education Policy Program at the New America Foundation, a non-partisan public policy institute in Washington, DC.… See Archive

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