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WebMemo #422 on Education

February 10, 2004

Reforming the Pell Grant Program Can Save Taxpayers Hundreds of Millions of Dollars

By

Members of Congress are seeking ways to cut wasteful spending while maintaining popular programs. Among the programs administered by the U.S. Department of Education, the Pell grant program stands out as being prone to both waste and fraud. Streamlining the way information is collected for Pell grants could save anywhere between $300 million and $600 million per year.

 

What is the Pell Grant Program?

The Pell grant program is the largest federal need-based aid program for postsecondary students. President George W. Bush has requested over $12.8 billion this year to fund some 5.3 million college students in the upcoming year. To apply for a Pell grant, a student must submit a variety of income and tax information to the Department of Education. The information submitted determines eligibility and, if a student is eligible, the amount of the grant. The maximum Pell grant is $4,050 per year.

 

The program, however, is susceptible to substantial fraud. According to a General Accounting Office report, fraud accounted for more than $600 million going to ineligible students over a two-year study period, or about $300 million per year.

 

Why Is There Fraud?

There are two basic problems with the existing system:

  • Students now have a strong incentive to cheat the system. Students can misrepresent their income and tax information (or their parent's income) to the Department of Education with only a small chance of discovery.
  • Information is rarely verified. About 30 percent of student aid applicants must submit their (or their parent's) tax returns so that the income information can be verified. Since these tax returns come directly from the student, not the IRS, they can be easily forged.

One Possible Solution

Rep. Sam Johnson (R-TX) has recently introduced the Student Aid Streamlined Disclosure Act of 2003 (H.R. 3613). This bill would still require the student to submit the same tax information to the Department of Education, but the information would be verified through IRS records, rather than by the student submitting tax returns directly. Such data sharing is a viable way to rid the Pell Grant (and potentially other student aid programs) of waste and abuse.

 

This reform would save money in two ways:

  • Program fraud would be reduced. If students know that the IRS will audit any information they submit to the Department of Education, they would be less inclined to give false income information.
  • The cost of administering Pell grants would be significantly decreased. The current system is cumbersome and expensive, as individual schools (typically) must input by hand the information contained in the tax returns - information already housed electronically at the IRS - before validity checks can be completed.

A number of estimates of the savings from such a change exist. One estimate from the Office of Management and Budget estimates total savings of as much as $638 million per year. Even if the savings were not this great, this simple reform would likely save between $300 million and $600 million per year.

 

Streamlining

To his credit, President George W. Bush's budget proposals over the past few years have all supported this kind of streamlining. To realize these savings, however, Congress must act on the President's proposals. Streamlining student aid application information is a simple way for the federal government to reduce fraud, simplify operations, and save taxpayers hundreds of millions of dollars every year.

 

Kirk A. Johnson, Ph.D., is Harry and Jeanette Weinberg Fellow in Statistical Welfare Research in the Center for Data Analysis at The Heritage Foundation.

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