A Supplemental Wealth-Based Pell Grant: How to Meet Unaddressed Need and Close Racial Gaps in Student Loan Borrowing
Summary: We ask to what extent student debt and Expected Family Contribution (EFC) financial aid formulas are associated with race and household wealth.
Data
- BPS
- FHFA Cenus Tract Home Values
- BPS GIS
- BPS Federal Student Aid Supplement
Executive Summary
Formulas for awarding federal student financial aid in the US are based primarily on income. This approach overlooks the realities of wealth inequality. Household wealth in the US is distributed more unequally than income (Saez and Zucman 2016), and the distribution of wealth is more racially unequal than the distribution of income (Derenoncourt, et al 2024). Recent racial-wealth-gap scholarship has informed policy on student debt cancelation (Charron-Chénier et al. 2022; Eaton et al. 2021). Yet, there remains a need for “front-end” solutions that attend to wealth in financial aid and prevent racial student loan debt disparities from forming in the first place (Houle and Addo 2022; Sanchez et al. 2024).
In this white paper we argue that unaddressed inequalities in wealth have created significant unmet need for low-wealth students. Many low-wealth students are also low-income, and insufficient financial aid for these students has fueled racial inequities in student loan borrowing and repayment. We assess the extent to which increasing federal grant aid to low-wealth students helps to close these gaps. We use national data on first-time, full-time dependent students filing the Free Application for Federal Student Aid (FAFSA) in the National Postsecondary Student Aid Study (NPSAS18), as well as data from the 2004 Beginning Postsecondary Students Longitudinal Study (BPS04) for longer term student loan outcomes. By analyzing these data, we develop a proposal for a new supplemental wealth-based Pell Grant that would eliminate racial disparities in student loan borrowing.
We first illustrate the problem:
• FAFSA filers with low family wealth are disproportionately Black and Latine. Compared to only 15% of white students, over one third of Black student filers and over a quarter of Latine student filers are in the lowest quintile of wealth.
• Nearly 50% of all Black filers, around 40% of Latine filers, and 20% of white filers are from both low-income and low-wealth households. Existing Pell Grants leave unmet need among students who experience compound disadvantage.
• Low-wealth filers are in many cases excluded from the existing Pell: Around a quarter of low-wealth FAFSA filers receive no Pell Grant award.
• Low-wealth students borrow more than wealthier students with comparable family income: Students in the bottom quintile for family wealth borrow nearly double the amount borrowed by the highest-wealth students with similar family income and Pell Grant financial aid awards.
• Low-wealth students struggle to repay their loans at higher rates. Twelve years after the start of college, students in the bottom quintile for family wealth still owe 70% of their undergraduate student loan borrowing, on average, compared to an average of 50% still owed by students from the top two quintiles.
We then offer a policy solution—the supplemental wealth-based Pell Grant.
A wealth-based Pell can be layered onto existing Pell eligibility, is compatible with other efforts to improve affordability, and would not require changes to existing FAFSA data collection to implement.
Specifically, we propose that students with low family wealth—calculated via existing data on students’ and their families’ assets collected on the FAFSA—receive a supplemental wealth-based Pell Grant equal to the maximum of the existing Pell, in addition to any existing Pell award. Low-wealth students who are not required to report asset data with the simplified FAFSA could submit a simple attestation regarding their lack of financial assets.
Our analyses highlight the potential impact of this intervention, projecting estimates based on three potential wealth cutoff points for the award; however, a range of thresholds, including graduated Pell awards, could be implemented. Even with a very low threshold, a wealth-based Pell would reach a substantial number of students. We project that:
• Around 2.8 million students would receive a wealth-based Pell if it was awarded to all families below a $500 FAFSA-reported wealth threshold.
A wealth-based Pell would equalize debt-free college access across racial groups by supporting all low-wealth students irrespective of racial identity, as it is not a race-based intervention. However, given racial wealth disparities, Black and Latine students would be most likely to receive a wealth-based Pell. We estimate that, among first-time, full-time dependent student FAFSA filers:
• With a $500 family wealth threshold for a wealth-based Pell Grant, 20% of white students would qualify, compared to 33% of Latine students, and 42% of Black students.
• Twenty-nine percent of all students, 48% of Black students, and 39% of Latine students would receive both existing Pell and a wealth-based Pell.
• 91% of Black students and 87% of Latine students would receive the existing Pell, the wealth-based Pell, or both.
A wealth-based Pell offers a financial aid solution to the radical growth in student loan debt following cuts to Pell Grants and state higher education funding since the 1980s. A wealth-based Pell Grant would help restore debt free college enrollments to levels reached in the late 1970s, when middle class students were still Pell eligible and Pell Grants covered higher shares of college costs. Debt free enrollment would particularly increase among Black students. Our projections suggest that, among first-time, full-time dependent student FAFSA filers with family wealth below $500:
• Roughly 85% could have attended their first year of college debt free if they had received a wealth-based Pell Grant in place of their federal student loans in 2017-2018—a 46 percentage point increase from 39% who attended debt free that year.
• Approximately 1 million more full-time students would have attended college debt free. Part-time students would likely see similar benefits
Because Black students are disproportionately low-wealth, we estimate that among all full-time first-year FAFSA filers:
• A wealth-based Pell for students with less than $500 of family wealth would roughly double the share of Black students who attended their first year of college debt free from 27% to 50% — eliminating the racial gap in the percentage of students who attend debt free.
• With a $2,000 ceiling for wealth-based Pell, nearly two-thirds of Black students could have attended their first year of college debt free.
These reductions in borrowing will help restore economic mobility and security for low-wealth students. For individuals born in the 1980s who are not white, earning a college degree no longer yields a wealth premium (that is, an increase in net worth) in large part because of student debt (Emmons, Kent, and Rickets 2019). A wealth-based Pell will alleviate this debt burden for students from low-wealth backgrounds who are disproportionately Black and Latine. In doing so, wealth-based Pell would join other policy proposals, like baby bonds, that are designed to redress the financial legacy of slavery and counter the complex of racialized policies that have long expropriated wealth from communities of color.
Preanalysis plan: https://osf.io/48m6j