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A frank talk with Michael McPherson reveals the creative thinking behind McPherson-Schapiro financial aid reconstructionism

One of the most vexing issues in financial aid today has to do with efficiency: If a school has $10,000 to spend on scholarships or tuition discounting, it can probably get more institutional benefit-in terms of enrollments, tuition revenue, and student quality-by spreading the money among four or five middle-income students rather than investing it in a single high-need student. Schools may prefer to provide access to the poorest students, but the incentives built into the current financial aid system are hard to ignore.

What would it take to reengineer these incentives? Macalester College President Michael McPherson and his frequent collaborator, Morton Schapiro, president of Williams College and, like McPherson, a well-known expert on financial aid, have argued in recent years that the key is in rethinking the way federal grants are administered. Late this summer, University Business called McPherson to hear more. What follows is an edited transcript of the conversation:

Michael McPherson: I think that the whole aid process has become a lot more adversarial in recent years. The federal government's suspicious that schools are going to "capture" money for their own purposes. Schools are suspicious that the government is going to try to regulate them to an untenable level. Everybody's kind of prowling around each other. Our sense is that the fundamental goals of these different outfits are rather similar: We'd all like to make it possible for a wide range of people to afford college.

The problem is that colleges and state governments have strong incentives to try to advance themselves as individual institutions or states by using merit scholarships and leveraging their financial aid onto middle- and upper-middle-income students. The federal government meanwhile is very concerned with middle-class and upper-middle-class voters who feel that college costs are out of control. So, in recent years, a lot more incremental dollars have gone into helping the middle than into helping high-need kids.

But if you're going to try to pull people back into more of a common purpose, the only entity with the resources and authority to do it is the federal government. So we put forward the idea of creating a kind of matching grant program on top of Pell, which would be available to students whose schools or states are devoting a lot of resources to low-income students.

McPherson: We originally suggested that schools that met some high fraction of the need of their low-income students-I think we said 90 percent-would be eligible for additional Pell-type dollars. You could even make those dollars go to the middle class to some extent, to help address the political issue that the feds need a broad base to support their policies.

But there are other ways to set it up. For example, in the original legislation that created Pell, there was a component of institutional aid called the Cost of Education Allowance, which was authorized but never funded. It said that any school that enrolled a Pell student would get-I think it was something like-$500 to recognize that the school was going to incur costs beyond what the Pell would pay for.

So perhaps we could resurrect the Cost of Education Allowances, maybe in a more sophisticated form. You could give allowances to schools that met certain kinds of goals-say in terms of graduation rates-or you could give the grants in proportion to the number of Pell recipients you graduated; that kind of thing.

McPherson: On the whole, the idea of dollars following the student makes a lot of sense. But there is the concern that if you push the size of the maximum Pell grant up enough, you may produce incentives for schools to raise tuition to make their students eligible. That certainly is alleged to have happened in the early days of the program, when schools that were completely free moved to charging tuition partly in order to make their kids eligible for Pell. The Cost of Education Allowances don't have that negative incentive effect. And the rewards the schools got would be proportional to the number of Pell students they enrolled or graduated or something like that. So it would still have some market influence.

McPherson: It would be different at different schools, and it's hard to put a number on it, but you would certainly need three zeroes on a student to get anybody's attention these days. But I don't think you necessarily have to make it more profitable for a school to enroll a low-income student, if you could reduce the disincentives.

McPherson: You might be talking about the same total number of dollars. That wouldn't mean you would offer $3,000 to all students who now get Pells, because they're only talking about the maximum Pell. And their calculation is, if nothing else changed and you raise the Pell by $3,000, you'd have this effect. But almost certainly, if you raise the Pell by $3,000, a lot of community and state colleges would raise their tuition. We think it's important in the design of a thing like this to avoid those kinds of incentives.

McPherson: Yes, if it was linked to need. But there are ways to avoid that. One would be to link the per capita payment just to income levels rather than tuition levels, so colleges wouldn't have to generate the extra need by raising tuition. Another way would be to treat the money as institutional aid. I must say that we've come to think that that's kind of nifty.

The idea of the federal government writing checks to colleges is far from the way Congress is thinking about colleges these days, but it would be an attractive way to reframe the debate. I actually think-and given my job, I have to think-that, generally, giving money to colleges is a pretty good use of money. There seems to be a tendency in Congress these days to think that any dollar that a college actually "captures" is a dollar wasted. And so, you have to make sure the schools don't benefit at all from the programs you're offering, and all the benefit goes to the students.

McPherson: I would think it would. And it would be great to restore a sense that Congress and the colleges are partners in trying meet a national problem. I think on a fundamental level they really are, but the institutional structure that's built up really puts them at odds a lot of the time.