South-Western College Publishing - Economics  
College education just got more expensive.
Subject Pell Grant funding formula being revised to save government expenses.
Topic Government and the Economy; Market Failure, Regulation and Public Choice  
Key Words

Pell Grant, college, financial aid.

News Story

Beginning with the 2005-06 academic year, the government seeks to save approximately $300 million by giving out smaller Pell Grants to recipients, and to eliminate funding for some prospective student financial aid recipients.

Pell Grants provide funding for the poorest students and despite the cutbacks, total spending could still surpass $12 billion. The government is arguing that the maximum Pell Grant, set at $4,050, is insufficient for access to college, and that cutting spending now will help provide more funds to needy students in the future. The spokesman for the House Committee on Education and the Workforce argued, “…there are consequences for wrongly adding hundreds of millions of dollars to the current budget shortfall.”

Analysts anticipate that while half of the approximately 5.3 million Pell Grant recipients will not be affected, many will see their benefits drop significantly, and approximately 89,000 students will be denied funding under the new aid calculation. As a result, these students will rely further on student loans for financing their college educations.

Opponents of the cuts argue that in tough economic times, students need more, not less, financial assistance, and denying aid to students will have significant negative consequences not only for those students, but also for society as a whole.

1. It has been argued that governments should bear a portion of the cost of education because external benefits accrue from an educated populace. What external benefits would society as a whole receive from educated citizens?
2. Use a graph of marginal benefits and marginal costs to indicate the presence (or absence) of external benefits from education.

Without the government subsidy in the form of the Pell Grant, what would you expect to happen to college attendance? Why? Use a graph if this helps you explain your answer.


Greg Winter. “Students to Bear More of the Cost of College.” The New York Times. 23 December 2004.

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