Just Say No to Special Interest Scholarships

There are many sensible reasons to give students scholarships. And there are at least as many ways to subsidize students wastefully. Unfortunately, the state legislature appears ready to do the latter with House Bill 1140.

At one time, college scholarships were largely based on merit—the aptitude or achievement of the student. The talent did not need to be academic—outstanding ability in athletics or the arts also was rewarded.

Schools also gave scholarships based on a particular career choice, especially for the ministry, the military, or medicine. Service to the nation was added as a criterion for scholarship money after WW II with the GI Bill.

Eventually, access to college became a redistributive entitlement. The federal Pell grant program provides financial aid for students with low family incomes (and for independent adult students). In North Carolina, all students coming from families with incomes under a certain threshold, regardless of ability, are eligible for several need scholarship programs.

Now the North Carolina legislature seeks to extend this redistribution process one step further. House Bill 1140 creates a new scholarship program for state residents who have worked at a minimum wage job for 18 consecutive months. (It has passed in the North Carolina House of Representatives, and must be passed by the Senate to become a law).

While the bill has strong bipartisan support and has “good intentions,” it’s still a bad idea that creates bad incentives.

One of the reasons the new program appears to be popular with so many legislators is that they do not have to appropriate any new money to create it. Instead, the scholarships will be funded out of the ten percent of state lottery money that is currently designated for need scholarships. (Other state need-based scholarships are funded out of the Escheats Fund and the General Fund). To qualify for the existing program (and the new program as well), students’ families (or themselves if they are independent adults) must also be unable to contribute more than $5,000 per year to a student’s education according to the federal PellgGrant formula.

The new program also gives much more money to the minimum-wage students than they would receive under the existing lottery scholarship program. Ordinary need-based scholarships funded by the lottery (combined with Pell grants) provide a maximum amount of $2,500 annually (the 2008-9 amount). This is $1,000-$1,500 less than what is needed to cover tuition, fees and books at most UNC schools, but more than what is needed at community colleges. The new program permits recipients to get as much as $12,500 (including the amount of a Pell grant). Students in non-credit remedial programs are ineligible for Pell grants, but will receive a maximum of $11,000 from the lottery fund.

According to one of the bill’s main sponsors, Representative Curtis Blackwood (R-Union), the reason why the bill was written with larger scholarship amounts was because the “vast majority” of likely scholarship recipients have small children—they are primarily single mothers. The larger amounts are intended to enable the recipients to concentrate on school without having to work full-time to “put food on the table.”

Of course, many single mothers earning minimum wage are also eligible for other programs such as public housing, food stamps, and more. Elizabeth McDuffie, the state’s Director of Grants, Training, and Outreach, said in a phone conversation that she doesn’t believe that there are any bars to accepting assistance (such as food stamps) if one has a lottery scholarship.

Thus, for a community college student, an award of $11,000 would leave $9,500 cash for living expenses, with many living expenses already covered by other programs. Although we are not talking about luxurious income levels, when the entire spectrum of aid is considered, these grants might make being a single mother going to school appear to be an attractive life-style choice for some. This is not something the state should promote.

Representative Blackwood said the program was a way to “enhance the value of people’s labor.” But what it really does is to distort the value of people’s labor—it makes lower-skilled work that is only worth the minimum wage more valued by society than higher skilled labor.

If somebody works full-time (40 hours per week) for 18 months at minimum wage (now $7.25 per hour), and gets $11,000 for two years of remedial work and $12,500 for two years in a degree program, the total amount of money received (not counting part-time work) will be $69,620. But if somebody were to earn $12.00 an hour—an excellent salary for a recent high school graduate—for 18 months and then get the maximum lottery need-based scholarship of $2,500 and the maximum UNC system need-based scholarship of $3,700 annually for four years, the amount of money at his or her disposal over this period would be only $62,240.

In other words, by creating an incentive to remain at minimum wage, the new program will discourage young people from advancing in the workplace beyond if they are considering getting a higher education at some point.

And for many, it might seem to be a better deal than the GI Bill—eighteen months living in one’s hometown doing routine work versus four tough years in the military, with the possibility of fighting overseas an ever-present concern. The benefits are roughly equivalent (GI benefits can vary widely, according to the situation), begging the question: “should we treat minimum wage workers as if they were veterans?”

This sort of income redistribution creates bad incentives throughout the economy. It effectively removes the most frequent “carrot” employers have to reward workers for hard work—a pay raise. It even encourages minimum wage workers hoping to qualify for the scholarships to deliberately do as little as possible, since getting more pay will have a negative impact in the long run.

Worse, the bill requires that these students get priority over other students, even though those other students may be more qualified. According to materials prepared by Richard Bostic of the state legislative fiscal research division, over 30,000 students received roughly $34 million in the 2008-9 school year from the lottery fund, for an average award of $1,104 (roughly equivalent to tuition at a community college).

In 2010-11, the first year the new scholarship program will apply, approximately $36 million is expected to be available for scholarships from the lottery fund. For that year, up to five percent of the $36 million—$1.8 million—will be available for the minimum wage scholarships, and up to ten percent—$3.6 million—will be available in the ensuing years.

Reserving an estimated $3.6 million from the general lottery scholarship fund for minimum wage workers suggests that between 3,000 and 3,500 other students will lose their state financial aid from that fund. Because the current lottery need-based scholarships do not prioritize according to achievement or ability but on a first-come, first-serve basis, the new scholarship creates the likelihood that more qualified students can be bumped from receiving financial aid by students who merely worked for minimum wage for eighteen months—no matter what their academic record or ability.

The university system and the community colleges already suffer from low retention and graduation rates—this program will hardly improve the chances that state subsidies for higher education will provide a return to the state’s residents who pay for them.

And it is neither fair nor a good way to create incentives for achievement. By giving priority to minimum wage workers (not generally considered an achievement), it is as if poor performance is being rewarded. Furthermore, the longer students have been working for minimum wage—the longer they have remained in the workforce without progressing—the greater their priority.

The fairest, most sensible way to prioritize these need-based scholarships is according to ability and achievement—this creates an incentive for high school students to work hard in order to qualify. It would also help to educate those students most likely to succeed and give back to the state residents who subsidized them. House Bill 1140 rewards those young people who went with the flow, made bad decisions, and didn’t lift themselves up. While sometimes people need a hand up in life, this bill is not the way to do it.