Higher-Income Families Seen as Main Beneficiaries of Lottery-Generated Scholarships

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by Pearl Stewart

 

David Mustard

A study that Dr. David Mustard co-authored is often referenced when debating the usefulness of lottery-funded, merit-based scholarships.

A piece of scholarly literature authored by University of Georgia economics professors Dr. Christopher Cornwell and Dr. David B. Mustard, titled “Merit-Based College Scholarships and Car Sales,” has informed an ongoing debate on the purpose and usefulness of lottery-funded, merit-based scholarships.

Published in Education Finance and Policy in 2007, the study concluded that the introduction of Georgia’s HOPE (Helping Outstanding Pupils Educationally) Scholarships largely benefited affluent families who, in some cases, purchased automobiles for their college students as incentives for them to attend state universities instead of expensive out-of-state institutions. Most of the money flowing into the lottery, however, comes from lower-income people.

Cornwell elaborates, “The typical lottery player is less well-educated and lower income. Merit-based scholarships that are funded by lotteries farm money from people in the bottom half of the income distribution and send those resources to people in the top half of the income distribution.” He adds, however, “In Georgia, to be fair, the lottery also funds universal Pre-K.” Some other states, including North Carolina and Tennessee, also fund Pre-K education in addition to college scholarships with lottery revenue.

Cornwell adds that, even when lottery proceeds are used to fund scholarships, “vehicles aren’t the only things it could be capitalized into. There are sometimes academic things—studying abroad, for example. But some of it got capitalized into car sales, and we presented some evidence to show that was occurring.”

“I thought it was an urban myth at first,” says Mike O’Grady, founder of Higher Education Resource Executives. “I heard people joking about ‘HOPEmobiles’ in the UGA parking lot—the cars people were buying for their kids because of HOPE money. Then I read the (Cornwell and Mustard) study, and I realized it wasn’t a joke.”

It is important to note that state lottery-funded scholarships such as Georgia’s HOPE program are different and separate from the federal Hope tax credit, now known as the American Opportunity Tax Credit. The AOTC allows eligible households to subtract some of the cost of tuition, materials and fees from their taxable income to help defray the cost of higher education.

A wealth of research has found that low-income people spend a larger percentage of their incomes on lottery tickets than do the wealthier segments of society. In a much-cited 2008 Carnegie Mellon study published in the Journal of Behavioral Decision Making, participants who were made to feel subjectively poor bought nearly twice as many lottery tickets as a comparison group that was made to feel subjectively more affluent. According to its authors, the study showed poverty’s central role in people’s decisions to buy lottery tickets.

So when most of the scholarships generated by the lotteries end up benefiting higher-income families, some economists and policymakers inevitably point to the imbalance. The disparities in lottery-generated scholarship programs also have not gone unnoticed by legislators and policymakers. Earlier this year, a proposal failed in the New Mexico state Legislature that would have bolstered the distressed lottery scholarship fund by raising eligibility requirements or possibly reducing payouts. Instead, they approved a plan to use tobacco industry settlement funds to support the scholarships for one year.

Lottery scholarships are now available to all New Mexico high school graduates with a minimum 2.5 GPA. Data from New Mexico State University reveal that more than half of lottery student-aid recipients come from families with $100,000 or higher incomes, while only 30 percent come from families with annual incomes of $20,000 to $39,999.

In Tennessee, where the lottery supports both merit-based scholarships and educational awards for economically disadvantaged students, the Senate Education Lottery Subcommittee has recommended several proposed reforms. One, introduced by state Sen. Lowe Finney, D-Jackson, would allow high-achieving students from low-income households to apply for both. Currently, they have to choose one or the other. However, Tennessee’s GPA requirements for merit-based awards are higher than in many other states. Tennessee requires students to maintain a 2.75 GPA in their first 48 credit hours and a 3.0 thereafter.

The Arkansas Legislature recently reduced that state’s lottery scholarships to $2,000 for freshmen, $3,000 for sophomores, $4,000 for juniors and $5,000 for seniors. The lawmakers have been steadily reducing the amounts over the years, as lottery proceeds have not kept up with demand. The lottery scholarships originally were $5,000 annually to attend a four-year institution and $2,500 to attend a two-year school, but, in 2011, the Legislature reduced the amounts for new students by 10 percent. Then this year, lawmakers approved the further reductions. Eligibility for maintaining the scholarships in Arkansas requires a 2.5 GPA.

“The politics of HOPE are pretty easy to understand; it’s a tremendous program for largely middle-class households. … It’s not just about cars; there are lots of ways this works,” Cornwell says. “There are some kids who don’t come from high-income households, and what it means for them is they don’t have to work as much, and they can devote more time to their studies.”

Critics suggest that any merit-based scholarship where the merit is defined by GPA and/or SAT or ACT scores will wind up allocating most of those scholarship dollars to students who are from households where becoming meritorious is easier—where students don’t have to hold down jobs, and where parents and siblings were also college graduates. So that means that the dollars are going to disproportionately benefit households with higher income levels.

Numerous bloggers and columnists around the country—especially in Georgia—are decrying the “welfare-for-the-rich” program they say the HOPE Scholarships have turned into. O’Grady calls it “a systemic reversal of Robin Hood.”

O’Grady says studies show the process isn’t having a positive effect on higher education. “If you look at the results, some of these states are still in the bottom five in the nation in terms of higher ed—people going to school and staying in school—so, instead of giving scholarships to people who would go to school anyway, they need to target needy families and reallocate the funds where it really makes a difference to whether someone attends school or not.”

He also notes that a number of “invisible barriers,” such as the need to work in order to help support a family, often prevent students from lower-income households from maintaining a high enough GPA to keep a merit-based scholarship.

Cornwell says the call for change is growing. “Some people will say we need to return to the very early days of HOPE scholarships and reintroduce a means test, or place an income cap on it; that way it would direct more of the resources to folks that are not in the upper end of the income distribution.”

Income caps are now becoming a part of the debate as lottery scholarship funds lag behind demand. And Georgia has made it a requirement for people who get HOPE scholarships to complete a FAFSA (financial aid) form “so we’re going to finally get income information,” Cornwell adds.

But change is unlikely to be swift or easy. “Once you give people stuff, it’s hard to take it away,” Cornwell says. “The income cap would be a way to do it, but I would be shocked if it gets any real traction in the Legislature.”

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