The Pitfalls of HOPE

Twenty years ago, the state of Georgia pioneered the Helping Outstanding Pupils Educationally (HOPE) scholarships. Since then, these scholarships have spawned imitations around the country and, at least within Georgia, they have achieved third rail status—that is, they are practically untouchable because they are so popular.

This popularity exists even though the scholarships are increasingly problematic: they have become much more costly than anticipated; two-thirds of the students fail to keep their grades high enough to maintain them; they are probably boosting tuition; and they are paid for by mostly low-income people through the state-run lottery.

Since HOPE scholarships began in 1993, more than $6.4 billion has been awarded to approximately 1.5 million students attending private and public colleges, universities and technical colleges within the state. Many parents and students have come to view the scholarship as an entitlement, and politicians have been somewhat reluctant to alter it, even in recent years when the combination of lottery revenue reductions and increased tuition rates has threatened the scholarship’s continued viability.

Initially, scholarship eligibility hinged on compliance with merit-based and need-based criteria. Any student who maintained a 3.0 GPA (“B” average) throughout high school, and whose parents’ combined income was less than $66,000, could receive two years of free tuition at any Georgia public college or university (or a more modest $1,000 per-year grant at a private college) as long as the student kept a “B” average during his or her collegiate career.

In 1994, the scholarship expanded, providing full tuition for four years while increasing the income cap to $100,000. The following year, the Georgia lottery’s continued profitability, combined with broad enthusiasm for the HOPE program, prompted Georgia legislators to abolish the income cap altogether, expand the scholarship to cover books and various institutional fees, and increase the allotment for students attending private colleges and universities.

But by 2011, after projecting a two-year, $560 million budget shortfall for HOPE, the Georgia General Assembly passed legislation to cap HOPE payments at 90 percent of the tuition then being charged by public institutions and discontinue funding for books and other fees. At the same time, a more selective scholarship within the HOPE program, the Zell Miller Scholarship, was created. This new scholarship funds 100 percent of tuition at a public college or university if a high school student maintains a 3.7 GPA and earns a 1200 on the SAT. To keep this new scholarship while in college, the student must maintain a 3.3 GPA.

Despite some of the problems associated with HOPE, many state governments have adopted similar initiatives. States like South Carolina, with its LIFE Scholarship, and Florida, with its Bright Futures scholarship, have taken a page directly from Georgia’s playbook. Although other states have combined merit-based and need-based aid, changed GPA and standardized test requirements and financed their scholarships with general education funding rather than lottery revenue, HOPE’s nationwide influence is nonetheless undeniable. It can even be seen at the federal level.

President Bill Clinton, motivated in part by the popularity of HOPE, signed the Taxpayer Relief Act of 1997 into law, which, among other things, created two higher education tax credits, the Hope Scholarship Credit and the Lifetime Learning Credit. These tended to favor middle-income families, as they had income restrictions and caps for lower- and upper-income individuals. These tax credits (extended in 2009 by Congress and the Obama administration) differ from Georgia’s HOPE scholarship because they have no merit component (that is, they don’t have minimum GPA requirements). 

No matter how popular HOPE and its counterparts might be, these policies are subject to a slew of unintended consequences. As the economist Thomas Sowell puts it, we must “think beyond stage one” of any particular enactment to determine if it may create negative, unforeseen effects down the road.

The HOPE scholarships have had a profound impact on enrollment. From 2000 to 2010, Georgia had the highest increase in full-time equivalent (FTE) college enrollment in the nation, 69 percent. The second- and third-highest FTE enrollment rates were found, respectively, in Nevada and Florida, states with HOPE counterparts.

The scholarships also appear to have had an effect on tuition. A recent five-year analysis of state tuition rates conducted by the College Board revealed that Georgia had the fifth-highest percentage increase in public four-year college tuition in the country, 63 percent. An explanation for this increase can be found with the “Bennett hypothesis,” named after former Secretary of Education William Bennett, which suggests that schools will increase tuition to capture all of the money students have available for higher education. 

In other words, if a student has $1,000 available to spend on education, the school will charge $1,000 in tuition. However, if the government provides another $1,000 to the student for education, the school will now charge $2,000 in tuition to capture the full amount. Because the HOPE scholarships and a labyrinth of federal loan programs drive up the demand for college and add to the pool of money students have to spend, Georgia colleges have no incentive to reduce prices.

Dismal HOPE retention rates are another cause for concern. Approximately 30 percent of students who start out with a HOPE scholarship end up keeping it. This means that, on average, more than two-thirds of students must eventually take out student loans, find employment, reach out to their parents and relatives for help, or drop out of college.

HOPE also creates some negative academic incentives for students. They are less likely to take an elective course or pursue an intellectual passion if they run the risk of getting a bad grade and losing their scholarship. The scholarship may also create problems at the high school level, as the pressure to get that coveted “B” average may influence teachers and parents to artificially “stimulate” grade point averages, something which will just set-up average and below-par students for failure once they get to college.

Of all the negative consequences, perhaps most important is that the Georgia lottery is a highly regressive tax scheme. Because the HOPE scholarship requires no direct taxation and is instead funded entirely by the “lottery tax,” it is extremely popular with middle- and upper-income residents. Since those who predominantly play the lottery are lower-income people, there is a transfer of funds from lower-income to middle-income families.

Policymakers, concerned parents, and students should carefully re-evaluate the efficacy of both state-based and federal higher education aid. There’s no such thing as a “free” college education: somebody always pays, even if it’s “just” the taxpayers.