State Lottery Funds May Not Help Those Who Need it Most

When it comes to using state lottery funds to finance scholarships for college, the idea that gambling proceeds are helping the poor pay for their education makes the state-sanctioned games of chance more acceptable than they might otherwise be.

But a deeper look at how state lottery proceeds actually flow to college students shows that lotteries often tend to benefit those who need the money the least at the expense of those who need it the most.

That is one of the key takeaways from a recent policy brief titled “A Gamble with Consequences: State Lottery-Funded Scholarship Programs as a Strategy for Boosting College Affordability.”

The paper—written by Kati Lebioda, a contributing policy analyst for the American Association of State Colleges and Universities—urges policymakers to pause before they accept the premise that lottery proceeds help students pay for college in a way that is beneficial to poor students and the state.

“While lotteries, on the surface, appear to be a positive policy solution to increase revenues and support college access, the literature on the outcomes of state-run lotteries indicates that such programs do not live up to their anticipated benefits on many fronts,” the brief states.

It says many of the factors are “intertwined and amplify one another.”

“For example, the instability and unpredictability of lottery revenues often lead to more stringent eligibility requirements for scholarships, which in turn can result in more funds being disproportionately distributed to the wealthiest families,” the brief states, noting longstanding inequities in academic preparedness between low-income students and their more well-off counterparts.

Lebioda examined the establishment of state lotteries throughout the nation to learn about the unintended consequences and often unseen repercussions of converting lottery proceeds into scholarships.

She found that:

• Lottery revenues are more expensive to collect than regular tax revenues, and they also tend to replace instead of augment state appropriations for education. “In fact, when lottery funds are earmarked for education, the risk of supplanting over supplementing actually increases,” the brief states, citing “numerous studies” that have shown that, while educational expenditures tend to increase right after a state starts a lottery, overall spending tends to decrease over time. “States without lotteries, on the other hand, end up spending approximately 10 percent more of their budget on education than states with lottery funds earmarked for education.”

• Lotteries make inequities in higher education worse, not better. Since scholarship dollars only cover outstanding tuition and fees after all other financial aid has been accounted for, low-income students do not receive grant or scholarship dollars above and beyond tuition costs, meaning they must pay for books, transportation, housing, childcare, and other non-tuition expenses involved in going to college on their own, the brief states. “Therefore, if two students have the same tuition bill, but one qualifies for Pell and the other does not, the result is that the state will spend more award funds on the wealthier student with no federally recognized financial need than the student who qualifies for the maximum Pell grant,” the brief states. “In short, last-dollar tuition scholarships do not correct inequity in college access and affordability across socioeconomic brackets; in fact, when the scholarships are merit-based instead of need-based, these programs tend to increase inequity instead of alleviating it.”

• Lotteries often function as a second tax on the poor to benefit the rich. This is the case because research shows that members of poor households tend to buy lottery tickets more than members of wealthy households. “In essence, poor families are helping send wealthy students to college,” the brief states. “In almost every study performed by economists, findings show that, as household income increases, the proportion spent on lotteries decreases.”

The brief says that, while scrapping lotteries altogether would be difficult to achieve, policymakers should explore ways to restructure lottery-based scholarship programs to make the revenue more predictable, possibly through privatization of lotteries. It also recommends placing a greater emphasis on restructuring the scholarships to help students who need financial assistance as opposed to letting the lottery money be used to finance merit-based scholarships that favor the more well-to-do.

“With some restructuring and imagination, lotteries and lottery-funded scholarships may become a sustainable and reliable lever for increasing college access, affordability and completion,” the brief states.