Trends in Higher Education

The College Board releases Trends in Student Aid 2009 at a time of major change in the student aid system. As we go to press, the House of Representatives has just passed legislation that would substantially simplify the application process for federal student aid and assure consistent increases in the level of the maximum Pell Grant. The legislation would also change the financing structure of federal student loans.

These and other potential changes follow a number of recent innovations to the federal student aid system. As of July 1, 2009, student borrowers can repay their federal loans through the Income-Based Repayment Plan, which limits monthly payments to no more than 15% of the amount by which the borrower’s income exceeds the federal poverty level. Pell Grants are now available for year-round study, and Congress increased the maximum Pell Grant from $4,731 in 2008-09 to $5,350 in 2009-10. As of January 2010, some students will be able to automatically transfer data from their income tax forms to their financial aid applications, reducing the confusion and the time involved in the process. Limits on the amount students can borrow through the unsubsidized Stafford Loan program also have been increased, and Congress has imposed some new regulations on the private student loan market.

Trends in Student Aid provides extensive data describing student aid of all types from all sources. It does not attempt to evaluate student aid programs or policies, but provides detailed information that can inform policymakers, researchers, student advocates and others in their efforts to assess and improve the effectiveness of student aid in increasing educational opportunities. The data reported this year do not reflect all of the recent changes now in effect, and if many of the proposals currently under consideration are implemented, the landscape could change quite a bit. Future editions of Trends in Student Aid will track these changes.

Trends in Student Aid reports on the different types of financial aid distributed to students and the various sources of that aid. The federal government, state governments, colleges and universities, and employers and other private entities are all partners in the student aid system, which provides grants, loans, tax benefits and work aid. Growth in aggregate amounts of aid may be misleading in an environment of rising enrollments and increasing college prices. To understand the impact of financial aid on educational opportunities, it is important to examine the amount of aid per student, the breakdown of aid between undergraduate and graduate students, and the distribution of aid across institution types and by student characteristics.

Every year since 1983, the College Board has published a new edition of Trends in Student Aid, providing detailed updated information on the sources, forms and amounts of financial aid available to assist students and families in paying for postsecondary education. A new website, introduced in 2008, makes data easily available for reference and downloading. All of the graphs and the selected tables included in the print version can also be found online, along with substantial additional information.

Total Student Aid

Table 1 reports on the total funds available to postsecondary students, both undergraduate and graduate, to supplement family and student payments over the decade from 1998-99 to 2008-09. Figure 1, modified from previous years, shows receipt of these funds — both student aid dollars and the money students borrow from nonfederal sources — on a per full-time equivalent (FTE) student basis. Together with students’ savings and earnings, as well as support from parental earnings, savings and borrowing from other sources, these funds contribute to making higher education financially accessible.

We report on percentage increases of each type and source of aid over the decade. However, the percentage increases have very different implications depending on the starting level. The 204% constant dollar increase in nonfederal loans represents an $8 billion increase from $3.9 billion in 1998-99 to $11.9 billion in 2008-09. In contrast, the 99% increase in federal loans represents a $41.7 billion increase from $42.3 billion to $83.9 billion. It is also important to consider these increases with a perspective on enrollment growth. In 2008-09, total FTE enrollment included 3.3 million more students than it had a decade earlier, a 31% increase.

The figures in Table 1 have been adjusted for inflation. Similar tables with data in current dollars (unadjusted) and broken down between undergraduate and graduate students are available online.

Types of Student Aid

From the student’s perspective, grant aid, which is a pure subsidy not requiring repayment, is the most desirable form of financial aid. Education tax credits and deductions are also pure subsidies, although the fact that the savings generally materialize months after the bills have been paid makes them less effective in facilitating college access.

A variety of forms of loans are described in this publication. Subsidized Stafford Loans and Perkins Loans provide the greatest benefit for students because the government pays the interest while the student is in school. Unsubsidized Stafford Loans and PLUS Loans for parents of undergraduate students and for graduate students also carry a federal guarantee and interest rates that are limited by legislation. In contrast, nonfederal education loans from banks and other lending institutions are not subsidized at all. Their value is only in providing liquidity for students who have no other means of accessing funds. We report on nonfederal student loans because of their importance, but do not include them in our measures of student aid because they do not carry any subsidy.

A small amount of student aid comes from the Federal Work-Study (FWS) Program, under which the federal government provides funds to institutions to subsidize the wages they pay to some student workers with documented financial need. Although these funds are packaged along with grants and loans to help students pay their bills, from the student’s perspective, they are simply wages received for services performed.

As Figures 2a and 2b reveal, the composition of the aid received by graduate students is quite different from the composition of the aid on which undergraduates rely. Federal loans play a much larger role for graduate students, while federal grants provide more support to undergraduates. The teaching and research assistantships from which many graduate students benefit are a form of compensation and are not included here.

Federal Aid

The allocation of federal student aid funds differs across programs. Need-based aid relies on the information provided by students and parents on the Free Application for Federal Student Aid (FAFSA) and the formula known as the Federal Methodology (FM). Pell Grants are distributed based on the expected family contribution (EFC) determined by this formula and do not depend on the charges at the particular school attended. Subsidized Stafford Loan eligibility is based on both the EFC and the cost of attendance at the student’s institution. A student who is found to have financial need at a high-priced institution might not have measured need and therefore might not receive a subsidized Stafford Loan if she attended a less expensive college or university. Campus-based federal funds including FWS, Federal Supplemental Educational Opportunity Grants (FSEOG), and Perkins Loans are also need-based. However, these funds are distributed to institutions based on a complex formula, and the institutions allocate them to students with financial need. Unsubsidized Stafford Loans are available to all students regardless of their financial circumstances; PLUS Loans require only the absence of adverse credit — a criterion that has affected more applicants during the recent financial crisis. Figure 9 illustrates the distribution of these various forms of aid to students at different types of institutions that results from these various allocation methods.

If the current efforts by the Obama administration and some members of Congress to simplify the aid application process and the federal need-analysis formula are successful, the allocation of federal student aid funds will certainly change to some extent.

Grant Aid

Grant aid comes from the federal government, state governments, employers and other private sources, and from colleges and universities in the form of discounts from the published price. As Figure 5 shows, these sources have contributed fairly stable portions of total grant aid over the course of the 1998-99 to 2008-09 decade.

Pell Grants, targeted at low- and moderate-income students, are designed to provide access to postsecondary education for those least able to afford it. Figure 12a provides details on Pell Grants over time. While federal expenditures on Pell Grants increased by 87%, from $9.7 billion to $18.2 billion in constant 2008 dollars over the most recent decade, the combination of rising college prices and an increase in the number of recipients from 3.9 million to 6.1 million has diluted the value of these grants to individual students.

The maximum Pell Grant level is currently determined annually through the Congressional appropriations process, resulting in very uneven growth. The Obama Administration has proposed increasing the maximum Pell Grant by 1% per year beyond the increase in the Consumer Price Index (CPI). This policy would increase predictability, but would have an indeterminate effect on award levels over time.

The maximum Pell Grant is awarded to students whose incomes are too low to generate any expected family contribution and is the most frequently cited descriptor of Pell funding levels. However, only about one-fourth of Pell Grant recipients qualify for the maximum grant. In 2008-09, the average grant of $2,973 was a better representation of the subsidy received by the typical Pell Grant recipient than the $4,731 maximum grant.

The largest portion of grant aid comes from colleges and universities. The data available on institutional grant aid are less precise than those on state and federal awards. In addition to the estimates of total institutional aid found in Table 1, this year we include more detailed data from the recently released National Postsecondary Student Aid Study (NPSAS). The NPSAS defines need-based aid as only those funds awarded on the basis of financial need. Aid that meets need but is awarded based on academic or other criteria is classified as non-need-based. This definition contrasts with that used by the College Board’s Annual Survey of Colleges, which categorizes aid based on the financial need of the recipient, regardless of the motivation for the award. In reporting NPSAS data, we describe the allocation of grant aid by parent income levels.

An estimated 16% of all grant aid comes from employers and private sources. No reliable data are available on the precise amount of funding from these sources. We base our estimates on a combination of data from the NPSAS and from membership surveys conducted by the National Scholarship Providers Association.

Loans

The federal government, the primary source of education loans, offers several different types of loans. There are two types of funding for Stafford Loans, the major federal education loan program. Under the William D. Ford Federal Direct Student Loan Program (FDSLP), students borrow directly from the government. Under the Federal Family Education Loan Program (FFELP), the federal government guarantees loans issued by private lenders. The division of loans between these two programs can be found in Table 1. The percentage of federal loans provided through the FDSL Program declined from 33% in 1998-99 to 19% in 2007-08. A combination of the difficulties in private credit markets, decreases in federal subsidies to lenders, and anticipation of the possible elimination of the FFEL Program led many schools to switch to direct lending, and in 2008-09, 25% of federal loans came through the FDSL Program.

All Stafford Loans issued in 2006-07 and 2007-08 carried interest rates of 6.8%. The interest rate on unsubsidized Stafford Loans remains fixed at 6.8%, but the rate on subsidized Stafford Loans declined to 6.0% in 2008-09 and to 5.6% in 2009-10. It is scheduled to decline to 4.5% in 2010-11 and 3.4% in 2011-12. Interest rates on both Stafford and PLUS Loans varied with market rates before 2006-07.

The private loan market is an important supplementary source of funds for students. These loans generally have higher interest rates and less favorable repayment terms than federal loans; they are not included in the new federal Income-Based Repayment Plan. The recent difficulties facing credit markets in general, combined with increases in the availability of federal loans for students, are reflected in diminished use of private education loans in 2008-09. There is no reliable source for exact information on total borrowing from these sources. Since 1995-96, the College Board Trends staff has conducted an annual survey of private lenders to compile the best possible estimate of this lending. We estimate that private loan volume was almost 50% lower in 2008-09 than in the preceding year. It is important to remember that our estimates in this area are much less precise than the data we report on student financial aid.

The Consumer Price Index

We provide much of our data in constant dollars, adjusting values for changes in the CPI. We use the change in the CPI from July 2007 to July 2008 to measure inflation between 2007-08 and 2008-09. While CPI adjustment is necessary to make meaningful comparisons of values over long periods of time, comparisons of one-year changes in constant dollars may be confusing. Large fluctuations in energy prices have led to an unusually volatile CPI recently. The 5.6% increase in the CPI from July 2007 to July 2008 was the highest annual inflation rate since 1982. As a result, constant dollar increases for academic year 2008-09 were small relative to current dollar increases. Between July 2008 and July 2009, the CPI declined by 2.1%, which will result in constant dollar increases that are large relative to current dollar increases.