Archived - Pursuing Broader Participation and Greater Benefit from Federal College Student Financial Aid

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Financing Postsecondary Education: The Federal Role - October 1995

Pursuing Broader Participation and Greater Benefit from Federal College Student Financial Aid

Toward New Purposes, Guidelines and Requirements for a More Efficient and Effective College Student Aid Program

Michael T. Nettles

(with assistance of Catherine M. Millett and Laura W. Perna)

The Reform Idea


Typically, historical analyses of federal financial aid policy begin with the Higher Education Act of 1965. Yet, if the analyses of the contemporary era of financial aid begin with the Serviceman's Readjustment Act of 1944 (the GI Bill), it is possible to examine not only the incubation of the broader 1965 financial aid policy but also to witness a time when the major national financial aid program was characterized by a single, clear policy with easy to understand eligibility requirements and administrative processes, as well as an impact which was easy to measure. In contrast to the GI Bill, which provided financial support for veterans who had performed honorable service for the country to attend college, today's financial aid policy includes a broad array of programs, each satisfying different purposes for different segments of the population who meet different thresholds of need.

A primary purpose of the federal financial aid programs authorized under Title IV of the Higher Education Act of 1965 is to ensure access and opportunity for students to attend college. Whether this has been accomplished is questionable. Several observers of higher education trends and financial aid have suggested that access has actually declined (Mortensen, 1991, and Orfield, 1992). In addition, the accumulation of numerous increases in the number and types of programs, modifications at different times to either expand or reduce eligibility for grants and loans, and alterations in the conditions for loan repayment, have resulted in disparate programs that lack coherence of purpose. Furthermore, fraud and abuse have become associated with the student loans program, which raises questions about the credibility and efficiency of national financial aid programs.

This paper outlines the expansion of federal financial aid policy, presents some of the challenges confronting the current federal financial aid policy, and proposes for consideration by the national government, a new policy direction aimed at increasing the efficiency and effectiveness of federal financial aid expenditures. The paper concludes with several policy questions that need to be addressed in order to monitor the effectiveness of the national policy .

Expansion of national financial aid policy

Since the enactment of the GI Bill, federal financial aid policy has grown to include the National Defense Student Loan program of 1959 (renamed first the National Direct Student Loan program and then later the Perkins Loan program); the College Work-Study program and the Educational Opportunity Grant program (now called the Supplemental Educational Opportunity Grant), both of which were established through the Civil Rights Act of 1964 and subsequently incorporated into the Higher Education Act of 1965; the Guaranteed Student Loan program (now called the Federal Family Education Loan program) which was established under the Higher Education Act of 1965; and the Basic Educational Opportunity Grant program (renamed the Pell Grant in 1980).

Figure 1 shows that today, the federal government is by far the most important source of student financial assistance, contributing roughly 75 percent of all aid ($31.43 billion of the total $41.94 billion) provided to college students in academic year 1993-94 (The College Board, 1994). The magnitude of financial aid for college students is evident by the fact that financial aid for college students comprises over two-thirds of the annual appropriation to the U.S. Department of Education (The Digest of Education Statistics, 1994).

                             FIGURE 1        ESTIMATED STUDENT AID BY SOURCE: ACADEMIC YEAR 1993-94                   (CURRENT DOLLARS IN MILLIONS)             Federal Family Education Loans:  $21,182            Institutional and Other Grants:   $7,950            Federal Pell Grants:              $5,590            State Grants and SSIB:            $2,461            Federal Specially Directed Aid:   $2,208            Campus Based Programs:            $2,207 

Despite its favorable legacy of providing access and opportunity for disadvantaged citizens to attend college, the growth in financial aid policy has been accompanied by greater scrutiny and discontent. Evidence of the Congress’ dissatisfaction with the program is revealed through the following actions:

Challenges facing current financial aid policy

The following six conditions are some of the challenges facing the national college student aid policy:
  1. the declining purchasing power of the annual financial aid awards that students receive:

  2. the shifting balance of federal financial aid awards from grants to loans;

  3. the unacceptably high default rate on guaranteed loans;

  4. the minimal effect of financial aid awards on expanding the range of institutions that economically disadvantaged recipients might attend;

  5. the high drop-out rates of grant recipients before degree program completion; and

  6. the lack of consideration given to the quality of both college preparation and academic performance in college for determining financial aid eligibility requirements.

Declining purchasing power of financial aid

Among the most formidable challenges to federal financial aid is maintaining its value from year to year. In the ten year period between 1983 and 1994, the average cost of attending America's universities and colleges out-paced the growth rate in federal financial assistance by more than a two-to-one ratio. Figure 2 illustrates that during the past decade the cost in current dollars of attending private four-year universities increased by 94 percent, from $10,243 to $19,884; at private four-year colleges by 88 percent, from $7,849 to $14,732; at public four-year universities by 76 percent, from $3,899 to $6,862; 74 percent at public four-year colleges, from $3,518 to $6,109; and 44 percent at public two-year colleges, from $2,807 to $4,039. During the same decade Figure 2 shows that the growth in the average Pell Grant increased by 38 percent, from $1,104 to $1,518; the average Stafford Loan increased 33 percent, from $2,297 to $3,061; and the average College Work Study increased 22 percent, from $877 to $1,066 (The College Board, 1994).

                               FIGURE 2          GROWTH IN PERSONAL INCOME, AVERAGE COST ATTENDANCE, AND  FEDERAL FINANCIAL AID AWARDS: 1984-85 TO 1993-94 (IN CURRENT DOLLARS)  Personal Income =============================> 58%    Private Univ. ============================================> 92%   Private 4-Year ===========================================> 88%     Public Univ. =====================================> 76%    Public 4-Year ====================================> 74%    Public 2-Year ======================> 44%       Pell Grant ==================> 38%    Stafford Loan ================> 33%       Work Study ===========> 22%                 +----+----+----+----+----+----+----+----+----+----+                 0    10   20   30   40   50   60   70   80   90   100                                        PERCENT  FROM: 

With the exception of the period between FY 1993 and 1994, when federal appropriations for the Pell Grant program declined by 8 percent, from just over $6 billion to slightly more than $5.5 billion, the Pell Grant program has received annual incremental funding increases for the past decade. The number of recipients during this exceptional year of an 8 percent decrease in appropriations declined from 4.2 million to 3.7 million students, or 12 percent. In addition to the decline in appropriations, more restrictive eligibility requirements may have lead to a decline in student recipients (The College Board, 1994). Despite annual incremental increases in federal appropriations for all other years during the past decade, except the period between 1993 and 1994, the actual maximum award amount in constant 1993 dollars declined from $2,643 in 1983 to $2,263 in 1994. The actual average Pell Grant amount that students received declined in constant 1993 dollars from $1,680 in 1986 to $1,494 in 1994 (The College Board, 1994).

Shift in the balance of loan to grant ratio

Prior to 1980, grants made up over two-thirds of the financial aid awarded by the federal government but, by 1984, grants comprised roughly 29 percent of federal financial aid (excluding College Work-Study) and loans made up the remaining 71 percent. During the past decade, grants continued to lose share of federal aid--going down to 23 percent compared to 77 percent for loans.

High student loan default rates

The National Commission on Responsibilities for Financing Postsecondary Education (1993) reported that in 1991 at least 1 million borrowers defaulted on more than $3 billion in guaranteed student loans. The amount of loans defaulted is approximately 15 percent of the money borrowed. The Commission also reported that 48 percent of students who attended non-degree-granting proprietary institutions and who received a guaranteed student loan defaulted on their repayment compared to 12 percent of the students attending four-year institutions. Interestingly, the National Commission also reported that students with the largest loan indebtedness were least likely to be in default while students with the smallest loan indebtedness were more likely to be in default.

Options for economically disadvantaged students

Complete choice is evidenced by equal attendance rates for various subgroups across institutions of different selectivity and costs of attendance (Dickmeyer, Wessels, & Coldren, 1981; Leslie, 1977). Under this definition, current attendance patterns indicate that lower income individuals do not have equal choice among postsecondary educational institutions. Although dependent undergraduates at all income levels were more likely to be attending four-year than two-year institutions in fall 1989, those with incomes below $30,000 were more likely than students with higher incomes to be attending two-year institutions (NCES, 1993). About 33 percent of dependent undergraduates with incomes between $10,000 and $19,999 were enrolled in public two-year institutions, compared with just 19 percent of those with incomes of $70,000 or more. In contrast, the percent of undergraduates enrolled in four-year doctoral-granting institutions increased with income, ranging from 28 percent of those with incomes less than $10,000 to 50 percent of those with incomes of $70,000 or more. Moreover, although dependent undergraduates at all income levels were more likely to be enrolled in public than private four-year institutions, students with higher incomes were more likely than those with lower incomes to be enrolled in private four-year institutions. Less than 10 percent of dependent undergraduates with incomes under $70,000 were enrolled in private four-year doctoral-granting institutions, compared with 17 percent of those with incomes above $70,000 (NCES, 1993).

Presented here are data on four points. Adequate data on dropouts are not currently available. At present, we know that roughly half of the nation's students who enter college graduate within six years of entry. This dropout rate reflects an inefficiency that colleges and universities are attempting to address. Whether the dropout rate for financial aid recipients differs from that of the overall population is unknown. But, an important question for the research on the national financial aid program is to assess the extent to which national financial aid policy shares this challenge. With respect to the quality of both college preparation and performance in college, the American educational systems are merit-based. In order to make the national financial aid programs compatible with and have common goals with the nation's universities and colleges, it behooves the national financial aid program to include an academic component. In fact, colleges and universities administer much of their financial aid to students on the basis of merit.

The current condition of the national financial aid policy described above leads to questions about what alternative approaches are possible in order not only to preserve but also to improve upon its popular legacy for the future. In order to enhance efficiency, restore credibility, and receive greater benefit from the national policy, the various aid programs will require modifications. Some of the existing programs must be strengthened, some must be replaced with alternative programs, and all programs must be subject to the continuous policy evaluation and research that are needed to monitor and improve the efficiency and effectiveness of the entire national financial aid policy.

Pressure has been mounting upon the national financial aid policy to extend benefits to larger segments of the population (middle class) while simultaneously increasing funding levels to keep pace with inflation for current recipients. The types of pressures currently placed upon the national financial aid policy include the following: (l) increasing student access to college, (2) increasing the rates of student retention and progress through degree programs, (3) reducing the debt burden of students who complete college, (4) permitting highly motivated and academically prepared economically disadvantaged students to attend the nation's best universities for which they are academically qualified, (5) encouraging students to complete higher levels of postsecondary education beyond their first degree (associate's or baccalaureate), and (6) promoting self-help by families to finance their own college education. Recent attempts to patch up the existing policy provide evidence that minor tinkering with how loans are processed, chiseling at the edges of eligibility requirements, raising the per capita amounts provided to students at rates below the growth rates of inflation, and constructing new bureaucracies to chase down fraudulent recipients will not lead to either optimal efficiency or effectiveness of the national financial aid policy.

A reform idea

Reforms in national financial aid policy should address both economic and societal needs and demands for postsecondary education that are not presently being met and encourage more students to enter and persist through completion of college. The national financial aid policy should incorporate the following features that address some of the major challenges to the present policy: Rather than adding new programs, the proposed reform advocates major adjustments to realign existing programs, causing them to work in tandem and form a coherent and comprehensive policy. The reform has the following three elements:

The details for implementing this approach have yet to be developed and perhaps some experimentation will be required in order to judge the quality and impact. But, this proposed reform has the following potential advantages over the present system of national financial aid:

  1. Grants would be 100 percent effective by ensuring that only students who complete a degree would receive a grant award.

  2. Because grants would be reserved only for college graduates, students would have a disincentive for dropping out, which should in turn help colleges and universities achieve higher retention rates.

  3. Waste in the grants programs would be eliminated because people who do not receive a degree would not have access to grants. These students would have access to loans.

  4. Resources saved in the grant programs could be used to increase the size of the grants awarded to degree recipients, broaden the range of people who receive grants, and extend grant awards to disadvantaged students who receive graduate degrees (master's and doctoral degrees).

  5. Because funding will continue to be available to students attending college in the form of loans, access and opportunity should not be negatively affected.

  6. The financial aid eligibility criteria will include merit in addition to financial need as a vital component.

  7. Each of the programs under the national policy will have a distinct/unique role to play but together will operate as a coherent comprehensive policy.

Questions that need to be addressed

Because this proposed strategy has yet to be implemented, several questions need to be addressed at the point of experimentation or implementation. The important questions include the following:

  1. What effect does the program have upon students' decisions to enter college and the type of college to which they apply and elect to attend?

  2. How does the program affect student retention, progression, graduation rates, and academic performance in college?

  3. How does the program affect student debt burdens and default rates?

  4. What rewards do colleges and universities merit for succeeding in increasing retention, graduation, and performance of   their students?
The proposal advanced in this paper is a novel, yet plausible solution to the stagnation of the existing federal financial aid policy. Perhaps its most compelling dimensions are (1) the inclusion of student performance as a criterion in addition to need in awarding financial aid and (2) the acknowledgment of the importance of extending financial aid in the form of grants and loan forgiveness through the graduate level. Both of these dimensions are important priorities for national economic and social development. In order to further develop this concept, the national government should proceed to invite further refinement of the principle concepts, to develop details for implementation, and to experiment on a modest scale as a first step in national reform.

Michael T. Nettles is professor of education and public policy at the University of Michigan, Ann Arbor. Previously he served as Vice President for Assessment for the University of Tennessee system in Knoxville. Nettles received his Ph.D. in Higher Education from lowa State University.


The College Board (1994).
Trends in Student Aid: 1984 to 1994, New York.

Dickmeyer, N., Wessels, J, & Coldren, S.L. (1981).
Institutionally Funded Student Financial Aid, Washington, DC: American Council on Education.

Leslie, L.L. (1977).
Higher Education Opportunity: A Decade of Progress, Washington, DC: ERIC/Higher Education Research Report, Number 3.

Mortensen, T.G. (1991).
Financial Aid Problems for Dependent Students from Low-Income Families, Journal of Student Financial Aid, 21 (3), p. 27-38.

Mortensen, T.G. (1990).
The Impact of Increased Loan Utilization Among Low Family Income Students (ACT Student Financial Aid Research Report Series, Number 90-1). Iowa City: American College Testing Program.

National Commission on Responsibilities for Financing Postsecondary Education (1993).
Making College Affordable Again (Final Report). Washington, DC.

National Center for Education Statistics (1993).
Financing Undergraduate Education 1990. U.S. Department of Education, (93-201).

Orfield, G. (1992).
Money, Equity, v. College Access. Harvard Educational Review, 62 (3). p. 337-72.

U.S. Department of Education, National Center for Education Statistics. (1994)
The Digest of Education Statistics, 1994. Washington, DC: U.S. Government Printing Office.

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