Financial aid refers to the wide variety of programs that help students and families pay for college or graduate school. Financial aid is available in three forms: grants and scholarships, which do not have to be repaid; loans, which have to be repaid; and work-study, which provides aid in exchange for work, usually in the form of campus-based employment.
Three major sources provide the bulk of student financial aid: the federal government, state governments, and colleges and universities. The federal government is the largest single provider, underwriting 72 percent of all financial aid available, mostly through loans. Private sources of aid, such as scholarships from companies and loans from nongovernmental organizations, also are available.
Most student aid - and almost all aid provided by the federal government - is awarded to students based on their or their families' ability to pay. Other aid is merit-based; students receive it on the basis of their individual achievement and not entirely according to family need.
Approximately 16.7 million students are enrolled in postsecondary study in the United States. Over half of these students receive some form of financial aid.
Some $64 billion in financial aid was provided to students in 1998-99, including federal and nonfederal loans, federal and state grants, and institutional grants.
Undergraduates are offered financial aid in the form of a "package" - a combination of grants, loans, and work-study. The first step in determining a student's financial aid package is through the process of need analysis. There are two formulas for need analysis. The first is conducted by the federal government to determine eligibility for its programs. The second is sometimes conducted by colleges and universities to determine how they will distribute their own institutional aid.
The process of need analysis determines how much students and their families are expected to contribute from their own resources ("expected family contribution," or EFC) and how much aid students are eligible to receive. When the federal government conducts a financial need analysis, it considers the family's income and assets (but ignores assets for families that make less than $50,000 a year), the family's size, the number of parents, the age of the older parent, and the number of other family members enrolled in postsecondary study. The federal formula typically expects a family contribution of approximately 5 percent of net worth.
The amount of financial aid an undergraduate qualifies for is determined by subtracting expected family contribution from the total price of attending the institution. Total price includes tuition, fees, room and board, and other expenses. The gap that exists between a family's expected contribution and the price of attending may be filled by a number of federal and state grant and loan programs, aid provided by institutions, and private sources of aid.
The federal grant programs are aimed at the neediest students, and provide aid that does not have to be repaid. They are often combined into a single financial aid package by institutions.
The Pell Grant program provides grants to low-income undergraduates to help them pay for college. In 1998-99, this program provided $7.2 billion in grants to 3.8 million undergraduate students at 5,900 postsecondary education institutions. Individual grants ranged from $400 to $3,000; the average grant was $1,880. The average family income of Pell Grant recipients who were dependent on their parents for financial support in 1997-98 was $20,544. The average income for financially independent students was $10,700. In 1999-00, the maximum grant is $3,125.
The SEOG program provides grants to low-income students, and generally helps supplement the aid they receive from Pell Grants and other sources. Federal funds provide for 75 percent of the award; the college or university contributes the remaining 25 percent or more. In 1997-98, the program provided $614 million in federal funds to approximately 1.1 million students at approximately 3,800 postsecondary institutions. In 1997-98, awards ranged from $100 to $4,000; the average grant was $727.
This program, which provides incentives for states to provide grants to students who attend college, has played a significant role in encouraging every state to create and maintain its own student grant program. States are required to provide at least 50 percent of the funding for this program. In 1998-99, federal SSIG funds provided $25 million in grants to students who attended postsecondary education. Including state matching funds, approximately 83,000 students receive SSIG funds in 1999-00.
These loans are guaranteed by the federal government, and are designed to give students flexible repayment options.
The FFEL program makes loans available to students and their families through some 7,100 participating private lenders. The federal guarantee protects FFEL lenders against loss from borrower default. In 1998-99, the program made 5.8 million loans for a total amount borrowed of over $22 billion.
The Direct Student Loan program uses federal Treasury funds to provide loan capital directly to schools, which then disburse loan funds to students. The program began operation in 1994-95 with approximately 7 percent of total U.S. student loan volume. In 1998-99, it made 3 million loans for a total of nearly $11 billion. Both FFEL and Direct Loans feature three types of loans.
These are subsidized, low-interest (currently no more than 8.25 percent) loans based on financial need. The federal government pays the interest while the student is in school and during certain grace and deferment periods. In fiscal year 1998, almost 5.1 million loans were issued, representing $18 billion. The average loan was approximately $3,500.
These loans are offered at the same low rates as subsidized Stafford Loans, but the federal government does not pay interest for the student during in-school, grace, and deferment periods. In fiscal 1998, 3.2 million loans were issued, representing $12.3 billion. The average loan was approximately $3,900.
These loans are available to parents of dependent undergraduate students, and have an interest rate of no more than 9 percent. The federal government does not pay interest during deferment periods. In fiscal 1998, approximately 525,000 loans were issued, representing $3.4 billion.
This program provides low-interest (5 percent) loans to undergraduate and graduate/professional students who demonstrate financial need. Loans are provided through a fund consisting of new federal capital contributions (FCC), institutional contributions, and loan repayments from prior borrowers. The FCC is matched 25 percent by colleges and universities. Undergraduates are eligible to borrow up to $3,000 per year, for a maximum of $15,000. Graduate students are eligible to borrow up to $5,000 per year, for a cumulative maximum (including undergraduate Perkins Loans) of $30,000. In 1997-98, the program made loans to about 788,000 students at approximately 2,700 institutions. Over half of the loan funds go to students with family income of $30,000 or less.
This program provides part-time jobs to undergraduates and graduate/professional students who use the earnings to finance their educational programs. Federal funds cover up to 75 percent of wages, with the remaining 25 percent or more being paid by colleges and universities or businesses. In 1997-98, this program provided $830 million in federal work-study funds to approximately 945,000 students attending 3,900 postsecondary institutions. In 1996-97, average student earnings from the program were $1,194. Half of the recipients came from families with income less than $30,000.
These programs are designed to help low-income Americans enter and complete college. TRIO provides services to over 700,000 low-income students, including assistance in choosing a college; tutoring; personal and financial counseling; career counseling; and workplace visits. Two-thirds of the students served must come from families in which neither parent is a college graduate and total income is less than $24,000.
Federal aid is also available from a variety of agencies outside the Department of Education. This aid, including fellowships, internships, grants, and loans, can be need-based or merit-based, depending on the program. These programs include: Graduate Assistance in Areas of National Need, National Science Foundation predoctoral fellowships (minority and general graduates), the Robert C. Byrd Honors Scholarship program, and college grants provided to volunteers in the Americorps national service programs. These programs provided more than $2.3 billion to students in 1996-97.
The federal State Student Incentive Grant (SSIG) program, which provided states with $25 million in matching funds for 1998-99, has played a significant role in encouraging every state to create and maintain its own student grant program. In 1998-99, state contributions to SSIG and other grant programs provided students with $3.5 billion in assistance. State loan programs provided $440 million. State programs accounted for approximately 6 percent of all aid available in 1998-99.
Grants from institutional sources are the second most common type of aid available to students. Nearly 20 percent of available aid comes from colleges and universities. Since 1987-88, institutions have more than doubled the amount of grant aid they provide, from $5 billion to $12 billion in inflation-adjusted dollars.
In addition to financial aid, students and their families have access to several federal tax benefits that help lower their college expenses. These benefits, which were passed as part the Taxpayer Relief Act of 1997, will provide $40 billion in student assistance over the next five years. Thirty-five billion dollars of that will be provided through the Hope Scholarship and Lifetime Learning tax credits.
The Hope Scholarship tax credit allows students, or their parents or guardians, to claim up to $1,500 per student per year for out-of-pocket tuition and fee expenditures. This $1,500 tax credit may be claimed for the first two years of undergraduate study, calculated as follows: the tax credit equals 100 percent of the first $1,000 spent on tuition and fees, and 50 percent of the next $1,000. The Hope credit is available to taxpayers with a gross income of up to $50,000 (up to $100,000 for joint filers). The credit is phased out on a sliding scale for taxpayers earning $40,000 and above (and $80,000 and above for joint filers).
The Lifetime Learning tax credit allows college students or their families to claim up to 20 percent of qualified out-of-pocket tuition expenditures per year. The Lifetime Learning credit, which may be claimed for an unlimited number of years for both undergraduate and graduate study, allows qualified taxpayers to claim a tax credit equal to 20 percent of the first $5,000 spent on tuition and fees through the year 2002, and 50 percent of up to the first $10,000 spent on tuition and fees thereafter. The Lifetime Learning credit is available to taxpayers with a gross income of up to $50,000 (and up to $100,000 for joint filers). The credit is phased out on a sliding scale for taxpayers earning $40,000 and above (and $80,000 and above for joint filers).
Penalty-free withdrawals are permitted from IRAs for undergraduate and graduate education. In addition, new "Education IRAs" can be funded with annual, nondeductible contributions of up to $500 per child. The earnings on these accounts are tax-free if the funds are withdrawn to pay college tuition. Eligibility to make contributions to Education IRAs is phased out for contributors with adjusted gross income between $95,000 and $110,000 for single taxpayers ($150,000 and $160,000 for joint filers).
The new deduction for student loan interest allows borrowers to deduct interest paid in the first 60 months on any loan used for college expenses. This deduction is available to all taxpayers, regardless of whether they take the standard deduction or itemize their deductions. The maximum deduction will be $1,000 in 1998; $1,500 in 1999; $2,000 in 2000; and $2,500 in 2001 and thereafter. The deduction is phased out for single taxpayers with adjusted gross income of between $40,000 and $55,000 ($60,000 and $75,000 for joint returns).
This provision allows workers to exclude from taxable income up to $5,250 a year in undergraduate tuition assistance provided by their employers