Paying for College
A Brief look at Student Financial Aid Programs
Forms of Financial
Aid
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 69 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.
Scope of Financial Aid
More than 15 million students are enrolled in postsecondary study in
the United States. Over half of these students receive some form of
financial aid.
Some $89 billion in financial aid was provided to
students in 2001-02, including federal and nonfederal loans, federal and
state grants, and institutional grants.
Determining Financial Aid Packages
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.
Major Student Financial Aid Programs
Federal Grant
Programs
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.
Pell Grant Program
The Pell Grant program provides grants to low-income undergraduates
to help them pay for college. In 2002-03, this program provided $11.6
billion in grants to 4.8 million undergraduate students at 5,900
postsecondary education institutions. Individual grants ranged from $400
to $4,000; the average grant was $2,411. The average family income of
Pell Grant recipients who were dependent on their parents for financial
support in 2000-01 was $21,599. The average income for financially
independent students was $13,658.
Supplemental Educational
Opportunity Grant (SEOG) Program
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
2001-02, the program provided $691 million in federal funds to
approximately 1.2 million students at approximately 3,800 postsecondary
institutions. In 2001-02, awards ranged from $100 to $4,000; the average
grant was $581.
Leveraging Educational
Assistance Partnership (LEAP) Program
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 2001-02, federal LEAP funds provided $50
million in grants to students who attended postsecondary education.
Including state matching funds, approximately 2 million students receive
LEAP funds in 2000-01.
Federal Loan
Programs
These loans are guaranteed by the federal
government, and are designed to give students flexible repayment
options.
Federal Family Education
Loan (FFEL) Program
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
2001-02, the program made 6.3 million loans for a total amount borrowed
of over $29 billion.
William D. Ford Direct
Student Loan Program
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 2001-02, it made 3 million
loans for a total of over $11 billion.
Both FFEL and
Direct Loans feature three types of loans:
Subsidized
Stafford Loans — These are subsidized, low-interest (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 2001-02, almost 5.6 million
loans were issued, representing $19.5 billion. The average loan was
approximately $3,500.
Unsubsidized Stafford Loans — 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 2001-02, 4 million
loans were issued, representing $17 billion. The average loan was
approximately $4,140.
PLUS Loans — 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 2001-02, approximately 612,000 loans were
issued, representing $4.6 billion.
Perkins Loan Program
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 2001-02, the
program made loans to about 695,000 students at approximately 2,700
institutions. Over half of the loan funds go to students with family
income of $30,000 or less.
Other Federal
Programs
Federal Work-Study (FWS)
Program
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 $1.2
billion in federal work-study funds to approximately 990,000 students
attending 3,900 postsecondary institutions. In 2001-02, average student
earnings from the program were $1,230. Half of the recipients came from
families with income less than $30,000.
TRIO Programs
These programs are designed to help low-income Americans enter and
complete college. TRIO provides services to over 750,000 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.
Specialized Federal
Programs
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 $2.7
billion to students in 2001-02.
State Programs
The federal Leveraging Educational Assistance Partnership (LEAP)
program, which provided states with $50 million in matching funds for
2001-02, has played a significant role in encouraging every state to
create and maintain its own student grant program. In 2001-02, state
contributions to SSIG and other grant programs provided students with $5
billion in assistance. State loan programs provided $634 million. State
programs accounted for approximately 5.6 percent of all aid available in
2001-02.
Institutional
Programs
Grants from institutional sources are the second most common type of
aid available to students. Nearly 19 percent of available aid comes from
colleges and universities. Since 1991-92, institutions have more than
doubled the amount of grant aid they provide, from $8.2 billion to $16.9
billion in inflation-adjusted dollars.
Tax Benefits for College
Students
In addition to financial aid, students and
their families have access to several federal tax benefits that help
lower their college expenses. These benefits 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.
Hope Scholarship Tax
Credit
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. 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).
Lifetime Learning Tax
Credit
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 $10,000 spent on tuition and fees. 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).
Coverdell Education
Savings Account
Coverdell ESA's are savings accounts to finance the education
expenses of a child or other designated beneficiary. Contributions are
limited to $2000 per year and are not tax deductible. However, funds
deposited into the account grow tax free until withdrawn to pay college
tuition. Eligibility to make contributions to Coverdell Education
Savings Accounts is phased out for contributors with modified adjusted
gross income between $95,000 and $110,000 for single taxpayers ($200,000
and $220,000 for joint filers).
Deduction for Student
Loan Interest
The deduction for student loan interest allows borrowers to deduct
interest paid 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 is $2,500
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
modified adjusted gross income of between $50,000 and $65,000 ($100,000
and $130,000 for joint returns).
Deduction for Tuition and
Fees Expenses
Beginning in 2002, up to $30,000 of qualified tuition expenses may
be deducted from your taxable income. This deduction is available to all
taxpayers, regardless of whether they take the standard deduction or
itemize. There are no income phase outs, therefore this deduction may be
beneficial to taxpayers who cannot take either of the education credits
because their income is too high.
Exclusion for Employee
Education Benefits (Section 127)
This provision allows workers to exclude from taxable income up to
$5,250 a year in undergraduate tuition assistance provided by their
employers.
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