Student financial aid in the United States

Student financial aid in the United States is funding that is intended to help students pay tuition, fees, living expenses (room and board, if living in college housing), transportation, books, and supplies for study at a post-secondary educational institution: a professional school, community college, four-year college, or university. General governmental funding in the form of subsidies for public education (not designated for an individual student) is not considered to be financial aid. Financial aid refers to awards to specific individual students. A scholarship is sometimes used as a synonym for a financial aid award, although grants and student loans are also major components of financial aid packages from students' intended colleges.

Types of financial aid

Need-based aid

• Pell and other types of grants, money that does not need to be repaid. Similar to scholarships, but awarded on the basis of economic Need rather than academic accomplishments or promise.
• Subsidized student loans, on which there is no interest while the student remains enrolled at least half time in an eligible institution.
• Cooperative education, which provides campus employment opportunities to students with Need.

The United States government and many state governments provide need-based student aid including grants, work-study, and loans; a few states provide merit-based aid. As of 2010 there are nine federal and 605 state student aid programs and many of the nearly 7,000 post-secondary institutions provide merit aid. Major federal grants include the Pell Grants, Federal Supplemental Educational Opportunity Grants, Federal Work-Study Program, federal Stafford Loans (in subsidized and unsubsidized forms), state student incentive grants and Federal PLUS Loans. Federal Perkins Loans are made by participating schools per annual appropriations from the U.S. Department of Education. Federal Stafford Loans and Federal PLUS Loans are made by the U.S. Department of Education. As of April 2010, Congress voted to eliminate the Federal Family Education Loan Program (FFELP) which had allowed private lenders to make student loans guaranteed by the federal government.

State governments also typically provide some types of need- and non-need-based aid, consisting of grants, work-study programs, tuition waivers, and scholarships. Individual colleges and universities may provide grants and need- and merit-based scholarships. Students requiring financial aid beyond what is offered by their institutions may consider a private (alternative) education loan, available from most large lending institutions. Typically, education loans obtained through the federal government have lower interest rates than private education loans. Institutions may also offer their own student financial assistance, in the form of need- or merit-based aid, as well as endowed scholarships (with varying need and/or merit-based criteria). Some institutions may only require the FAFSA; some may also require a need-based analysis document, such as the CSS/Profile, to apply for such funds to apply a more stringent need analysis for the rationalization of institutional funds.

Types of financial aid and application process

Main article: FAFSA

Financial aid is classified into two varieties, based on the criteria through which the financial aid is awarded: merit-based or Need-based. Aid consists of grants and scholarships, low-interest government-subsidized loans, work-study, and education tax benefits.

To apply for Need-based aid, a student or the student's parent(s) must first complete the Free Application for Federal Student Aid (FAFSA). The application must then be submitted either electronically to the United States Department of Education, using the Department of Education's website, mailing a paper form, or, as the law also authorizes, by getting professional assistance from a fee-based preparer, such as Edifi. A student's aid application (FAFSA) may be submitted to the Department of Education as early as January 1 before the summer or fall when the student enrolls and must be re-submitted with updated information each year. The FAFSA consists of about 130 questions regarding a family's financial situation. The Department of Education processes each request and tells a student how much the federal government (formulas set by Congress) believes his/her family is able to pay toward college expenses—the Expected Family Contribution (EFC). However, an EFC is not necessarily how much a student will pay for college — aid can reduce an individual's cost. Then, the post-secondary institutions to which a student applies, determine how much federal, state, and college-specific aid a student will receive. An individual's student aid award is likely to vary from institution to institution.

Grant programs include the Pell Grant and the TEACH Grant. Federal loan programs include the Federal Direct Subsidized Loan and Federal Direct Unsubsidized Loans, known together as Stafford Loans, the Perkins Loan and the (unsubsidized) PLUS Loan, available to parents and graduate students but not to undergraduates. Unlike grants, a borrower must repay the loan amount and any interest. Federal loans offer lower interest rates and better repayment terms than private student loans from banks and other financial institutions.

Students (or their parents/guardians) can take advantage of education tax benefits to ease the financial burden of attending college. Education tax benefits added up to more than $6.8 billion in 2008–2009. Education benefit programs include the American Opportunity Tax Credit and the Lifetime Learning Tax Credit. These programs reduce a student's (or his or her parents'/guardians') taxable income while the student attends college.

In addition to federal student aid, students may be eligible for state-based aid. States provide students more than $10.2 billion of aid every year. Each state aid program is different. Usually, a student must reside and attend college in the state providing his/her aid. In some cases, a student can spend state aid on colleges in neighboring states. The FAFSA is also the application for state aid.

Most aid is provided on a first-come, first-served basis so it is essential that students prepare and submit their FAFSAs as close to January 1 as possible, using estimated income and tax figures. The aid "window" stays open 18 months in case student's financial circumstances change and require adjustment to their aid application.

The application asks for information on household size, income, assets, the number in college and other financial factors to determine a student's Need-based aid eligibility, expressed as an EFC. Institutions use EFC to guide their decision about how much need-based financial aid to award a student. The EFC also takes into consideration any participation in college savings or pre-paid tuition plans. In the past, financial aid officers weighed pre-paid tuition plans more heavily than other 529 college savings plans when determining a student’s eligibility. In February 2006, Congress passed legislation to treat both types evenly.

Merit-based aid

Merit-based grants or scholarships include scholarships awarded by the college or university and those awarded by outside organizations. Merit-based scholarships are typically awarded for outstanding academic achievements and maximum SAT or ACT scores, although some merit scholarships can be awarded for special talents, leadership potential and other personal characteristics. Scholarships may be given because of group affiliation (such as YMCA, Boys Club, etc.). Merit scholarships are sometimes awarded without regard for the financial need of the applicant. At many colleges, every admitted student is automatically considered for merit scholarships. At other institutions, a separate application process is required. Scholarships do not need to be repaid as long as all requirements are met.

Athletic scholarships are a form of merit aid that takes athletic talent into account.

Need-based aid

Need-based financial aid is awarded on the basis of the financial need of the student. The Free Application for Federal Student Aid application (FAFSA) is generally used for determining federal, state, and institutional need-based aid eligibility. At private institutions, a supplemental application may be necessary for institutional need-based aid.

A recent trend shows that what is purely need-based aid is not entirely clear. According to the National Postsecondary Aid Survey (NPSAS), SAT scores have an impact on the size of institutional need-based financial aid. If a student has a high SAT score and a low family income, they will receive larger institutional need-based grants than a student with a low family income that has low SAT scores. In 1996, public higher education institutions gave students with high SAT scores and a low family income $1,255 in need-based grants. However, only $565 in need-based grants were given to students with low SAT scores who had low family incomes. The lower a student’s SAT score, the smaller the amount of need-based grants a student received no matter what their family income level was. The same trend holds true for higher education private institutions. In 1996, private institutions gave students with high SAT scores and a low family income $7,123 versus $2,382 for students with low SAT scores and a low family income. Thus, “institutional need-based awards are less sensitive to need and more sensitive to ‘academic merit’ than the principles of needs analysis would lead us to expect.” It has been found that increasing an SAT score in the range of 100-200 points can result in hundreds of dollars more in institutional grants and on average substantially more if one is attending a private institution.

While providing financial information to the government is a reasonable expectation to calculate a student’s financial need, it does not necessarily follow that colleges should have access to this information. Providing that information to schools may be problematic because schools learn about students’ other sources of funding and may adjust their financial aid packages accordingly. There is an asymmetric information problem since schools have full knowledge of their customers' ability to pay while students and their families have little information about costs that colleges face to provide their services. That is, when planning for the next academic year, a school will know its current and projected costs as well as each student’s ability to pay after receiving state and federal grants. According to the Center for College Affordability and Productivity (CCAP), “If the federal or state authorities increase financial support per student, the institution has the opportunity to capture part or all of that increased ability to pay by reducing institutional grants and/or raising their charges for tuition, fees, room, or board.” Importantly, it also notes that “the exception to this general pattern is modest aid targeted at only low-income students, like the Pell grant.” The center uses data about net proceeds (tuition plus room, board and other fees) as a percentage of median income to show that financial aid practices have not been effective in decreasing prices in an effort to increase access. Net proceeds at public four-year institutions rose from 15% to 20% of median income from 1987 to 2008. In that same time, productivity has declined in the form of lighter teaching loads for professors and increased expenditures on administrative staff.

Merit-based aid versus need-based aid

With the yearly rising cost of tuition, room and board, and fees among schools across the nation, low-income students are finding it harder to pay for their education. In an attempt to help students meet the high, costly demands of college, schools have increased merit-based grants, for students with outstanding academic position, involvement in organizations, or high athletic talent. The issue is that these reasons for awarding scholarships take away from low-income students who often do not meet these merit standards. In other words, funds for merit-based scholarships are taking away from the already small amount of federal aid available to low-income students who simply cannot pay for college without some kind of financial aid.

In recent years, government has responded to the financial crisis students are facing and therefore passed legislation that boosted the value of grants for low-income students and trimmed subsidies for private education lenders. Schools have also taken action for the sake of students. Harvard University, a well-known costly but wealthy institution that had previously cut tuition for students whose families earned less than $60,000 a year, proceeded to cut costs by nearly fifty percent for those students whose families earned between $120,000 and $180,000 a year. Institutions will consider students' financial needs as well as their academic merit standing when applying for financial aid. Merit-based aid and need-based aid have been linked together for many financial aid scholarships. This relationship is beneficial as it underlies that one form of financial aid, particularly merit-based, is not completely taking over need-based aid. Statistics do show results of studies performed from 1992-2000 that the increase in financial aid awarded was based entirely on merit. However, when viewing numbers of both merit-based and need-based aid closely, the differences are not significant.

Common financial aid misconceptions

There are several misconceptions surrounding financial aid.

• It is sometimes believed that students should not apply for financial aid until they have already been accepted by, and have decided on, the college or university of their choice. This is a serious error that may have significant negative impact on the aid the student receives. While most federal student aid is unlimited (the Perkins Loan is an exception), institutional aid is not, and may have all been tentatively distributed before the student decides on a college. To maximize eligibility, the FAFSA should be submitted, using estimated income figures and a tentative list of colleges, as soon as the application becomes available, usually January 1.

• Not enough aid is available to make college financially possible. While this is sometimes true for expensive colleges, financial aid will cover most or all of the cost at a community college or other low-cost school. This is even more true in states, such as New York, that have significant state financial aid.

• The application process is too complicated. While the process can be complicated, the less income and assets a student and/or family has, the simpler it is to apply. Many high schools provide assistance.

• Low high school grades will prevent a student from getting financial aid. This is only true for merit-based aid. For Need-based aid, by far the largest type, once a student is admitted to a college the high school grades are irrelevant.

• Financial aid is only available to the most needy students. Merit-based aid is available to all. Many middle-class families do not know that they may qualify for some Need-based aid. The well-to-do can receive unsubsidized federal loans, which are available regardless of Need.

Graduate and professional students

The following types of federal financial aid are available to graduate and professional students::

• The William D. Ford Federal Direct Loan (Direct Loan) Program: Eligible students may borrow up to $20,500 per school year. These loans are unsubsidized; Congress has determined that subsidized loans (no interest while enrolled) are only available to undergraduates. Graduate and professional students enrolled in certain health profession programs may receive additional Direct Unsubsidized Loan amounts each academic year. These federal loans, although unsubsidized, are far superior in interest rate and repayment terms to private student loans.
• Federal Perkins Loan (Perkins Loan) Program: This is a school-based loan program for eligible students with exceptional financial need. Students may qualify for a Perkins Loan of up to $8,000 each year depending on financial need, the amount of other aid received, and the availability of funds at the school.
• Teacher Education Assistance for College and Higher Education (TEACH) Grant: The TEACH Grant Program provides grants of up to $4,000 a year to students who are completing or plan to complete coursework needed to begin a career in teaching. The TEACH Grant is different from other federal student grants in that it requires students to take certain kinds of classes to get the grant, and then to do a certain kind of job to keep the grant from turning into a loan.
• Federal Work-Study (FWS) Program: The Work-Study Program provides part-time jobs for undergraduate and graduate students with financial need. This program allows students to earn money to help pay education expenses. The program encourages community service work and work related to a student’s course of study.
• Federal Pell Grant: A Pell Grant, unlike a loan, does not have to be repaid. Most graduate and professional students are not eligible for Pell Grants, but those enrolled in a post-baccalaureate teacher certification program are eligible.

Graduate students may also be eligible for these financial aid programs:

• Aid from other federal agencies (i.e., research grants or fellowships)
• State aid (i.e., state loans)
• Institutional aid (i.e., institutional scholarships or graduate assistantships/fellowships)
• Non-institutional scholarships

International students

It is often believed that international (non-citizen) students are never eligible for financial aid. It is true that international students are not eligible for Federal aid. However, many universities provide their own institutional aid for international students (both need- and merit-based).

For example, according to Uni in the USA, "The main source of financial assistance for UK students, after family contributions, will be the university itself."

There are six US universities that will cover all financial needs for all students, including international students. These are Amherst, Yale, UPenn, Dartmouth, Princeton, MIT and Harvard.

College cost calculators

Main article: College cost calculator

Post-secondary institutions post a Cost of Attendance or Price of Attendance, also known as a "sticker price." However, that price is not how much an institution will cost an individual student. To make higher education costs more transparent before a student actually applies to college, federal law requires all post-secondary institutions receiving Title IV funds (federal funds for student aid) to post net price calculators on their websites by October 29, 2011.

As defined in The Higher Education Opportunity Act of 2008, the net price calculator’s purpose is:

“…to help current and prospective students, families, and other consumers estimate the individual net price of an institution of higher education for a student. The net price calculator shall be developed in a manner that enables current and prospective students, families, and consumers to determine an estimate of a current or prospective student’s individual net price at a particular institution.”

The law defines estimated net price as the difference between an institution’s average total Price of Attendance (the sum of tuition and fees, room and board, books and supplies, and other expenses including personal expenses and transportation for a first-time, full-time undergraduate students who receive aid) and the institution’s median need- and merit-based grant aid awarded.

Elise Miller, program director for the U.S. Department of Education's Integrated Postsecondary Education Data System (IPEDS) stated the idea behind the requirement: "We just want to break down the myth of sticker price and get beyond it. This is to give students some indication that they will not necessarily be paying that full price."

The template was developed based on the suggestions of the an IPEDS’ Technical Review Panel (TRP), which met on January 27–28, 2009, and included 58 individuals representing federal and state governments, post-secondary institutions from all sectors, association representatives, and template contractors. Mary Sapp, Ph.D., assistant vice president for planning and institutional research at the University of Miami, served as the panel’s chair. She described the mandate’s goal as “to provide prospective and current undergraduate students with some insight into the difference between an institution’s sticker price and the price they will end up paying.”

To meet the requirement, post-secondary institutions may choose between a basic template developed by the U.S. Department of Education or an alternative net price calculator that offers at least the minimum elements the law requires. A recent report issued by the Institute for College Access and Success, "“Adding it all up 2012: are net price calculators easy to find, use and compare?”, found key issues with the implementation of the net price calculator requirement. In “Adding it all up,” the authors state, “this report takes a more in-depth look at the net price calculators from 50 randomly selected colleges. While we found some positive practices that were not evident at the time of our previous report, net price calculators are still not reliably easy for prospective college students and their families to find, use, and compare”.

After the requirement came into effect, the free website CollegeAbacus.org began creating a system that would allow students to enter the personal information once, and then use and compare net-prices of multiple schools. The Gates Foundation's College Knowledge Challenge announced College Abacus as one its winners in January 2013; the $100,000 grant from the Gates Foundation will enable College Abacus to expand from its beta version with 2500+ schools to a fully comprehensive version with all the colleges and universities in the United States.

Debt vs. grants

No-loan financial aid

In 2001, Princeton University became the first university in the United States to eliminate loans from its financial aid packages. Since then, many other schools have followed in eliminating some or all loans from their financial aid programs. Many of these programs are aimed at students whose parents earn less than a certain income — the figures vary by college or university. These new initiatives were designed to attract more students and applicants from lower socioeconomic backgrounds, reduce student debt loads, and provide the offering institutions with an advantage over their rivals in attracting commitments from accepted students. This is an attractive way for students to relieve the amount of debt they are in after college.

The following colleges and universities offer such no-loan financial aid packages as of March 2008:

Post-secondary institution	No-loan financial aid for families meeting these eligibility requirements:
Amherst College	No max income
Arizona State University	Arizona residents with family income of up to $60,000
Bowdoin College	No max income
Brown University	Family income below $100,000
Caltech	Annual income below $60,000
Claremont McKenna College	No max income
Colby College	No max income; all students
Columbia University	No max income
Cornell University	Annual income below $75,000
Dartmouth College	Annual income below $100,000
Davidson College	No max income
Duke University	Annual income below $40,000
Emory University	Annual income below $100,000
Haverford College	No max income
Harvard University	No max income
Lafayette College	Annual income below $50,000
Lehigh University	Annual income below $50,000
MIT	Annual income below $75,000
University of Maryland, College Park	Maryland resident with 0 EFC
Michigan State University	Michigan resident with family incomes at or below the federal poverty line
Northwestern University	Family income lower than approx. $55,000
North Carolina State University	North Carolina resident with income less than 150% of the poverty line.
University of Chicago	No max income
UNC Chapel Hill	200% of federal poverty line
University of Pennsylvania	No max income
Pomona College	No max income
Princeton University	No max income
Rice University	Annual income below $80,000
Stanford University	No max income
Swarthmore College	Anyone with financial need
Tufts University	Annual income below $40,000
Vanderbilt University	No max income
Vassar College	Annual income below $60,000
University of Virginia	200% of federal poverty line ($24,000 to $37,000)
Washington and Lee University	No max income
Washington University in St. Louis	Annual Income below $60,000
Wellesley College	$60,000
Wesleyan University	$40,000
College of William and Mary	$40,000 (VA residents only)
Yale University	No max income

Loan cap

Some universities have opted to have a "loan cap" program, which is a maximum loan — either per year or for the four years combined — designed to reduce the cost of attendance for low-income and middle-class students. The following schools have a loan cap program:

School	Loan cap for students meeting these eligibility requirements:
Brown University	Family earning less than about $125,000: Caps total loans to $3,000 per year. Family earning up to $150,000: Caps total loans to $4,000 per year. Family earning up to $150,000: Caps total loans to $5,000 per year.
University of Chicago	"Those whose families make between $60,000 and $75,000 will have 50% of their loans replaced."
Cornell University	Undergraduates with family incomes less than $120,000 will have loans limited to $3,000 per year.
Duke University	Undergraduate students with family income between $40,000 and $100,000 will have their loans limited on a graduated basis ($1,000 to $4,000 per year) and loans "frozen" at the freshman level.
Emory University	"Annual assessed incomes of $50,000 to $100,000 who demonstrate need for financial aid. The program caps total need-based loans at $15,000, assuming on-time progression toward graduation with up to eight semesters of study."
Grinnell College	"Beginning in the 2008-09 academic year, need-based loans for all eligible students will be capped at $2,000 per year."
University of Maryland, College Park	Students with need-based financial aid will have their loans capped at $15,900 for their four years of attendance.
Middlebury College	Family income below $40,000: $1,500 per year; family income $40,000 to $80,000: $2,500 per year; family income above $80,000: $3,500 per year.
Rice University	Students with a family income below $60,000 will not have loans. Families with incomes over $60,000 will have their loans capped at about $14,500.
University of Virginia	200% of federal poverty line ($24,000 to $37,000). Need-based loans are capped at 25% of the in-state cost of attendance, regardless of state residency.

Effect of financial aid on enrollment

In a study on the correlation between the price of higher education and enrollment rates, Donald Heller finds that the amount of financial aid available for students is a strong factor in enrollment rates.

Different factors have different effects on financial aid:

• Decreases in the amount of financial aid leads to decreases in enrollment. However, different types of financial aid have differing effects. Grant awards tend to have a stronger effect on enrollment rates.
• Changes in tuition and financial aid affect poorer students more than they affect students with higher incomes.
• In terms of race, changes in financial aid affects black students more than it affects white students.
• Changes in financial aid affect students from community colleges more than students from four-year schools.

Need-blind admissions

Need-blind admissions do not consider a student’s financial need. In a time when colleges are low on financial funds, it is difficult to maintain need-blind admissions because schools cannot meet the full need of the poor students that they admit.

There are different levels of need-blind admissions. Few institutions are fully need-blind. Others are not need-blind for students apply after certain deadlines, international students, and students from a waitlist. Some institutions are moving away from need-blind admissions so that they can fulfill the full need of the students that are admitted. Meeting the full-need will probably increase the funds for financial aid. For example, Wesleyan University is only need-blind if it has enough money to satisfy the full need of admitted students.

Outside the United States

Many national governments provide student financial assistance subsidies, i.e., student benefit, for students attending a university, although proposed policies to change such subsidies have engendered considerable debate in places, such as Canada, the United Kingdom, Germany, the Netherlands and Scandinavian countries. The heavy reliance on private subsidies, as in the United States, is not as widespread, although this may be changing.

In Germany, the main source of financial aid is provided by the Bundesausbildungsförderungsgesetz, colloquially known as BAFöG.

See also

• College admissions in the United States
• Scholarship
• Student benefit
• Transfer admissions in the United States

External links

• Federal Student Aid. U.S. Department of Education.