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1 Introduction In a little more than 100 years, the Congress has moved from support- ing institutions by building colleges and universities, to ensuring that geo- graphically underserved populations have access to higher education, to supporting students by deciding "to put purchasing power in the hands of needy students and let the students make their own choices in the market- place of postsecondary education" (Gladieux and Wolanin, 1976~. THE FEDERAL STUDENT FINANCIAL AID SYSTEM Since World War II, the financing of higher education has changed through the expansion of the role of need-based student aid. Scholarships for students who were both meritorious and needy have always been avail- able, but the introduction of need-tested aid in the 1950s and the major federal support and regulation of student aid that followed have resulted in what is today a complex system of aid. As McPherson and Schapiro (1991) point out, while some see the combined system of need-based aid and oper- ating subsidies as a fundamental part of the higher education financing system, others see an ineffectual and ill-structured system that distorts the incentives of students and educational institutions. The current system has roots dating to 1965, when the Higher Educa- tion Act enacted into law the principle that the federal government should assume an important share of the responsibility for ensuring postsecondary educational opportunities for disadvantaged students. There are many justi- fications for the federal role. One is that federal funds spent on training and 21

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22 QUALITY IN STUDENT FINANCIAL AID PROGRAMS education significantly increase the productive capacity and earning power of citizens and, therefore, tax receipts. Over the past decade, for example, earnings of college-educated males aged 24 to 34 increased by 10 percent, earnings of those with only high school diplomas declined by 9 percent, and those in the work force who did not hold high school diplomas saw their real incomes drop by 12 percent (National Center on Education and the Economy, 1990:20~. Others argue that in a democracy that demands an educated citizenry to function successfully the cost of an uneducated citizenry is greater than the cost of higher education. Some would infer that eventually expenditures on education and training will produce reductions in larger social costs, such as welfare and incarceration. For example, the average U.S. public investment (which includes subsidies for public institutions, state and federal student aid, and tax incentives) in the room, board, and tuition for every American student in higher education was over $8,000 a year in the 1980s. Such expenditures might seem small if, for example, they helped reduce the need to spend the $7,300 provided annually to a mother and two children receiv- ing Aid to Families with Dependent Children (AFDC), housing assistance, food stamps, and energy assistance benefits at 80 percent of poverty level (Edelman, 1987:32-34~. Postsecondary students can receive financial aid from the federal gov- ernment, states, postsecondary institutions, private organizations, or a com- bination of these sources. Direct aid to students is dominated, however, by federal aid programs (grants, loans, and employment programs). In the academic year 1989-90, total available student aid equaled $27.3 billion; generally available federal aid equaled $19.0 billion (College Board, 1992:4. Of the full-time undergraduate students enrolled in postsecondary schools in 1989-90, 57 percent received aid from at least one source and 44 percent received federal funding. As indicated in Table 1-1, state, institutional, and other funding went to 20 percent, 23 percent, and 14 percent of enrolled students, respectively. A fundamental principle guiding federal participation in student aid programs is that the primary responsibility for meeting the postsecondary educational expenses of a student lies with the "family" the student and, when applicable, his or her spouse or parents should contribute to the student's educational expenses to the degree that they are able. To achieve this objective, the family's financial circumstances should be evaluated in a consistent and fair manner, recognizing that special circumstances may af- fect a family's ability to contribute to educational expenses. 1Total available student aid includes specially directed federal aid, such as Social Security; generally available federal aid through Title IV of the Higher Education Act (the programs studied in this report); and institutional and state aid.

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INTROD UCTION TABLE 1-1 Percent of full-time undergraduate students receiving aid by sources of aid and by type and control of institution: 1989-90 23 Anya Federal State Institution Other Student/Institution Type aid aid aid aid aid Undergraduate Students Total 57.2 43.5 19.8 22.5 13.5 All Public 47.8 34.5 18.3 15.3 11.7 Public, less than 2-year 51.2 33.3 9.9 7.9 17.0 Public, 2- to 3-year 44.3 31.8 17.0 12.6 12.8 Public, 4-year 49.5 35.9 19.2 17.0 10.9 All Private (not for-profit) 70.4 50.4 29.9 46.2 16.0 Private, less than 2-year 74.4 52.5 25.5 10.4 14.7 Private, 2- to 3-year 66.2 50.1 23.0 28.9 18.2 Private, 4-year 70.6 50.3 30.5 48.6 15.9 All Proprietary 85.7 81.1 10.0 19.6 19.6 Private for-profit, less than 2-year 86.4 82.0 6.9 21.9 21.5 Private for profit, 2-year and above 84.3 79.3 16.4 15.1 15.6 Standard Errors Total 0.9 0.9 0.7 0.6 0.4 All Public 1.0 0.9 0.9 0.6 0.5 Public, less than 2-year 5.3 5.6 2.5 2.0 4.1 Public, 2- to 3-year 2.1 1.9 1.8 1.3 1.1 Public, 4-year 1.1 1.0 1.1 0.7 0.5 All Private 1.2 1.3 1.4 1.4 0.7 Private, less than 2-year 4.2 7.0 6.5 6.0 4.9 Private, 2- to 3-year 4.0 4.1 3.7 3.5 2.5 Private, 4-year 1.3 1.4 1.5 1.5 0.7 NOTE: Due to design changes in NPSAS:90, estimates in this table are not comparable to published estimates from the 1987 NPSAS. aSources of aid do not add to "any aid" percentage since students often receive aid from more than one source. SOURCE: National Center for Education Statistics NPSAS:90 Undergraduate Table Genera- tion System Questions have persisted concerning the adequacy of the delivery sys- tem for federal student financial aid. Especially troublesome for the U.S. Department of Education have been the recurring questions about the accu- racy of determining the share of educational expenses to be borne by the family and the effectiveness of the systems of accountability mandated by federal regulations.

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24 QUALITY IN STUDENT FINANCIAL AID PROGRAMS PURPOSE AND SCOPE OF STUDY The U.S. Department of Education requested that a panel of experts be convened at the National Academy of Sciences to study the quality control of federal student financial aid programs covered by Title IV of the Higher Education Act of 1965. Specifically, the department was motivated by concerns about the accuracy of payments, both overpayments and underpay- ments, to students under the various Title IV financial aid programs. A recent study (Price Waterhouse, 1991) found that errors in the determination of financial aid awards were the third most important compliance problem related to the regulation of postsecondary institutions. Payment inaccura- cies, if they are widespread or systematic, raise questions about the equity with which federal student aid is distributed and could foster public miscon- ceptions about waste, fraud, and abuse. In particular, the panel was asked to study (1) the quality control prac- tices employed by the Department of Education to measure the accuracy of awards to students and (2) the methods used by program ~nanagers, based on this information, to reduce errors. Thus, the panel's report is about the possible use of quality control information to prevent errors through appro- priate corrective actions. While addressing its charge of examining current quality control meth- ods and procedures, the panel has kept in mind the broader educational objectives of the Higher Education Act. Although the panel found useful suggestions in many of the research reports that it studied, most of the suggestions in those reports are based on the paradigm that major aspects of the delivery and control systems (e.g., school-based verification) would remain essentially unchanged. The panel reviewed the existing systems and proposes several shifts in the paradigm. In reaching its conclusions, the panel was influenced by the recurring nature of several problems in previ- ous studies. The major recurrent themes are the following: Making the educational institution responsible for identifying and correcting errors in student-supplied information creates inefficiencies and adversarial relationships. Clear evidence is lacking that schools can be regulated into achiev- ing significant reductions in the national rate of payment error. The Department of Education's use of regulations that require ac- tions by all participants to solve problems found in only a few is inefficient and unfair. Research to guide management of the programs lacks adequate tech- nical guidance.

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INTROD UCTION 25 ORGANIZATION OF THE REPORT The remainder of Part I describes the new philosophy of continuous improvement, which provides an organizational framework for dealing with such cross-cutting problems as those described above. It also describes Title IV student financial aid programs and the system for distributing the awards. Part II discusses the outcome of Department of Education activities to control, improve, and monitor the "quality of the award" in the current system. The panel reviews and comments on the controversial processes of verification, audit, and program review, and it makes recommendations for their improvement if the current system is to be maintained. Among the special topics addressed by the panel in Part II are the methodological and statistical integrity of current quality control studies, including the accuracy of estimates of national error rates; a review of the application forms and their instructions; and the potential for risk-based management of audit and review processes. Part III looks at the larger picture and recommends changes in the system that should more efficiently reduce the recurring problems identified in Part II. The topics addressed include knowledge and experience gained from quality control practices in other federal assistance programs and in service industries; the relationship between information collected and effec- tive strategies to reduce errors; and institutional pilot study activities.