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Overview of Student Financial Aid Programs TYPES AND SOURCES OF STUDENT AID Student financial aid may be described by a number of different terms and categories. A useful method of presentation is to characterize three types of aid and the four sources from which each type might come.) The three types of aid are: · gift aid grants and scholarships, which need not be repaid; · employment- part-time jobs, which enable the student to earn part of his or her educational expenses; and · loans funds that have to be repaid, almost always with interest, but usually not until the borrower is no longer attending school. Student aid programs originate from one of four sources: · postsecondary institutions · state government · federal government · private foundations or organizations outside the school Figure 3-1 shows the amount of financial aid awarded from these sources for academic year 1991-92. ~ This section is adapted from FACTS - Financial Aid Concepts for Training Staff, National Association of Student Financial Aid Administrators (1990). 35
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36 Institutional and Other Grants ($5,991 ) 1 As/ State Grants ($1,9` Veterans Benefits ($908) 3% Other Federal Programs ($955) 3% QUALITY IN STUDENT FINANCIAL AID PROGRAMS Pen Grants ($5,242) Guaranteed Student Loans - federal ($13,716) 45% Federal Campus-Based Programs ($2,030) 7% FIGURE 3-1 Estimated student aid by source, academic year 1991-92 (current dollars in millions). SOURCE: The College Board (1992~. Reprinted by permis- s~on. Institutional Programs Most postsecondary institutions have their own scholarship and grant programs to assist students. Such institutional programs, however, are much more prevalent at private institutions than at public ones. Scholarship pro- grams typically have specific academic or talent requirements that must be met by the recipients; grant programs are usually based on demonstrated need. In addition, many schools use their own financial resources to admin- ister part-time employment programs, as well as short- and long-term loan programs. Since federal money is not involved in these programs, institu- tions are free to establish eligibility criteria without regard to federal regu- lations. For administrative ease, however, some institutions choose to fol- low federal rules in awarding their own funds. State Aid Programs Many of the grant programs administered by states were initiated or encouraged under the federal State Student Incentive Grant Program, which provides matching funds for state financial aid programs. Some states have relatively limited amounts and types of student financial aid, whereas others provide substantial funds through a full range of grants, loans, and employ- ment.
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OVERVIEW OF STUDENT FINANCIAL AID PROGRAMS 37 The terms and conditions of state aid programs vary widely by state. For example, there are differences in whether private institutions are eli- gible for state aid. Also, some states restrict eligibility to state residents attending postsecondary institutions within the state. Others have reciproc- ity agreements with other (usually neighboring) states whereby residents from each state included in the agreement may use aid funds from their home state at institutions within the other states included in the agreement. In addition to funding student aid programs, states also subsidize tuitions in that they are by far the largest source of funds to support the operating and capital budgets of public colleges and universities. Federal Title IV Programs Federally funded student financial aid is made available largely through Title IV of the Higher Education Act. Title IV programs comprise Federal Pell Grants, Federal Campus-Based Programs, and Federal Family Educa- tion Loan Programs.2 Federal Pell Grant Program Pell grants provide aid to undergraduates, which does not have to be repaid. A Pell grant is the underpinning of the federal financial aid pro- gram, and it is designed to help the neediest students. For this program, need is measured by a statutory methodology, which is based on a calcula- tion of the expected family contribution to the student's education. (This methodology was called the Pell Grant Index prior to reauthorization.) Funded by Congress, Pell grants are not dependent on the availability of funds at a particular school, and qualified students who receive Pell grants may use the money for study in any approved program at any eligible postsecondary institution in the United States. Federal Campus-Based Programs These programs include the Federal Work-Study, Federal Supplemental Educational Opportunity Grant, and Federal Perkins Loan programs. Schools must apply annually for funding and are then responsible for awarding the monies to eligible students, based on need. For this reason, if a student receives outside funding (such as private scholarships), his or her award of 2Prior to the 1992 reauthorization, these programs were called the Pell Grant program, Campus-Based Programs. and Guaranteed Student Loans. The reauthorization was passed late in the deliberations of the panel. Discussion of the impact of the reauthorization on the quality improvement areas considered by the panel is in Chapter 9.
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38 QUALITY IN STUDENT FINANCIAL AID PROGRAMS Federal Campus-Based program funds (and loans described in the next sec- tion) is subject to change if the sum of all sources of aid exceeds calculated need. The change may occur even after the student has begun attending the school, because total aid cannot exceed the cost of attendance minus the expected family contribution, described later in this chapter. Federal Work-Study Programs This type of aid provides jobs for stu- dents, paid for jointly by the federal government (which pays the major portion of the student worker's wages) and the school or other employer. Undergraduate and graduate students are eligible for this assistance. Schools must pay undergraduates on an hourly basis, but they may pay graduate students based on hours or salary. Federal Work-Study employees must be paid at least minimum wage, as determined by the Fair Labor Standards Act, but the actual wage rate will vary. Some schools pay only the minimum wage for all Federal Work- Study jobs; others vary the rate according to the job. The jobs may be located on or off campus; the employer is often the school itself, a nonprofit community agency, or a for-profit organization. While many schools try to relate all jobs to the student's academic major, only jobs in the private, for- profit sector are required to be academically relevant. Federal Supplemental Educational Opportunity Grants These grants are a need-based gift available only to undergraduates who have not yet earned a baccalaureate or first professional degree. Pell grant recipients must be given priority for these funds, which tend to be the smallest source of student aid funds at an institution. Federal Perkins Loans This program is available to undergraduate and graduate or professional students; priority is given to those who demon- strate exceptional financial need. Basic student eligibility for this program is determined by federal law, but each school participating in the program may distribute funds to those eligible as it sees fit. Because a school's definition of exceptional need will relate to its mission and goals as well as the unique characteristics of its student population, a student may meet one school's definition of exceptional need, but not that of another school. Federal Family Education Loans The Federal Family Education Loan Program, formerly Guaranteed Student Loans, encompasses three programs: Stafford loans, Supplemental Loans for Students, and Parent Loans for Undergraduate Students. These loans provide the largest amount of student aid funds administered by the federal government and are classified as guaranteed because the lender is assured of payment (by the federal government) should the borrower default, die, or declare bankruptcy.
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OVERVIEW OF STUDENT FINANCIAL AID PROGRAMS 39 Stafford Loans These loans provide more dollars of student aid than any other single source. Banks or savings and loan associations lend money to students, and a state or national guaranty agency insures the loans, which are offered at a below-market rate. While a student is in school, the federal government subsidizes the interest on the loan, paying the student's share of the interest to the lender plus an additional percentage, which brings the total interest paid up to market rates. Once out of school, the student becomes responsible for repayment of the loan amount as well as interest that has started to accrue. Recent changes in the Higher Education Act added an unsubsidized component to the Stafford Loan Program, for which financial need is not a criterion. The loans are limited to Stafford limits and cannot exceed the cost of attendance minus other aid. All Stafford eligibility criteria, except financial need, apply. However, for this part of the student's Stafford bor- rowing, there is no interest subsidy, and repayment of principal and interest begin while the student is in school unless capitalized to be paid later. Supplemental Loans for Students These loans are primarily available to graduate and professional students and to undergraduate students who are independent of their parents. The amount that a student may borrow is limited to the smaller of (1) the difference between the cost of attending the school and any other aid that the student is to receive, and (2) limits set by legislation. These loans come from lending institutions and banks, and they are insured by guaranty agencies in the event that the loan is not repaid due to default, death, or permanent disability. There are, however, no interest subsidies in this program, and repayment of principal and interest begins 60 days after the loan is disbursed, unless the borrower capitalizes interest for later repayment. Parent Loans for Undergraduate Students This program is similar to the supplemental loan program above, but it is designed for parents rather than students. The loan can be used to substitute for part or all of the family contribution. The amount that may be borrowed is limited only to the difference between the cost of attendance and the other financial aid the student is expected to receive. Brief Background on the Programs These "generally available" types of student aid programs (excluding student aid for veterans and Social Security recipients) are administered by the Department of Education. Because the Federal Campus-Based Pro- grams have not grown much in real terms since their inception in the mid- 1960s, the Federal Family Education Loans and the Federal Pelt grant pro- gram have gradually become the main sources of federal student aid. Since
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40 QUALITY IN STUDENT FINANCIAL AID PROGRAMS 1985, the Pell program has grown by 12 percent and Family Education Loans by 20 percent in real terms, leading to the latter becoming the major federal higher education financing mechanism (McPherson and Schapiro, 1991:27). One factor related to the change in major financing mechanisms is that, except for Federal Family Education Loans, these programs are not entitle- ments (uncapped funds). Under an entitlement program, if a student meets requirements and wants support, it will be provided. Under a nonentitlement program, however, a student may meet eligibility criteria but may not re- ceive the amount of funds he or she is "entitled" to because of the amount allocated to the program and the number of students applying. Federal Family Education Loans are funded so that all who apply and are eligible may receive the full amount of aid allowed by law. Maximum awards for other programs may be less than the law allows, as has usually been the case with Pell grants. Also, in the Federal Campus-Based Pro- grams, students who apply early have the best chance of receiving funds before the monies allocated are exhausted. In instances in which students with similar characteristics apply for aid, the amount of the Pell grant awarded will be the same. With Campus-Based funds, students with similar characteristics may be awarded different amounts, as decided by the institution. FEDERAL STUDENT FINANCIAL AID RECIPIENTS Initially, the federal student aid programs were designed solely to pro- vide funds for postsecondary education to students who could not otherwise attend because of their parents' financial circumstances. Over the years, programs and funding were expanded to broaden the goal to include choice among the institutions offering the student's intended course of study. Thus, students can select an institution based on the quality of the program of- fered rather than their family's financial circumstances. In addition, stu- dents should be provided reasonable assurance that if they reapply each year in a timely manner and continue to meet program eligibility require- ments, they will be provided the funds they need to complete their program of study. The targeting of federal student aid programs, across students and insti- tutions, has varied considerably. When the programs were begun, most aid recipients were full-time students in traditional colleges and universities who were financially dependent on their parents. In recent years, however, there has been rapidly increasing use by financially independent students, many of them adults, who now make up the majority of applicants (Figure 3-21. In the 1988-89 academic year, for example, there were 3.4 million independent and 3.1 million dependent recipients of federal student aid.
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OVERVIEW OF STUDENT FINANCIAL AID PROGRAMS 3,600,000 3,400,000 en 3,200,000 Q 3,000,000 a) E 7 2,800,000 2,600,000 2,400,00 41 ,// ,,," if o7 / it Independent - Dependent 1 1 1 1 1 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 FIGURE 3-2 Applicants by dependency status. SOURCE: National Computer Systems (1988-89, 1989-901. The applicant changes are also linked to changes in financial aid pat- terns among various types of institutions. Currently, students at proprietary vocational and technical institutions, most of which offer nondegree pro- grams of less than two years and which enroll fewer than 7 percent of undergraduate students, receive more than a quarter of all Pell grant funds. That figure is up from only 11 percent in 1979-80 (McPherson and Schapiro, 1991:281. For a similar time period, the percentage of Stafford loans going to proprietary schools increased fivefold, to about 30 percent (U.S. Depart- ment of Education, l990b:19~. ELIGIBILITY In student financial aid programs, eligibility has a number of meanings, depending on who or what is being considered. The most common use of the word concerns student eligibility. Even if an individual meets the stu- dent eligibility criteria, however, he or she must be enrolled in an eligible program of study at an eligible institution in order to receive federal student
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42 QUALITY IN STUDENT FINANCIAL AID PROGRAMS financial aid. An institution's eligibility is certified by the Department of Education. But the fact that an institution is eligible does not mean that all of its academic programs are eligible. When the Department of Education confirms an institution's eligibility, it also specifies which programs of the institution are eligible. The institution's president or chief executive and the Department of Education then sign a Program Participation Agreement, which specifies the financial aid programs in which the institution may participate. Enrollment in an eligible program does not in and of itself mean that a student may receive federal student aid. To receive student financial aid administered by the Department of Education, a student must meet all of the following criteria: · be a U.S. citizen or eligible noncitizen · be enrolled or accepted for enrollment on at least a half-time basis3 at an eligible institution in an eligible program of study · if required, register with the Selective Service and file a statement indicating Selective Service registration status · file a Statement of Educational Purpose stating that all funds re- ceived will be used solely for educational purposes · maintain satisfactory academic progress in the program · not be simultaneously enrolled in elementary or secondary school · not have had federal benefits suspended or terminated as a result of a conviction for a drug offense · not be in default on a previous federal educational loan or owe a repayment on a previous federal educational grant · not have borrowed in excess of federal loan limits Some federal aid programs have additional eligibility criteria that are spe- cific to the particular program. THE AID FORMULA The awarding of Title IV aid, prior to the 1992 reauthorization of the Higher Education Act, has been based on two formulas, one for Pell grant awards (the Pell Grant Index), which go to lower income students, and one (the Congressional Methodology) for other programs. With reauthorization, only one formula, the Congressional Methodology, will be used. Basically, using this formula, family resources available for educational costs are de- termined, and student need is then calculated by subtracting the amount the 3 Recent changes in the Higher Education Act will permit undergraduate students to receive Pell grants if eligible and attending less than half-time beginning in academic year 1993-94.
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OVERVIEW OF STUDENT FINANCIAL AID PROGRAMS 43 student and family are expected to pay from the student's cost of attending school. Cost of attendance is an estimate of how much money the student will need to cover tuition and fees, room and board, and miscellaneous ex- penses, such as books, supplies, and transportation to and from home. Key student choices must be made before financial aid administrators can deter- mine the cost of attendance, including what institution to attend, whether to live on campus or off, and for students living off campus, whether to live with parents. The expected family contribution, based on the family's ability to pay, is driven by the premise that the student and parents have primary responsi- bility for paying for the education. The family contribution is determined by making allowances for family size and the number of family members in college, in addition to considering the amount of federal, state, and local taxes paid. A student's dependency status is also considered to determine whether the family contribution should consist of a parental contribution and a separately calculated student contribution. Under the Congressional Methodology, the expected parental contribu- tion is calculated based on the parents' income and assets above specified amounts. In what is called the simplified formula or application, assets are not considered for applicants with income below specified levels ($15,000 pre-reauthorization and $50,000 subsequently). As income increases, so does the expected parental contribution. To arrive at the expected parental contribution, available income is calculated by subtracting allowances (in- cluding such things as basic living expenses, taxes, and so on) from total income, and then income supplements from assets are estimated to get an adjusted available income, which is used to determine the proportion avail- able for the parental contribution. The Title IV legislation is a major factor in determining who gets what amount of student aid. Based on established guidelines, financial aid ad- ministrators must consider all sources of aid and determine a suitable and accurate aid package for each student. The Fell grant award amount is the first item considered. Any need beyond the Pell grant can be satisfied by a combination of non-need-based aid obtained from outside organizations, state grants, loans, federally funded campus-based aid, and institutional aid, as detained by the school. At this point, some students still require aid, and they often resort to higher interest loans. THE AWARD PROCESS As an introduction to the student financial aid process, the panel re- viewed a flowchart of the Federal Family Education Loan Program. The process diagram stretched from fingertip to fingertip of the outstretched
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44 QUALITY IN STUDENT FINANCIAL AID PROGRAMS Student/Family · Decide to apply · Determine which types: Pell grant Campus-based Loan Other nonfederal Various versions of forms are designed and/or distributed by the Department of Education and its data entry contractors and by lenders and institutions | Institution | May assist I ~Student/Family _ Obtain appropriate forms (Forms vary by program) . ~ StudenVFamily at/ Complete application form(s) / ~ | Form input for Pell grants ~ \; Form input for campus-based programs | | | and loans l Corrections made Central Processor Edits and produces Student Aid Report (SAR) 1 _ 1 Student Review of SAR Makes corrections, if I If correct, needed, and returns | send to \~ Institution · Validates data of selected applicants · Determines eligibility Determines cost of attendance · Determines availability of campus-based program funds Determines award package Institution Uses approved methods to determine need; most schools use a processor for this calculation ~ r Department of Education/Lender . , Disburses funds to institution ~Institution or student, as required by program Disburses funds to student 1 1! Institution Reconciles account Independent Auditor ~ Department of Education I Audits institution's records | 1 1 1 1 FIGURE 3-3 Basics of the Title IV award system Loan Originator Takes loan application , ~ arms of the presenter. The presenter made the point, which the panel heard many times from players in the system, that the system was very complex. Although the detailed flowcharts for the Pell and Campus-Based programs were less complex, the major and the subtle differences among the pro- grams in determining program eligibility and in administrative policies and practices posed a challenge for the panel in determining how to report on
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OVERVIEW OF STUDENT FINANCIAL AID PROGRAMS 45 the quality of these activities. (It seems to be a problem for the Department of Education too; the panel was cautioned that the charts, which were pro- duced for the Department of Education by contractors, are outdated.J The panel had two problems to overcome. First, reporting on all the detailed differences would make the report tiresome to read. Second, correctly in- corporating regulatory changes due to reauthorization that were being made during the drafting of this report would be impossible. Thus, throughout this report we discuss the system that awards financial aid according to its basic form, which involves the activities of (a) applicants as they learn about and complete appropriate forms and correspondence; (b) the Depart- ment of Education's processing contractors as they input data, edit data, request corrections from applicants, and try to predict applications that are prone to error; (c' institutions as they labor to help students under tight time frames and a myriad of activities; (d) lenders as they work with an addi- tional application process; and (e) the Department of Education as it tries to regulate activities. Figure 3-3 provides a greatly simplified view of the process.
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Representative terms from entire chapter: