College prices, student aid, student debt, and college affordability are common topics of conversation in the popular press, in political debates, and around the dinner tables of current and prospective students. Unfortunately, much of the discussion occurs with limited knowledge of the facts. It is difficult for people to understand how the complex system of college pricing and student aid works, and many people form strong opinions without access to data describing the reality of how much and in what ways people pay for college. Trends in Student Aid and the companion publication, Trends in College Pricing, provide a wide array of data that can contribute to the development of solutions to the serious problems our nation faces relating to the financing of postsecondary education.
The recent dramatic increase in spending on Pell Grants—reported in both the 2010 and 2011 editions of Trends in Student Aid—has generated some concern about the long-term viability of this core program as currently structured. It is clear that the growth in the program stemmed from a combination of policy changes, sharp increases in enrollment, and financial constraints facing students and families in a weak economy with continuing high unemployment. The worry has not been—and should not be—that the near doubling of Pell expenditures from $18.8 billion in 2008-09 (in 2011 dollars) to $37.0 billion in 2010-11 represented a new equilibrium growth rate. If this was in fact a focus for some observers, the $1.1 billion decline in total Pell expenditures in 2011-12 should be reassuring. After increasing by 80% from 2006-07 to 2010-11, the number of recipients was stable in 2011-12, and equaled 37% of all undergraduate students. The average grant per student declined in 2011-12, when the brief experiment that allowed students to receive more than one grant during an academic year was suspended.
The goal of increasing the number of adults with quality college credentials is widely shared. Rising published tuition levels, particularly at public colleges and universities, make the role of student aid in diminishing financial barriers ever more critical. At the same time, many observers are focusing on the extent to which our complex financial aid system is effectively supporting college success, as opposed to just enabling access. Concern over long-term budget deficits at the federal level, a lower priority on education funding in most state budgets, and a sharp focus not just on the dollars spent on government programs, but also on the effectiveness of those dollars, makes increased scrutiny of the design of student aid programs likely.
This edition of Trends in Student Aid reports on the break in the upward trend in Pell expenditures and continuing growth in education subsidies offered through the tax code, which now reach more students than any other federal aid program. It also documents large increases in the number of students borrowing—but smaller increases in both the average debt per student and in the percentage of all students who borrow. Reports of a student debt "crisis" are frequently exaggerated, but the reality that some students borrow more than they can reasonably expect to repay raises important questions about whether or not the system is working as well as it could.
This report puts recent changes into historical context and provides important background for ongoing conversations about the roles of federal, state, institutional, and private partners in helping students and families to finance postsecondary education. Only policy reforms based on reliable data and analyses can assure that the financial aid system continues to increase educational opportunities for students and to support the development of a more productive labor force and a more educated society.
Trends in Student Aid
Trends in Student Aid, an annual College Board publication since 1983, is a compendium of detailed, up-to-date information on the funding that is available to help students pay for college. This report documents grant aid from federal and state governments, colleges and universities, employers, and other private sources, as well as loans, tax benefits, and Federal Work-Study assistance. It examines changes in funding levels over time, reports on the distribution of aid across students with different incomes and attending different types of institutions, and tracks the debt students incur as they pursue the educational opportunities that can increase their earnings, open doors to new experiences, and improve their ability to adapt to an ever-changing society.
Trends in College Pricing, a companion report, relies on data from the College Board's Annual Survey of Colleges (ASC) to provide information on changes in undergraduate tuition and fees, room and board, and other estimated expenses related to attending colleges and universities. Although data for Trends in Student Aid 2012 end with the 2011-12 academic year, Trends in College Pricing 2012 includes information on published prices for the 2012-13 academic year. The Trends website makes data easily available for reference and downloading.
Total Student Aid
Table 1 of Trends in Student Aid reports on the total funds available to postsecondary students, both undergraduate and graduate, to supplement family and student payments over the decade from 2001-02 to 2011-12. Together with students' savings and earnings, as well as support from parental earnings, savings, and borrowing from other sources, these funds contribute to making higher education financially accessible. Increases in total funds are important indicators of the resources being devoted to student assistance. But these figures may create an overly optimistic view of the benefits available to individual students because they do not account for increases in the number of students enrolled in postsecondary education.
Figure 1 shows the funds detailed in Table 1 divided across full-time equivalent (FTE) students. Between 2001-02 and 2011-12, total FTE postsecondary enrollment increased by 34%, with 3.5 million more FTE undergraduates and 570,000 more graduate students enrolled at the end of the decade. The 118% increase (after adjusting for inflation) in total financial aid over the decade amounted to a 62% increase in aid per FTE student.
The data in Table 1 have been adjusted for inflation. Similar tables in current dollars (unadjusted) and that separate undergraduates from graduate students and include data going back to 1963 are available online.
Types of Student Aid
From the student's perspective, grant aid, which is a pure subsidy not requiring repayment, is the most desirable form of financial aid. Tax credits and deductions are also pure subsidies, but the fact that the savings generally materialize months after the tuition bills have been paid makes them less effective in facilitating college access.
Education loans postpone, but do not eliminate, student payments. However, because most federal loans do reduce the overall cost of education for students—although by much less than the face value of the loans—they qualify as a form of student aid. The government pays the interest on subsidized Stafford Loans and Perkins Loans while the student is in school. Other federal loans also carry interest rates that are controlled by legislation. In contrast, nonfederal education loans from banks, other private lending institutions, and (on a smaller scale) states and postsecondary institutions, are generally not subsidized at all. Their value is in providing liquidity for students who have no other means of accessing funds. We report on nonfederal student loans because of their importance, but since they do not carry subsidies, we do not include them in our measures of student aid.
A small amount of student aid comes from the Federal Work-Study (FWS) Program, under which the federal government provides funds to institutions to subsidize the wages they pay to some student workers with documented financial need. Although these funds are packaged along with grants and loans to help students pay their bills, from the students' perspective, they are wages received for services performed. In Trends 2012, we include only the federal share of FWS earnings in our measure of student aid.
As Figures 4A and 4B reveal, the composition of aid received by graduate students is quite different from that of the aid on which undergraduates rely. Grants constituted 51% of the aid received by undergraduates in 2011-12, but only 29% of the aid received by graduate students. Federal loans made up 68% of graduate student aid, compared to 40% of undergraduate aid. The teaching and research assistantships from which many graduate students benefit are a form of compensation and are not included here.
Like other need-based aid programs, Pell Grant eligibility is based on the information provided by students and parents on the Free Application for Federal Student Aid (FAFSA) and the Federal Methodology (FM) formula. Eligibility for Pell Grants does not differ depending on the charges at the school attended. In contrast, subsidized Stafford Loan eligibility is based on both the student’s financial circumstances and the cost of attendance at her institution. Campus-based federal funds, including FWS, Federal Supplemental Educational Opportunity Grants (FSEOG), and Perkins Loans are also need-based. However, these funds are distributed to institutions based on a complex formula, and the institutions allocate them to students with financial need.
Unsubsidized Stafford Loans are available to students regardless of their financial circumstances and PLUS Loans require only the absence of adverse credit. Figures 8A and 8B illustrate the distribution of these various forms of aid to students at different types of institutions. Aid to veterans and military personnel now constitutes 27% of all federal grants awarded to students and federal tax credits and deductions provide almost 40% as much assistance as all forms of federal grants.
Grant aid comes from the federal government, state governments, employers and other private sources, and from colleges and universities in the form of discounts applied to the published price. As Figure 5 shows, federal grants declined from 40% to 29% of total grant aid over the 1990s, then increased from 33% to 44% of the total between 2008-09 and 2009-10. Colleges and universities continue to increase their grant aid every year, and institutional grant aid accounted for 37% of all grant aid in 2011-12. In 2011-12, the federal share was 44% and state grant aid, which increased by 4% in inflation-adjusted dollars between 2010-11 and 2011-12, contributed 9%. Figures 17B and 18A detail some of the variation across states in their grant funding for college students.
Students whose family incomes are too low to generate any expected family contribution qualify for the maximum Pell Grant, which is the most frequently cited descriptor of Pell funding levels. About two-thirds of 2010-11 Pell Grant recipients qualified for the maximum grant of $5,550, but about half of these students received a smaller grant because they did not enroll full-time for the full year. In 2011-12, when the maximum Pell Grant was $5,550, about 9.4 million students received an average of $3,685 from the program.
In addition to total and per-student amounts of grant aid, Trends in Student Aid reports on the distribution of grant aid among students. Some students' parents are able to provide them with the financial resources necessary to pay tuition and fees, as well as other costs associated with going to college, without serious difficulty. For many others, postsecondary education would be out of the question without generous subsidies from government, their colleges and universities, or other sources. As college prices and the other expenses associated with college attendance continue to rise more rapidly than income, more students and potential students fall into the second category.
Federal grants are targeted at low- and moderate-income students, but both states and institutions frequently consider factors other than, or in addition to, financial circumstances when allocating their aid. Figures 17A and 17B show changes over time and variation across states in the distribution of need-based and non-need-based grant aid. The trend toward allocating state grants without regard to financial circumstances has leveled off, and 14 states consider ability to pay in the allocation of all of their grant funds. Figures 19A and 19B put a similar focus on institutional grants.
The federal government, the primary source of education loans, offers several different types of loans. As of July 1, 2010, the federal government no longer guarantees education loans made by banks and other private lenders, but funds these loans through the Federal Direct Student Loan Program (FDSLP). Major federal education loan programs include those for undergraduate students with documented financial need (Subsidized Stafford Loans), for undergraduate and graduate students (Unsubsidized Stafford Loans), for graduate students only (GradPLUS), for parents (PLUS), and for students with high need at some institutions (Perkins). The conditions and interest rates vary by program. As of 2012-13, interest will accrue on all of the loans taken by graduate students, but about half of the undergraduate Stafford Loans will carry the in-school interest subsidy.
Figure 9A reports on default rates for federal student loans. In the current weak economy, default rates have risen measurably, although the current 9.1% two-year cohort default rate (CDR) is much lower than the peak of 22% in 1990-91. The federal government is in the process of extending the window for inclusion in the official measure of default from two years to three years after entering repayment. Students who default later in the repayment period will still be excluded from the official count. If more students took advantage of the Income-Based Repayment option, which limits payments owed to a manageable percentage of discretionary income, inadequate earnings would not lead them to default on their student loans. Nonfederal loans, however, are not eligible for this protection.
The private loan market is an important supplementary source of funds for students, but the loans generally have higher interest rates over the long term and less favorable repayment provisions than federal loans. The recent difficulties facing credit markets in general, combined with increases in the availability of federal student loans, are reflected in diminished use of private education loans. Beginning in 1995-96, the College Board Trends staff conducted an annual survey of private lenders to compile the best possible estimate of this form of lending. In 2011 and 2012, we benefited from the assistance of the Consumer Bankers Association, which provided the information on total private student loans compiled through MeasureOne. In addition, we surveyed the major credit unions that extend student loans to obtain a national estimate from these lenders. The totals for nonfederal loans also include information on the loans states make to students and on those that institutions provide to their students. The National Association of Student Financial Aid Administrators (NASFAA) worked with us this year and last year to survey its members and to collect data on the volume of institutional lending in recent years. Combining these data with information from the National Postsecondary Student Aid Study (NPSAS), we estimate that students borrowed about $730 million from their institutions in 2011-12. Like our estimates of grants from private sources (compiled with the assistance of the National Scholarship Providers Association), our estimates in this area are less precise than most of the data on student financial aid that we report.
Total education borrowing declined from $118.5 billion (in 2011 dollars) in 2010-11 to $113.4 billion in 2011-12—the first such decline in at least 20 years. But this leaves the total almost 25% higher than it was five years earlier. Interpreting the growth in total education loan volume is difficult because it is a reflection of both increases in enrollment and declines in the availability of other appealing sources of borrowing, such as home equity loans. The real concern about student loans is the amount of debt that individual students accumulate. Student loans make it possible for many students who could not otherwise pay for college to gain the postsecondary experience they need to improve their life prospects. Just as most small business start-ups would be impossible to launch without loans that can be repaid out of future earnings, many students would be unable to invest in themselves without debt financing. Although postsecondary education has a higher success rate in terms of future earnings than small businesses, excessive debt and barriers to managing that debt create major difficulties for many students.
Stories in the press about individual students with startling amounts of debt obscure actual borrowing patterns. As Figure 11A reports, only 2% of students who first enrolled in 2003-04 had borrowed more than $50,000 by 2008-09. The vast majority of these borrowers had earned bachelor's degrees by that year. In contrast, over 40% of those who did not borrow or who borrowed less than $10,000 were no longer in school in 2008-09 and had not earned a degree or certificate.
Figures 12A and 12B indicate that 2010-11 bachelor's degree recipients graduated with markedly higher debt levels than those who graduated two years earlier. The average debt of those who graduated in 2008-09 from the public four-year institution at which they began their studies was $20,800 (in 2011 dollars)—less than the average of $21,500 three years earlier. By 2010-11, however, that average had increased to $23,800. About one-third of all bachelor's degree recipients graduate without debt.
The Consumer Price Index
We provide much of our data in constant dollars, adjusting values for changes in the Consumer Price Index (CPI). We use the change in the CPI from July 2010 to July 2011 to compare the value of aid in 2010-11 to the value in 2011-12. Following a decline of 2.1% from 2008-09 to 2009-10 and an increase of 1.2% in 2010-11, the CPI increased by 3.6% between July 2010 and July 2011.