GAO 

United States Government Accountability Office

Report to Congressional Committees

FEDERAL STUDENT 

AID FORMULA 

Cost-of-Living 

Adjustment Could 

Increase Aid to a Small 

Percentage of 

Students in High-Cost 

Areas but Could Also 

Further Complicate 

Aid Process

August 2009 

GAO-09-825 
Page i GAO-09-825 

Contents 

Letter 1

Appendix I Briefing Slides 5 

Appendix II Scope and Methodology 42 

Appendix III Counties Where Students Could See a Change in 

Financial Aid under Different COLA Options 49 

Appendix IV Summary of Effects of Adding a COLA to the 

Federal Needs Analysis Formula on Expected Family 

Contribution Levels and Pell Grant Awards 51 

Appendix V Change in Pell Grant for Example Students in 

High-Cost and Low-Cost Areas for Each COLA 53 

Appendix VI GAO Contact and Staff Acknowledgments 55 

Tables 

Table 1: Change in Pell Grants for Full-Time, Dependent Student 

from a Family of Four with Home Rental Cost COLA 53 

Table 2: Change in Pell Grants for Full-Time, Dependent Student 

from a Family of Four with Regional Price Parities COLA 53 

Table 3: Change in Pell Grants for Full-Time, Dependent Student 

from a Family of Four with Housing Expenditure COLA 53 

Table 4: Change in Pell Grant for a Full-Time, Independent Student 

with No Dependents with Home Rental Cost COLA 54 

Table 5: Change in Pell Grant for a Full-Time, Independent Student 

with No Dependents with Regional Price Parities COLA 54 

Table 6: Change in Pell Grant for a Full-Time, Independent Student 

with No Dependents with Housing Expenditure COLA 54 

 Federal Student Aid Formula 
Figures 

Figure 1: Counties Where Students’ Aid Could Increase or Decrease 

with Regional Price Parities COLA 49 

Figure 2: Counties Where Students’ Aid Could Increase with 

Housing Expenditure COLA 50 

Figure 3: Estimated Percentages and Total Number of Financial 

Aid Applicants and Potential Changes in Their Expected 

Family Contributions for Each COLA 51 

Figure 4: Estimated Average Pell Grant Increase for Students 

Receiving a Pell Increase for Each COLA 52 

Abbreviations 

BEA Bureau of Economic Analysis 

COLA cost-of-living adjustment 

CPI Consumer Price Index 

Education Department of Education 

EFC expected family contribution 

HUD Department of Housing and Urban Development 

IPA income protection allowance 

MSA Metropolitan Statistical Area 

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Page ii GAO-09-825 Federal Student Aid Formula
Page 1 GAO-09-825 

United States Government Accountability Office

Washington, DC 20548 

 

August 14, 2009 

The Honorable Edward M. Kennedy 

Chairman 

The Honorable Michael B. Enzi 

Ranking Member 

Committee on Health, Education, 

 Labor, and Pensions 

United States Senate 

The Honorable George Miller 

Chairman 

The Honorable John Kline 

Ranking Member 

Committee on Education and Labor 

House of Representatives 

In fiscal year 2008, the Department of Education (Education) oversaw the 

distribution of approximately $96 billion in federal student financial aid, 

including $14.6 billion in Pell Grants to low- and middle-income students, 

to help students and their families pay for higher-education expenses. 

Much of this aid was distributed based on a formula specified in the 

Higher Education Act, as amended, that is used to identify students who 

need financial assistance to pay for higher education. To apply for federal 

financial aid, such as Pell Grants, students submit a Free Application for 

Federal Student Aid on which they report their own or both their own and 

their families’ income and assets. Students who are financially dependent 

on their parents or other family members are required to report their own 

and their family’s income and assets, while those who are financially 

independent report only their own income and assets (and their spouse’s, 

if they are married). To determine if a student has financial need, the aid 

formula compares how much it costs a student to attend a particular 

college and an estimate of how much the student or student and family 

can afford to pay toward the cost—called the expected family contribution 

(EFC). How much a family can afford to contribute to college costs 

depends on a variety of factors, including the cost of living where a family 

resides. Some observers have questioned whether the federal aid formula 

appropriately accounts for geographic cost-of-living differences. 

 Federal Student Aid Formula 
 

As required by the Higher Education Opportunity Act,1 we are providing 

information on options for adjusting the federal student aid formula for 

geographic cost-of-living differences. Specifically, this report addresses 

the following questions: 

1. How does the current federal financial aid formula affect students in 

different geographic areas? 

2. What options exist for modifying this formula to reflect geographic 

cost-of-living differences? 

3. How would adding a cost-of-living adjustment (COLA) to the formula 

affect the federal financial aid system, including the distribution of Pell 

Grants? 

On July 6 and 7, 2009, we briefed cognizant congressional staff on the 

results of this study, and this report formally conveys the information 

provided during this briefing (see appendix I for the briefing slides). In 

general, we found that while data suggest that the cost of living is higher in 

some areas than in others, the current aid formula accounts for these 

differences in only a limited way. How these differences affect a family’s 

ability to pay for college is unclear, in part because no official measure of 

geographic cost-of-living differences exists. We identified three possible 

COLA options that could be used in the federal aid formula. These COLAs 

could increase Pell Grants and other financial aid for a small percentage of 

students from high-cost areas but could also further complicate the 

process for calculating and administering federal student aid. 

We used the following methodology to develop our findings. To 

understand the financial aid formula, we interviewed Education officials 

and reviewed relevant federal laws, regulations, and program guidance. To 

determine how the current formula affects students in different 

geographic areas and to identify possible COLA options, we interviewed 

economists and higher education experts; representatives from seven 

higher education associations; and financial aid officials from 19 

postsecondary institutions that represent a mix of 2-year and 4-year public, 

not-for-profit, and proprietary schools in different geographic areas, 

including both urban and rural locations. We also reviewed relevant 

literature and interviewed experts to identify COLAs that could be used in 

 

1

Pub. L. No. 110-315, § 1114. 

Page 2 GAO-09-825 Federal Student Aid Formula
 

the federal aid formula and identified three possible options.2 We applied 

these three COLA options to an Education dataset of a sample of students 

who applied for federal financial aid for the 2007-2008 school year to 

determine their impact on students’ expected family contribution 

estimates, the impact on students’ Pell Grant amounts, and the number of 

Pell recipients that could see a change in their Pell Grants. While we 

discuss generally how changes in the expected family contribution can 

affect other sources of financial aid, our detailed analyses focus on the 

distribution of Pell Grants and the impact on Pell Grant spending. To 

assess the reliability of Education’s dataset, we interviewed agency 

officials knowledgeable about the data and reviewed relevant 

documentation. We determined that the data were sufficiently reliable for 

the purposes of this report. For additional information on our scope and 

methodology, see appendix II. 

We conducted our work from December 2008 to August 2009 in 

accordance with all sections of GAO’s Quality Assurance Framework that 

are relevant to our objectives. The framework requires that we plan and 

perform the engagement to obtain sufficient and appropriate evidence to 

meet our stated objectives and to discuss any limitations in our work. We 

believe that the information and data obtained, and the analysis 

conducted, provide a reasonable basis for any findings. 

We provided a draft copy of this report to Education for review and 

comment. Education did not provide formal comments on this report, but 

did provide some technical comments that we incorporated as 

appropriate. 

We are sending copies of this report to relevant congressional committees, 

the Secretary of Education, and other interested parties. In addition, this 

report will be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

 

2

For example, see GAO, Poverty Measurement: Adjusting for Geographic Cost-of-Living 

Difference, GAO/GGD-95-64 (Washington, D.C.: Mar. 9, 1995), and Constance F. Citro and 

Robert T. Michaels, Measuring Poverty: A New Approach (Washington, D.C.: National 

Academy Press, 1995). 

Page 3 GAO-09-825 Federal Student Aid Formula
 

If you or your staffs have any questions about this report, please contact 

me at (202) 512-7215 or scottg@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributions to this report are 

listed in appendix VI. 

curity Issues 

George A. Scott 

Director, Education, Workforce, 

 and Income Se

Page 4 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

Page 5 GAO-09-825 

Appendix I: Briefing Slides 

1

Federal Student Aid Formula:

Cost-of-Living Adjustment Could Increase Aid 

to a Small Percentage of Students in HighCost Areas but Could Also Further Complicate 

Aid Process

Briefings to Congressional Staff

July 6 & 7, 2009

 Federal Student Aid Formula 
Appendix I: Briefing Slides 

2

Overview

• Introduction

• Research Objectives

• Scope and Methodology

• Summary of Findings

• Background

• Findings

Page 6 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

3

Federal Aid Formula Estimates a Family’s Financial 

Need but May Not Account for Geographic Cost-ofLiving Differences

• In FY 2008, an estimated $96 billion in federal financial aid was 

distributed to almost 11 million students for postsecondary education, including $14.6 billion in Pell Grants to low- and middleincome students who need help to pay for college.

• The federal formula used to determine how much financial 

assistance a family needs to pay for college is based on a variety of 

financial factors. Some observers have questioned whether the 

formula appropriately accounts for geographic cost-of-living 

differences—that is, the amount of money needed to buy a set of 

goods and services for a given standard of living.

• Some federal programs factor in geographic differences in cost-ofliving, such as Medicare payments to physicians and basic housing 

allowances for military personnel.

Introduction

Page 7 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

4

Research Objectives

1. How does the current federal financial aid formula affect 

students in different geographic areas?

2. What options exist for modifying this formula to reflect 

geographic cost-of-living differences?

3. How would adding a cost-of-living adjustment (COLA) to the 

formula affect the federal financial aid system, including the 

distribution of Pell Grants?

Page 8 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

5

Scope and Methodology

• To address our objectives, we:

• reviewed relevant federal laws, regulations, and program 

guidance;

• reviewed relevant literature and interviewed experts to identify

possible geographic COLAs that could be applied to the federal 

aid formula and applied three COLAs* to a sample of financial aid 

applications from the 2007-2008 school year to determine their 

impact on students’ expected family contributions, the distribution 

of Pell Grants, and the Pell Grant budget; and

• interviewed Education officials; economists and higher education

experts; representatives from 7 higher education associations; and 

financial aid officials from 19 schools. We selected these schools 

to represent a balance of 2-year and 4-year public, not-for-profit, 

and proprietary institutions in both urban and rural locations.

*We reviewed other potential adjusters but determined they were not appropriate for our purposes. See appendix II for more information.

Page 9 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

6

A Cost-of-Living Adjustment Could Increase Aid to a 

Small Percentage of Students in High-Cost Areas but 

Could Add Some Complexity to Aid Process

• The federal aid formula accounts for a small degree of geographic 

cost-of-living differences, but it is unclear how geographic cost-ofliving differences not accounted for in the formula affect a family’s 

ability to pay for college. 

• While no official measure of overall geographic cost-of-living 

differences exists, we have identified 3 possible COLA options that 

could be used in the aid formula. These COLAs have varying 

geographic scopes, impacts, strengths, and limitations.

• The COLAs we identified could increase Pell Grants and other aid

to a small percentage of students from high-cost areas, but could 

also further complicate the calculation and administration of aid.

Summary of Findings

Page 10 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

7

Students Are Eligible for Federal Need Based Aid if 

the Cost of Attending a School Is More Than a 

Family’s Expected Contribution (EFC)

• EFC is a rough approximation of the financial resources a family

has available to help pay for a student’s postsecondary education 

expenses.

• If a school costs $10,000 to attend and a student has an expected family contribution of $4,000, the student is eligible for up to $6,000 

of aid.*

Background: Federal Aid Formula

Determining a Student’s Financial Need

*This example applies to financial aid for which a student must demonstrate financial need according to the federal student aid formula, 

including certain grants and certain loans that are subsidized by the federal government while the student is in school.

Page 11 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

8

Expected Family Contribution Varies by 

Family Size and Composition

• Students are classified as either financially dependent on their

parents or independent in the financial aid process.

• EFC for dependent students is based on both the student’s 

and the parents’ income and assets.

• EFC for independent students is based on the student’s (and if 

married, spouse’s) income and assets.*

• EFC formula varies based on factors such as:

• family size 

• whether the family has other members in college

• whether an independent student has children or other dependents (other than a spouse)

Background: Expected Family Contribution

*An independent student is generally one of the following: at least 24 years old, is married, is a graduate student, has a legal dependent other 

than a spouse, is a veteran or in active military service, or is an orphan or ward of the court (or was a ward of the court until age 18). 

Page 12 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

9

Expected Family Contribution Accounts for 

Certain Allowances and Expenses

Income and Assets

• Salary

• Savings

• Investments

• Net worth of 

business/farm

Allowances and Expenses

• Federal income tax paid

• State and other tax allowances

• Employment expense allowance

• Income protection allowance (to protect the income needed to pay for a family’s 

basic living expenses)

• To estimate the expected family contribution:

• a family reports its income and assets

• certain allowances and expenses are then subtracted to account 

for income the family needs for other purposes, such as taxes, 

food, and housing.

• a certain percentage of the remaining available income is the 

amount that the family is expected to contribute to college 

expenses.*

Background: Expected Family Contribution

*The percentage varies based on income level.

Page 13 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

10

Federal Formula Is Used to Determine 

Eligibility for Several Aid Programs

• Pell Grants: For low- and middle-income undergraduates who have financial need.* The maximum allowable Pell Grant is $5,350 for the 2009-

2010 school year.

• Stafford Loans: For undergraduate and graduate students and subject to 

maximum loan limits.

• Subsidized: Students with financial need are eligible and the federal government pays the interest while student is in school. 

• Unsubsidized: Students do not have to have financial need, but are 

responsible for paying all interest costs.

• PLUS Loans: For graduate students and parents of dependent 

undergraduates.

• Campus-Based Aid: Participating schools receive separate funds for 3 

programs for students with financial need: Perkins Loans, Supplemental 

Educational Opportunity Grants, and the Federal Work Study Program.

Background: Federal Aid Programs

*Students in certain post-baccalaureate teacher preparation programs may also qualify for a Pell Grant.

Page 14 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

11

Many Schools Use Federal Formula to 

Distribute Institutional Aid

• Students can receive aid from nonfederal sources, including 

state grants and institutional aid from schools.

• Schools must use the federal aid formula to award federal 

aid, but many also use the federal formula to award 

institutional aid. 

• Some schools use alternative formulas to distribute 

institutional aid.

• The College Board offers an alternative formula, which 

includes an optional geographic cost-of-living adjustment.

Background: Other Financial Aid

Page 15 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

12

Students Received Over $100 Billion in 

Federal and Other Aid in 2007-2008

Estimated Percentage of Undergraduates 

Receiving Selected Types of Aid, 2007-2008**

Background: Student Aid Award Totals

Source: 2007-08 National Postsecondary Student Aid Study.

2007-2008 Selected Federal Aid Programs*

•Pell Grants: $14.6 billion

•Stafford and PLUS

Loans: $74.7 billion

•Campus-Based 

Programs: $3.3 billion

Source: 2008 Annual Report for Federal Student Aid, U.S. Department of Education.

2007-2008 Nonfederal Aid Programs

•Institutional Grants: $22.8 billion

•State Grants: $7.8 billion

•Other Grants: $7.5 billion

Source: Multiple data sources collected by the College Board, Trends in Student 

Aid, 2008.

*Federal law also provides several postsecondary tax credits and tax deductions to help families pay for college.

**Students included in the “any aid” and “any federal aid” columns may be receiving federal aid from more than one source. 

Page 16 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

13

It is Unclear How Geographic Cost-of-Living Differences That Are 

Not Accounted for in the Current Federal Aid Formula Affect 

Families’ Ability to Pay for College

• The federal financial aid formula accounts for a small degree 

of geographic cost-of-living differences.

• Differences in cost-of-living could affect available financial 

resources.

• Financial aid representatives had mixed views on the need 

for a cost-of-living adjustment.

Finding 1: Current Formula--Overview

Page 17 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

14

The Federal Aid Formula Accounts for a Small 

Degree of Geographic Differences in Costs

• State and Other Tax Allowance in the formula accounts for 

geographic differences in state and other tax liabilities.

• This allowance is set at a specific rate for each state and generally ranges from 1 to 9 percent of total income.*

• Cost of Attendance is calculated by each institution using 

elements set forth in federal law and includes room and board; it 

can therefore reflect geographic differences in students’ living

expenses.

• Students attending schools with a high cost of attendance may be eligible for additional financial aid.

• Federal aid formula does not adjust for general cost-of-living 

differences when estimating families’ available resources to pay for 

school.

Finding 1: Current Formula

*GAO has identified limitations with how the tax allowance is calculated. See GAO, Student Financial Aid: Need Determination Could Be 

Enhanced through Improvements in Education's Estimate of Applicants' State Tax Payments, GAO-05-105, (Washington, D.C.: January 21, 

2005).

Page 18 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

15

Geographic Cost-of-Living Differences May Exist, but 

It Is Unclear How Much They Vary

• It is generally accepted that there are variations in the 

cost of living in different geographic areas. Some 

locations are more expensive to live in than others.

• However, it is difficult to separate cost-of-living from other factors like local income, housing quality, and local amenities that also drive up 

prices.

• It is unclear how much the total cost of living varies 

across the country, but studies have found significant 

variations in housing costs.

• For example, median rent for a standard two bedroom apartment in San Francisco, CA is 2.5 times as expensive as in Cheyenne, WY ($1,679 vs. $671 per month), according to data from the Department of Housing and Urban Development (HUD).

Finding 1: Current Formula

Page 19 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

16

Differences in Cost of Living Could Affect 

Available Financial Resources

• Cost-of-living differences could 

impact families’ available 

financial resources to pay for 

higher education.

• Similarly situated students with 

permanent addresses in San 

Francisco, CA and Cheyenne, 

WY would receive the same Pell 

Grant award despite potential 

differences in the cost of living.

$2,360 $2,360

Estimated Pell Grant 

2007-2008 school year, family 

of four, one child in college

San Francisco

CA

Example of the Impact of Cost-of-Living 

Differences on Available Resources

$14,852 $26,948

Available resources 

for other expenses 

including education

-$20,148 -$8,052

Annual rent cost

based on HUD’s median 

rent data for standard two 

bedroom apartment

Total family income $35,000 $35,000

after taxes

Cheyenne

WY

Finding 1: Current Formula

Page 20 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

17

Traditional Criticisms of Cost-of-Living Differences 

Are Not Generally Applicable to the Financial Aid 

Population 

Job location and family ties can make it 

costly for some people, particularly lowincome families, to move out of a high-cost 

area.*

High-cost areas are more expensive 

because they may have more amenities 

than low-cost areas, such as:

•proximity to recreational activities 

and entertainment

•larger houses

The federal aid formula already accounts for 

income but not cost of living.

Differences in cost of living are offset by 

income differences. For example, salaries 

are generally higher in high-cost areas.

Criticism Counterargument

Finding 1: Current Formula

*Citro, Constance F., and Robert T. Michael (eds.), Measuring Poverty: A New Approach. Washington, DC: National Academy Press, 1995.

Page 21 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

18

Financial Aid Officials and Higher Education 

Experts Had Mixed Views on Need for a COLA

• Several officials believe the current formula disadvantages 

families in high-cost areas because they have fewer available 

financial resources than the formula suggests. 

• Other officials and experts were concerned that adding a COLA 

might not improve the formula or might shift the focus of 

financial aid away from low-income families.

• However, most other officials and experts did not have strong 

opinions, noting that a COLA might improve the formula 

depending on how it was implemented. 

Finding 1: Current Formula

Page 22 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

19

Several Options Exist for Adjusting for Cost-of-Living 

Differences, but They Vary in Scope, Impact, 

Strengths, and Limitations

• Measuring cost-of-living differences is difficult.

• We identified three potential cost-of-living adjustments with 

different scopes and impacts on aid eligibility.

• Different strategies for implementing a COLA have 

implications for students from low-cost areas and for Pell 

spending.

Finding 2: COLA Options- Overview 

Page 23 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

20

Measuring Cost-of-Living Differences Is 

Difficult

• There are no official federal measures of overall geographic cost-ofliving differences*

• Existing measures track changes in prices over time rather than differences in prices across the country.

• A 1995 GAO report identified 12 methodologies that, in some part, 

could contribute to the development of a cost-of-living index, but 

identified problems with each methodology.**

• Common problems associated with measuring cost-of-living 

differences are:

• Challenges developing a common market basket of goods 

• Difficulties accounting for area characteristics

• Data limitations

• Difficulties defining an appropriate geographic area

• Cost of living can vary among and within regions, cities, and counties.

Finding 2: COLA Options 

*Federal programs that currently adjust for cost-of-living differences use measures focusing on special populations (e.g., military 

personnel) or specific costs (e.g., medical practice costs).

**GAO, Poverty Measurement: Adjusting for Geographic Cost-of-Living Difference, GAO/GGD-95-64, (Washington, D.C.: March 9, 1995).

Page 24 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

21

We Identified Three Potential Cost-of-Living 

Adjustment Options with Different Scopes and 

Impacts on Aid Eligibility

Cost-of-Living Adjustment Options

Developed by the College 

Board and currently used by 

a number of colleges to 

calculate institutional aid 

Preliminary methodology 

developed by the Bureau of 

Economic Analysis

Developed by GAO based 

on proposals by the National 

Academy of Sciences and 

the University of California

Design

Average annual expenditures 

on housing (owned and 

rented) and utilities

Prices for a broad basket of 

211 consumer goods ranging 

from housing (owned and 

rented) to haircuts

Median rental costs for 

standard two-bedroom 

apartments

Unit of 

measure

All 363 metropolitan areas 28 major metropolitan areas and aggregate amounts for 

each state’s non-metro areas

Scope Every county in the U.S.

Consumer Expenditure 

Survey

Multiple data sources 

including the Consumer 

Price Index and American 

Community Survey

Department of Housing and 

Urban Development data

Source

Home Rental Cost Regional Price Parities Housing Expenditure

Finding 2: COLA Options 

Note: Additional information about the data sources for these COLAs can be found in appendix II.

Page 25 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

22

Potential Cost-of-Living Adjustment Options 

Have Various Strengths and Limitations

Cost-of-Living Adjustment Options

Home Rental Cost Regional Price Parities Housing Expenditure

•Only available for a 

small number of 

metropolitan areas

•Only measures housing 

costs

•Cannot be used to 

reduce aid in low-cost 

areas

•Experimental 

methodology has not 

been fully vetted

•Provides same values 

for all non-metro areas 

within a state

•Only captures recent 

movers rather than the 

entire rental housing 

stock

•Only measures rental 

housing costs

Limitations

•Currently used by some 

colleges to adjust for 

cost-of-living differences 

in the College Board’s 

institutional aid formula

•Accounts for more than 

just differences in 

housing costs 

•Available for every 

county in the U.S. 

•Widely used to 

calculate housing 

expenses

Strengths

Finding 2: COLA Options 

Page 26 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

23

COLA Could Be Based on Students’ Permanent 

Residence

• Students’ ZIP codes could be matched to the COLA 

for their county of permanent residence

• Dependent students would use ZIP codes where their parents live

• Independent students would use the ZIP codes of their permanent 

address

Impact of COLA on Aid Eligibility Based on Students’ Permanent Residence

High cost-of-living county Decreases or no change Increases or no change

Low cost-of-living county Increases or no change Decreases or no change

Pell Grant Award

Expected Family 

Permanent Residence Contribution (EFC)

Finding 2: Implementing a COLA

Page 27 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

24

Implementing a COLA for Independent Students 

Would Likely Not Be a Significant Problem

• According to aid officials, independent students generally change their permanent residence when moving to a new location; however, the aid formula would use the location 

reported on the federal aid application.

• If an independent student moved from Wyoming to California, the COLA for the first year would be based on the Wyoming address. 

• The COLA for subsequent years, however, would be based on the new California address.

• Financial aid officials generally did not view this as a significant obstacle to implementing a COLA because:

• Officials told us that relatively few independent students move to attend school.*

• Aid officials can use professional judgment to adjust a student’s EFC based on special circumstances.

• Some students will benefit from a COLA in their first year if they move from a high-cost area to a low-cost area.

Finding 2: Implementing a COLA

*Data from the 2007-2008 National Postsecondary Student Aid Study suggest that few independent students move to attend school. For 

example, only 10.5 percent attended an out-of-state institution.

Page 28 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

25

Different Strategies for Implementing a COLA Have 

Implications for Students From Low-Cost Areas and 

for Pell Spending

• A COLA could be implemented using three different 

strategies:

• Hold harmless: COLA is only used in high-cost areas where it will 

increase student aid. Students from low-cost areas are held harmless 

from adjustments. This option would increase Pell spending. 

• Across the board: COLA is used to increase aid for students in highcost areas and decrease aid for students in low-cost areas. For Pell 

spending, increases in aid are offset by reductions in aid.

• Phased in: Current aid recipients are held harmless from any 

reductions while the COLA is applied across the board to new 

applicants.* This approach would increase Pell spending in the short 

term, but the long-term costs would be lower. 

Finding 2: Implementing a COLA

*Education officials said it would be administratively challenging to operate different aid formulas for current recipients and new applicants.

Page 29 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

26

Each COLA Would Increase Pell Grants and Other Aid 

for a Small Percentage of Students from High-Cost 

Areas but Could Also Complicate Aid Process

• Each COLA would increase aid to applicants in a small 

number of counties in high-cost areas.

• COLAs would not greatly increase overall Pell spending 

because many Pell recipients already receive the maximum 

Pell Grant or do not live in a high-cost area.

• Pell recipients with relatively higher incomes could receive 

the greatest benefit from adding a COLA.

• Adding a COLA could be inconsistent with other efforts to 

simplify the financial aid process.

Finding 3: COLA Impact—Overview

Page 30 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

27

Each COLA Would Increase Aid to Applicants in a 

Small Number of Counties in High-Cost Areas

Regional Price Parities 206 109 million 2,905 164 million

Housing Expenditure 208 106 million N/A* N/A*

2,861

Number of 

Low-Cost 

Counties

163 million

Population in 

Low-Cost 

Counties

263

Number of 

High-Cost 

Counties

111 million

Population in 

High-Cost 

Counties

Home Rental Cost

COLA

Number of Counties and Population in High-Cost Areas for Each COLA

• All three COLAs largely identify similar metropolitan counties 

as high-cost areas.

• Each COLA would increase aid to some students who come 

from a small number of densely populated counties.

Finding 3: COLA Impact on Counties

Source: GAO analysis of Census, HUD 50th Percentile Rent Data, College Board Data, and Bureau of Economic Analysis data and 

Census estimates for county populations in 2000.

*The Housing Expenditure COLA only identifies high-cost counties.

Page 31 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

28

COLAs Could Increase Aid to Students from 

California, the Northeast, and a Few Other Areas 

Around the Country

Finding 3: COLA Impact on Counties

Counties Where Students’ Aid Could Increase or Decrease with Home Rental Cost COLA*

*Blank counties are neither high cost nor low cost. Low-cost counties would not lose aid if COLA were implemented “hold harmless.” 

Other COLAs affect similar areas (see appendix III). 

Source: GAO analysis of HUD 50th Percentile Rent data.

aVery high-cost areas are more than 15 percent more expensive than the median.

Page 32 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

29

Many Students Have No Expected Family Contribution 

under the Current Formula and Would Not Benefit 

From a COLA

Estimated Percentages and Total Number of Students with No 

Expected Family Contribution for 2007-2008 School Year

Finding 3: COLA Impact on Students

aStudents in this group have low incomes and assets and an expected family contribution of zero, which means that a COLA cannot 

reduce the EFC any further. Graduate students are included and are generally not eligible for Pell Grants.

Source: GAO analysis of Department of Education data.

Page 33 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

30

About 17 Percent of Federal Financial Aid Applicants 

Could Receive More Aid because They Are From High-Cost 

Areas

• The COLAs would lower the expected family contribution for 

students who are from high-cost areas and for whom the federal aid 

formula indicates an expected contribution.*

• For these students, a lower expected family contribution might 

result in increased Pell Grants, Stafford Loans, or increased 

institutional aid if their college uses the federal formula.

• For example, a student with a reduced expected family contribution 

might be eligible for additional amounts of subsidized and/or 

unsubsidized Stafford loans, unless

• the student has already borrowed the maximum allowed

• the student is offered sufficient additional aid from other 

sources to reduce his/her eligibility for a Stafford loan.

Finding 3: COLA Impact on Aid

*For students with no expected family contribution, the COLA could not reduce the expected family contribution any further and the 

student would not be eligible for any additional aid.

Page 34 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

31

• The Home Rental Cost or Regional Price Parities COLAs would 

increase the expected family contributions and potentially decrease 

aid for students who are from low-cost areas—if implemented 

“across the board.”

• For these students, a higher expected family contribution could 

possibly result in decreased Pell Grants, Stafford Loans, or 

decreased institutional aid if their college uses the federal formula.

• However, if the COLAs were implemented with a “hold harmless” 

provision, then these students would see no change in their aid.

Finding 3: COLA Impact on Aid

About 37 Percent of Federal Financial Aid Applicants 

Could Receive Less Aid because They Are from Low-Cost 

Areas

Page 35 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

32

COLAs Would Not Greatly Increase Pell Spending because 

Many Pell Recipients Already Receive the Maximum Pell Grant 

or Do Not Live in a High-Cost Area

Estimated Pell Spending under Different COLA Scenarios, 2007-2008 Grant Year 

(in millions of dollars)

N/A*

$14,289

$14,465

$14,685

Pell Spending

(across the board)

Housing Expenditure $14,797

Regional Price Parities $14,928

Home Rental Cost $14,844

No COLA $14,685

Pell Spending 

(hold harmless)

COLA Option

Finding 3: COLA Impact on Pell Spending

Source: GAO analysis of Department of Education data, Bureau of Economic Analysis data, HUD 50th Percentile Rent data and College 

Board data.

• The Home Rental Cost and Regional Price Parities COLAs would 

reduce overall Pell expenditures (if implemented across the board) 

because more students would see a reduction in aid than an increase.

*

Housing Expenditure COLA is only calculated for a small percentage of U.S. counties and can not be implemented across the board.

Page 36 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

33

The Proposed COLAs Would Increase Pell 

Grants for About 10 Percent of Pell Recipients

Estimated Percentages and Total Number of Pell Recipients with Changes in Their 

Pell Grants for Each COLAs*

Finding 3: COLA Impact on Pell Grants

aThe percentage of students with increased grants in each figure includes about 1 to 2 percent of students newly eligible for a Pell Grant.

Source: GAO analysis of Department of Education data, Bureau of Economic Analysis data, HUD 50th Percentile Rent data and College Board 

data. 

Notes: Figures reflect across-the-board COLA implementation. Students would see no decrease in aid if the COLA were implemented as hold 

harmless instead of across the board. Students with no change in Pell Grant already receive the maximum grant, do not live in a high-cost or 

low-cost area, or live in a United States territory.

*See appendix IV for additional information.

Page 37 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

34

Pell Recipients with Relatively Higher Incomes 

Could Receive the Largest Grant Increases

• Lower income students already receive the maximum—or nearly the 

maximum—Pell Grant and would receive either no grant increase or only a 

small increase.

• A family in San Francisco earning $31,000 would see their Pell Grant 

increase slightly from $4,160 to $4,310 with any COLA.

• Students from high-cost areas with relatively higher incomes would receive 

large Pell grant increases.

• A family in San Francisco earning $51,000 could see their Pell grant 

increase from $860 to $3,060 with the Home Rental Cost COLA. 

• This $2,200 increase is more than 6 times the average increase of 

$318 (for those with an increase) with the Home Rental Cost COLA.

Finding 3: COLA Impact on Pell Grants

Page 38 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

35

Finding 3: COLA Impact on Pell Grants

Estimated Change in Pell Grant for Family of Four with One Child and One 

Other Dependent in College with Home Rental Cost COLA (Implemented 

Across the Board) 

+$1500

+$1500

+$150

Boston, MA

$0a $51,000 +$2200

$41,000 +$1850 -$600

$31,000 +$150 -$500

Family Income San Francisco, CA Cheyenne, WY

• Other COLAs show similar trends, although on average for students with 

expected increases in grants:

• Pell increases are greater with the Regional Price Parities COLA

• Pell increases are lower with the Housing Expenditure COLA.*

aStudent would be ineligible for Pell Grant with or without a COLA.

Source: GAO analysis of Federal Needs Analysis formula, HUD 50th Percentile Rent data

Pell Recipients with Relatively Higher Incomes Could 

Receive the Largest Grant Increases (continued)

*

See appendix V for additional examples.

Page 39 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

36

COLA Could Be Inconsistent with Broader 

Federal Efforts to Simplify the Aid Process

• Many financial aid professionals and economists recommend 

that the current aid formula and overall application process 

be simplified. Education has also published a proposal to 

simplify the aid formula and application.*

• Several aid officials and experts were concerned that a 

COLA would complicate the aid formula and process.

• Formula would be more difficult to explain to families.

• Formula would be more complex for aid professionals to administer.

• Guidance on how to deal with address changes and verification of

addresses would be needed.

• Any COLA would also have to be updated on a regular basis.

Finding 3: COLA Impact on Aid System

*In addition, GAO recently convened a study group, as mandated by the Higher Education Opportunity Act, to examine options and 

implications in simplifying the financial aid process, with a report on the group’s results expected in October 2009.

Page 40 GAO-09-825 Federal Student Aid Formula
Appendix I: Briefing Slides 

37

Some Officials Thought Other Problems with Formula 

Should Be Addressed before Adding a COLA

• Several financial aid officials and experts described the federal 

formula as imperfect and not an accurate measure of a family’s 

ability to pay for college expenses.

• Several aid officials commented either that 

• a COLA should be considered as part of a more comprehensive review of the formula or 

• improving other sections of the formula should be a higher priority.

• Some noted that increasing the income protection allowance in the 

expected family contribution formula for all families would improve 

the formula more than adding a COLA to this allowance.

• Several officials and experts described the income protection allowance as unrealistic because it is based on old data that have 

been updated for inflation, but do not reflect changes in family

spending patterns.

Finding 3: COLA Impact on Formula

Page 41 GAO-09-825 Federal Student Aid Formula
Appendix II: Scope and Methodology Appendix II: Scope and Methodology 

To address our objectives, we reviewed relevant federal laws, regulations, 

and guidance; identified three potential cost-of-living adjustments (COLA); 

and analyzed Education’s sample file of 2007-2008 financial aid applicants 

to estimate the impact of potential COLAs. Our analyses focused mainly on 

the impact of COLAs on Pell Grants because they are Education’s primary 

need-based grants. We also interviewed financial aid experts and 

economists. 

We conducted our work from December 2008 to August 2009 in 

accordance with all sections of GAO’s Quality Assurance Framework that 

are relevant to our objectives. The framework requires that we plan and 

perform the engagement to obtain sufficient and appropriate evidence to 

meet our stated objectives and to discuss any limitations in our work. We 

believe that the information and data obtained, and the analysis 

conducted, provide a reasonable basis for any findings. 

To research possible COLAs that could be applied to the federal student 

aid formula, we reviewed relevant literature and interviewed several 

financial aid experts and economists.1

 We found a limited number of 

available options that could be used in the student aid formula. For 

example, we considered the Basic Allowance for Housing that the 

Department of Defense uses, but we determined that this COLA was not 

appropriate for the financial aid formula because it adjusts for different 

income levels in addition to cost-of-living differences. We ultimately 

identified three possible COLA options—Home Rental Cost, Regional 

Price Parities, and Housing Expenditure COLAs—that could be used to 

adjust the federal aid formula for geographic cost-of-living differences. 

These three COLAs were the best options we identified during our 

research, although it is possible that other options could be developed. 

Below is a description of how we implemented these three COLAs, but we 

recognize that they could be implemented in alternative ways. 

COLA Options 

 

1

For example, see GAO, Poverty Measurement: Adjusting for Geographic Cost-of-Living 

Difference, GAO/GGD-95-64 (Washington, D.C.: Mar. 9, 1995); Constance F. Citro and 

Robert T. Michaels, Measuring Poverty: A New Approach (Washington, D.C.: National 

Academy Press, 1995); and Dean Jolliffe, How Sensitive Is the Geographic Distribution of 

Poverty to Cost of Living Differences? An Analysis of the Fair Market Rents Index, a 

report for the Economic Research Service, U.S. Department of Agriculture (Washington, 

D.C.: June 8, 2004).

Page 42 GAO-09-825 Federal Student Aid Formula
Appendix II: Scope and Methodology 

We standardized our COLAs on a county level, which allowed us to 

compare the effects of different COLAs and to simulate the effect of 

adding a COLA. However, each of these COLAs was originally calculated 

based on geographic areas of varying sizes, most often Metropolitan 

Statistical Areas, which often encompass multiple counties. For each 

county, we assigned the COLA that applied to the area in which the county 

is located. We did not include U.S. territories in any COLA because they 

were only available for the Home Rental Cost COLA. 

Home Rental Cost COLA The Home Rental Cost COLA was generated by GAO using data from the 

Department of Housing and Urban Development’s (HUD) 50th Percentile 

Rent database. HUD estimates 50th Percentile Rents annually for different 

areas in the United States.2

 These 50th Percentile Rents are the estimated 

median price of a two-bedroom apartment in different areas across the 

United States.3

 HUD calculates the 50th Percentile Rent by using the 

decennial Census to provide base-year information on rents. It then 

updates this baseline number each year using random-digit-dialing 

telephone surveys, consumer price index information in areas where 

available, and the American Community Surveys. HUD publishes 50th 

percentile rent estimates for all U.S. counties or county subareas.4

 HUD 

50th Percentile Rent areas are often Metropolitan Statistical Areas. 

GAO used the following process to convert HUD 50th Percentile Rent data 

to a COLA. First, a housing cost index was created from the 50th 

 

2

HUD estimates the 50th Percentile Rent from the same dataset they use to develop Fair 

Market Rents. Fair Market Rents are primarily used to determine standard payment 

amounts for the Housing Choice Voucher program. The Fair Market Rent covers the same 

530 metropolitan areas and 2,045 nonmetropolitan county areas as the 50th Percentile 

Rent. 

3

We used the two-bedroom rent because HUD generates the two-bedroom rent first and 

then adjusts it to apply to housing units of other sizes. Therefore, if other apartment sizes 

such as three bedrooms were used, the end result would be a very similar index. 

4

We used 2006 Census definitions of counties and county equivalents as the unit of analysis 

for the Home Rental Cost COLA, as well as the other two COLAs. However, a few situations 

where HUD 50th Percentile Rent Areas did not match the Census file were treated as 

follows: (1) HUD provides a 50th Percentile Rent for Columbia City, Md., and Sullivan City, 

Mo. Neither of these areas is a Census county or county equivalent, so we dropped them 

from the dataset and used the 50th Percentile Rent for the county in which these areas are 

located; and (2) HUD provides a 50th Percentile Rent for Clifton Forge City, Va., which is 

not a Census county or county equivalent. However, its 50th Percentile Rent is the same as 

Alleghany County, Va., in which the city is located, so dropping Clifton Forge City did not 

change the Home Rental Cost COLA. 

Page 43 GAO-09-825 Federal Student Aid Formula
Appendix II: Scope and Methodology 

Percentile Rent data using the median cost of a two-bedroom rental unit. A 

weighted national average rental amount was computed based on the 

county population estimates from the 2000 Census. Then, the local area’s 

average rental amount was divided by the national average to create the 

housing cost index.5

 We used a 3-year average of HUD 50th Percentile 

Rent data (2005 through 2007) to create the housing cost index. Using the 

3-year average helps mitigate the fact that 50th Percentile Rent data reflec

data only on people who have moved in the last 15 months, which can 

result in significant year-to-year fluctuations in some areas because such 

data only consider the rental market at t

t 

hat time. 

 

To account for the fact that the 50th Percentile Rent data only captured 

housing costs, we weighted the COLA so that it applied only to the housing 

portion of the income protection allowance. The Home Rental Cost COLA 

is calculated as a sum of 42 percent of our housing cost index and a 

constant of 58 percent. The 42 percent weight reflects housing as a 

component of overall consumption.6

 The 58 percent is the remaining 

weight that is applied for the other nonhousing components of 

consumption since this COLA only captures housing costs.7

Regional Price Parities 

COLA 

The experimental Regional Price Parities COLA was developed by the 

Bureau of Economic Analysis (BEA) and provides estimated differences in 

the cost of living for a broad market basket of goods, including housing, 

transportation and food. BEA analyzed data from several data sources, 

including the Consumer Price Index, the Census, and the American 

Community Survey, to estimate a COLA for 363 Metropolitan Statistical 

Areas and another COLA for each state that is applied to all counties in the 

5

All GAO analysis is at the county level. However, HUD divides some counties, mostly in 

New England, into component areas. In these cases, each county’s rent was first computed 

by generating a population-weighted average rent for each county, based on its 

components, by each year. 

6

Research done by the Bureau of Labor Statistics researchers and others estimates that 

housing costs are about 42 percent of the cost of living within the “market basket of 

goods.” See Bettina H. Aten, Report on Interarea Price Levels, WP2005-11 (Washington, 

D.C.: U.S. Bureau of Economic Analysis, Nov. 30, 2005). 

7

For example, if the housing index were 2.00, the Home Rental Cost COLA would be 

calculated as 2.00 times .42 (the housing weight) added to .58 (the remaining, unadjusted 

part of the COLA), which would give a COLA of 1.42. 

Page 44 GAO-09-825 Federal Student Aid Formula
Appendix II: Scope and Methodology 

state that are not part of a Metropolitan Statistical Area.8 We used the 

Regional Price Parities COLAs for the counties in the Metropolitan 

Statistical Areas (which include over 1,000 counties of the 3,141 U.S. 

counties and county equivalents in the U.S.) and a state level COLA for all 

the nonmetropolitan counties in a state.9

 Because the other two COLAs 

included multiyear averages, we averaged the Regional Price Parities from 

2005 and 2006—the most recent 2 years for which the Regional Price 

Parities have been computed. Unlike the Home Rental Cost COLA, the 

Regional Price Parities can be applied directly to the income protection 

allowance because it represents a broad market basket of goods. 

Housing Expenditure 

COLA 

The Housing Expenditure COLA was developed by the College Board for 

schools that use the College Board’s Institutional Methodology to award 

institutional student aid. According to College Board officials, about 270 

schools use the Institutional Methodology and have the option to use the 

Housing Expenditure-based COLA to adjust aid levels for geographic 

differences in the cost of living. The COLA reflects a 3-year average of the 

differences in housing expenditures (for all renters and homeowners) 

collected by the Bureau of Labor Statistics for 28 Metropolitan Statistical 

Areas using the Consumer Expenditure Survey. Similar to GAO’s treatment 

of the Home Rental Cost COLA, the College Board weights the Housing 

Expenditure COLA to only reflect housing as one component of overall 

consumption. We used the COLAs provided directly by the College Board, 

which do not provide the option for downward adjustments to low-cost 

areas.10

 

8

Bettina H. Aten and Roger J. D’Souza, “Regional Price Parities: Comparing Price Level 

Differences Across Geographic Areas,” Survey of Current Business (Washington, D.C.: 

U.S. Bureau of Economic Analysis, November 2008). 

9

BEA continues to explore additional methods to estimate regional price parities for 

individual nonmetropolitan areas but has not published any specific measures. GAO used 

only Regional Price Parities that BEA has published. 

10Some of the counties in the 28 Metropolitan Statistical Areas may have a cost of living 

below the national average. However, over 2,000 counties have no assigned cost of living. 

Therefore, if the COLA were designed to be implemented across the board, it would only 

reduce aid for students in a few lower-cost cities, while holding students from the rest of 

the country harmless. 

Page 45 GAO-09-825 Federal Student Aid Formula
Appendix II: Scope and Methodology 

To estimate the impact of potential cost-of-living adjustments, we 

multiplied the COLA value for each county by the families’ income 

protection allowance (IPA) in the formula. We used the COLAs to adjust 

the parents’ IPA for dependent students and the students’ IPA for 

independent students. While the aid formula could be adjusted for regional 

variation in the cost of living in different ways, the law mandating this 

study specifically requested that GAO apply a COLA to the IPA.11 The IPA 

is an allowance, adjusted over time for inflation, that represents the 

income needed to pay for a family’s basic living expenses. The IPA varies 

by family size and the number of family members pursuing a higher 

education. When the IPA is increased, a family is expected to contribute 

less of their income to higher education expenses and the family’s 

expected family contribution could be reduced, which could result in an 

increase in federal student aid. The values of the COLAs we used range 

from 60 percent to 151 percent of the IPA’s original size. A COLA below 

100 percent would decrease the IPA and could lead to a higher expected 

family contribution and reduced aid. A COLA above 100 percent would 

increase the IPA and could lead to a lower expected family contribution 

and increased aid. 

Estimating the Impact 

of Potential Cost-ofLiving Adjustments 

To analyze the impact of the COLAs on students, we recalculated students’ 

expected family contributions and Pell Grants for specific example 

students and also simulated the total effects on a large sample of students. 

To determine the change in Pell Grants for our example students, we 

created a profile for a full-time, independent student and a profile for a 

full-time, dependent student from a family with two working parents and 

one other dependent. We used three different income levels for the two 

types of student profiles but held all other characteristics constant.12 We 

then entered the students’ characteristics in the federal aid formula, 

adjusting the families’ IPA for COLAs in different areas, to determine the 

example students’ adjusted expected family contributions and Pell Grants. 

 

11Pub. L. No. 110-315, § 1114. 

12We made the following assumptions: (1) The cost of attendance is higher than the 

maximum Pell Grant, which in turn maximizes a student’s potential Pell Grant; (2) the 

student or both the student and parents do not have sufficient assets to make a 

contribution from assets; and (3) because the federal aid formula has an allowance for 

federal taxes paid, we generated a tax estimate assuming the standard deduction (and a 

$1,000 child-tax credit for the dependent student’s family) but did not assume any 

contributions to retirement accounts or other tax deductions. 

Page 46 GAO-09-825 Federal Student Aid Formula
Appendix II: Scope and Methodology 

To determine the impact of geographic cost-of-living differences on the 

total cost of all Pell Grants, we ran a simulation on an Education-provided 

sample of federal financial aid applicants from the 2007-2008 school year. 

This sample file includes undergraduate and graduate students. Although 

most graduate students are not eligible for Pell Grants, they are eligible for 

other federal financial aid. Education collects the random sample of more 

than 500,000 student aid records to estimate the cost of Pell Grants. We 

modified Education’s Pell Grant cost-estimation model by applying the 

three COLAs to the families’ IPAs to estimate expected family 

contribution. We used students’ ZIP codes in the sample file to determine 

which county-level COLA would apply to each student.13 We then used the 

adjusted expected family contribution to determine the total estimated 

change in Pell Grants, as well as to generate summary statistics on the 

estimated number of families with a change in expected family 

contributions. We applied the COLAs using two methods to estimate the 

impact on Pell Grant spending: (1) applying the COLAs while holding 

students in low-cost areas harmless by keeping the original, unadjusted 

IPA for low-cost areas and (2) applying the COLAs across the board, 

where we reduced students’ IPAs in low-cost areas. 

We assessed the reliability of the datasets we used for our analyses and 

found them sufficiently reliable for our purposes. To assess the reliability 

of Education’s dataset and HUD 50th Percentile Rents, we interviewed 

agency officials knowledgeable about the data and reviewed relevant 

documentation. For Education’s dataset, we also conducted electronic 

testing to assess missing data and other potential problems. We 

determined that the data were sufficiently reliable for the purposes of this 

report. The BEA Regional Price Parities are an experimental methodology, 

but we interviewed relevant agency officials who provided a general 

overview of their methodology and concluded that the data used to 

generate the Regional Price Parities COLAs were sufficiently reliable for 

our purposes. Similarly, we spoke to College Board officials about the 

Housing Expenditure COLAs and determined that the data used to 

generate the COLAs were sufficiently reliable for our purposes. 

Our methodology and data have some limitations. In the simulation, we 

did not produce estimates for the impact of a COLA on the most recent 

federal aid formula, the 2008-2009 school year, because a sample file of 

 

13In the small percentage of cases where the ZIP code spanned more than one county, we 

assigned students a county. 

Page 47 GAO-09-825 Federal Student Aid Formula
Appendix II: Scope and Methodology 

those students is not yet available. Therefore, our analysis does not reflect 

changes in the federal formula or Pell Grant schedule, including increases 

in the IPA amounts for inflation and increases in the maximum Pell Grant, 

from $4,310 in 2007-2008 to $4,731 in 2008-2009. Additionally, Education 

officials have cautioned that the self-reported student ZIP codes may be 

unreliable if applicants report their school address instead of their 

permanent mailing address. However, we checked the reliability of the ZIP 

code data by comparing the state of the parents’ residence with the state 

associated with the ZIP code for all dependent students and found they 

matched in 95 percent of cases. 

We interviewed higher education experts and economists; representatives 

from seven higher education associations; and financial aid officials from 

19 postsecondary institutions that represented a mix of 2-year and 4-year 

public, not-for-profit, and proprietary schools in different geographic 

areas. 

Interviews 

We identified one expert mentioned in news articles on financial aid issues 

and we obtained recommendations from Education and other sources for 

additional individuals to contact. We then contacted those individuals and 

obtained further recommendations from them on additional individuals to 

contact. We also consulted with a panel of higher education experts and 

economists convened by GAO for a related study on simplifying the 

federal financial aid formula. 

We also interviewed officials from the following higher education 

associations: the American Association of Community Colleges, the 

American Association of State Colleges and Universities, the American 

Council on Education, the Career College Association, the National 

Association of Student Financial Aid Administrators, the National 

Association of Independent Colleges and Universities, and the Association 

of Public and Land-grant Universities (formerly the National Association 

of State Universities and Land-Grant Colleges). 

Page 48 GAO-09-825 Federal Student Aid Formula
Appendix III: Counties

See a Chan

CO

 Where Students Could

ge in Financial Aid under Different

LA Options 

Page 49 GAO-09-825 

Appendix III: Counties Where Students Could 

See a Change in Financial Aid under Different 

COLA Options 

Figure 1: Counties Where Students’ Aid Could Increase or Decrease with Regional Price Parities COLA 

Low-cost county (aid decreases)

High-cost county (aid increase)

Very high-cost county (greatest aid increase)

Cost of living in different U.S. counties

Source: GAO analysis of Bureau of Economic Analysis data.

Notes: Very high-cost counties are more than 15 percent more expensive than the median. Blank 

counties are neither high cost nor low cost. Low-cost counties would not lose aid if COLA were 

implemented “hold harmless.” 

 Federal Student Aid Formula 
Appendix III: Counties Where Students Could 

See a Change in Financial Aid under Different 

COLA Options 

Figure 2: Counties Where Students’ Aid Could Increase with Housing Expenditure COLA 

High-cost county (aid increase)

Very high-cost county (greatest aid increase)

Cost of living in different U.S. counties

Source: GAO analysis of College Board data.

Notes: Very high-cost counties are more than 15 percent more expensive than the median. Blank 

counties are unmeasured by the Housing Expenditure COLA. 

Page 50 GAO-09-825 Federal Student Aid Formula
ummary of Effects of Adding a 

deral Needs Analysis Formula

xpected Family Contribution Levels and 

ell Grant Awards

Page 51 GAO-09-825 

Appendix IV: S

COLA to the Fe

on E

P

Appendix IV: Summary of Effects of Adding a 

COLA to the Federal Needs Analysis Formula 

on Expected Family Contribution Levels and 

Pell Grant Awards 

Figure 3: Estimated Percentages and Total Number of Financial Aid Applicants and Potential Changes in Their Expected 

Family Contributions for Each COLA 

2.2

(18%)

4.4

(36%)

5.7

(47%)

2.1

(17%)

4.6

(38%)

5.6

(46%)

10

(82%)

2.3

(18%)

Home Rental Cost

(numbers in millions)

Regional Price Parities

(numbers in millions)

Housing Expenditure

(numbers in millions)

Sources: GAO analysis of 2007-2008 Department of Education data, Bureau of Economic Analysis data,

HUD 50th Percentile Rent data, and College Board data.

Decrease

Increase

No change

Notes: Figures reflect across-the-board COLA implementation. Students with a lower EFC could see 

an increase in aid and students with a higher EFC could see a decrease in aid. Students would see 

no decrease in aid if the COLA were implemented as hold harmless instead of across the board. 

Percents may not add to 100 due to rounding. 

 Federal Student Aid Formula 
Appendix IV: Summary of Effects of Adding a 

COLA to the Federal Needs Analysis Formula 

on Expected Family Contribution Levels and 

Pell Grant Awards 

Figure 4: Estimated Average Pell Grant Increase for Students Receiving a Pell 

Increase for Each COLA 

0

100

200

300

400

500

600

700

800

 Housing

Expenditure

Regional Price

 Parities

Home Rental

 Cost

Dollars

Sources: GAO analysis of federal needs analysis formula, 2007-2008 Department of Education data,

Bureau of Economic Analysis data, HUD 50th Percentile Rent data, and College Board data.

COLA option

318

486

202

Page 52 GAO-09-825 Federal Student Aid Formula
A

Students in 

Each C

ppendix V: Change in Pell Grant for Example 

High-Cost and Low-Cost Areas for 

OLA 

Page 53 GAO-09-825 

Appendix V: Change in Pell Grant for 

Example Students in High-Cost and Low-Cost 

Areas for Each COLA 

Table 1: Change in Pell Grants for Full-Time, Dependent Student from a Family of 

Four with Home Rental Cost COLA 

Family income San Francisco, CA Boston, MA Cheyenne, WY

$31,000 +$150 +$150 -$500

41,000 +1,850 +1,500 -600

51,000 +2,200 +1,500 0

Change in Pell Grants 

for a Dependent 

Student 

Source: GAO analysis of federal needs analysis formula and HUD 50th Percentile Rent data. 

Notes: Table shows across-the-board implementation. In a hold-harmless implementation, students in 

low-cost areas, such as Cheyenne, would not see a reduction in their grant. City indicates student’s 

permanent address. 

Table 2: Change in Pell Grants for Full-Time, Dependent Student from a Family of 

Four with Regional Price Parities COLA 

Family income San Francisco , CA Boston, MA Cheyenne, WY

$31,000 +$150 +$150 -$200

41,000 +1,850 +1,400 -300

51,000 +2,200 +1,400 0

Source: GAO analysis of federal needs analysis formula and Bureau of Economic Analysis data. 

Notes: Table shows across-the-board implementation. In a hold-harmless implementation, students in 

low-cost areas, such as Cheyenne, would not see a reduction in their grant. City indicates student’s 

permanent address. 

Table 3: Change in Pell Grants for Full-Time, Dependent Student from a Family of 

Four with Housing Expenditure COLA 

Family income San Francisco, CA Boston, MA Cheyenne, WY

$31,000 +$150 +$150 $0

41,000 +900 +300 0

51,000 +900 +300 0

Source: GAO analysis of federal needs analysis formula and College Board data. 

Note: City indicates student’s permanent address. 

 Federal Student Aid Formula 
Appendix V: Change in Pell Grant for Example 

Students in High-Cost and Low-Cost Areas for 

Each COLA 

Table 4: Change in Pell Grant for a Full-Time, Independent Student with No 

Dependents with Home Rental Cost COLA 

Family income San Francisco, CA Boston, MA Cheyenne, WY

$8,000 +$550 +$550 -$300

12,000 +1,300 +800 -300

16,000 +1,300 +900 -400

Change in Pell Grants 

for an Independent 

Student 

Source: GAO analysis of federal needs analysis formula and HUD 50th Percentile Rent data. 

Notes: Table shows across-the-board implementation. In a hold-harmless implementation, students in 

low-cost areas, such as Cheyenne, would not see a reduction in their grant. City indicates student’s 

permanent address. 

Table 5: Change in Pell Grant for a Full-Time, Independent Student with No 

Dependents with Regional Price Parities COLA 

Family income San Francisco, CA Boston, MA Cheyenne, WY

$8,000 +$550 +$550 -$200

12,000 +1,200 +800 -200

16,000 +1,200 +800 -400

Source: GAO analysis of federal needs analysis formula and Bureau of Economic Analysis data. 

Notes: Table shows across-the-board implementation. In a hold-harmless implementation, students in 

low-cost areas, such as a Cheyenne, would not see a reduction in their grant. City indicates student’s 

permanent address. 

Table 6: Change in Pell Grant for a Full-Time, Independent Student with No 

Dependents with Housing Expenditure COLA 

Family income San Francisco, CA Boston, MA Cheyenne, WY

$8,000 +$550 +$200 $0

12,000 +500 +100 0

16,000 +500 +100 0

Source: GAO analysis of federal needs analysis formula and College Board data. 

Note: City indicates student’s permanent address. 

Page 54 GAO-09-825 Federal Student Aid Formula
Appendix VI: 

A

GAO Contact and Staff 

cknowledgments 

Page 55 GAO-09-825 

Appendix VI: GAO Contact and Staff 

Acknowledgments 

George A. Scott, (202) 512-7215 or scottg@gao.gov

In addition to the contact named above, the following staff made key 

contributions to this report: Melissa Emrey-Arras, Assistant Director; 

Michelle St. Pierre, Analyst-in-Charge; William Colvin; Susannah Compton; 

Patrick Dudley; Jean McSween; Aron Szapiro; and Monique B.Williams. 

 Federal Student Aid Formula 

GAO Contact 

Staff 

Acknowledgments 

(130908) 
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