Most federal student financial aid programs are authorized under the Higher Education Act of 1965. Federal student financial assistance exceeded $30 billion in academic year 1993-94, and most assistance came from two programs—the Pell grant and Federal Family Education Loan (FFEL) programs. The Pell grant program, which primarily targets low-income students, accounted for about $5.7 billion, while the FFEL program comprised over $21 billion of the total federal aid. Maximum annual awards to students in each program are capped: In 1993-94, the maximum Pell grant was $2,300, and the maximum subsidized Stafford loan—the largest of the FFEL loan programs—ranged from $2,625 for freshmen to $5,500 for seniors. The Department of Education administers the Pell grant program in accordance with eligibility criteria and authorized maximum award amounts set by the Congress. In addition, the Congress effectively limits actual maximum Pell award amounts each year through the appropriations process. Actual maximum awards have been less than the authorized levels each year since 1980. For example, in 1993-94, the authorized maximum Pell grant was $3,700, but the appropriation for the program limited the actual maximum award to $2,300. The composition of student financial assistance has changed dramatically over the past two decades. Although total federal aid has increased since the late 1970s, loan aid has increased far faster than grant aid. From 1977 to 1980, grant aid exceeded loan aid, but since 1985 loan aid has exceeded grant aid by about twice as much (see fig. 1). Budgetary concerns and program changes have limited grant aid for low-income students. As the deficit rose during the 1980s, policymakers’ awareness of budgetary trade-offs and the need to leverage resources grew. Loans are a less expensive form of aid for federal budgetary purposes than grants because the budget accounts only for the cost of interest subsidies and default payments. Thus, for a given federal expenditure, the government can offer more aid if it is provided as loans.In addition, the 1978 Middle Income Student Assistance Act extended eligibility for Pell grants to higher income students; however, appropriations did not allow for commensurate increases in program dollars. Consequently, more students now receive Pell grants, but the actual maximum award has remained approximately constant in nominal dollars since 1986. Cost pressures for low-income families have increased since the late 1970s, as the average cost of 4-year colleges and universities has increased faster than the inflation rate. Between 1978 and 1992, the average tuition, room, and board charge at 4-year public colleges and universities rose by 26 percent in real terms. This had two distinct effects. First, college expenses at the average public university absorbed 11 percent of median family income in 1978 and 14 percent in 1992. For families at the 20th-income percentile, this charge increased even more, from 22 to 31 percent of income. Second, the actual maximum Pell grant, which covered over half the costs at the average public 4-year school in 1985, now covers less than 40 percent. Low-income students are underrepresented among college students. Low-income students enroll in college at lower rates than high-income students, although enrollment rates have been rising for all income groups (see fig. 2). We found no data on students’ degree completion by income group. However, minorities are overrepresented among low-income families, so their rates serve as a reasonable proxy for low-income students’ graduation rates. Sample data show that minority students are less likely to stay in school and graduate than white students. For example, in one sample of students entering 4-year colleges in 1983, 1984, or 1985, 56 percent of white students completed degrees within 6 years, but only 41 percent of Hispanic students and 32 percent of African American students did so. Policymakers have raised the possibility that reduced grant aid, relative to the soaring costs of a college education, have adversely affected graduation rates for students at the low end of the income scale. The composition of financial aid packages and the timing of particular aid components influence education outcomes. Our results indicated that, for low-income students, grant aid was effective in reducing dropouts, but loan aid was not. In addition, grant aid for low-income students was most effective in the first year, with efficacy decreasing in the second and third years. The results of the university frontloading program strengthened our confidence in this finding. Students who received frontloaded grants had a lower dropout probability than other comparable students. Results of our statistical work showed the following. Grants versus loans: Grants significantly reduced dropout probabilities for low-income students. In the High School and Beyond database sample, an additional $1,000 in grant aid for a low-income student reduced the dropout probability by 14 percent for the award year. Loans did not have a statistically significant effect for this group—a commensurate increase in loans did not significantly affect the student’s probability of dropping out. First-year students: Grants were most effective in reducing low-income students’ dropout probabilities in the first year. For these students, an additional $1,000 grant in the first year reduced the dropout probability by 23 percent. In the second year, the additional grant reduced the dropout probability by 8 percent while, in the third year, it had no statistically discernable effect. Frontloading grants: The university’s program for high-need freshmen, which included frontloading grants, had a significant effect on reducing dropouts. Program participants were 39 percent less likely to drop out in a year than nonparticipants. For the lowest income students, those below the poverty line, the program reduced the dropout probability by 64 percent. These results, with certain qualifications, indicate that frontloading grants for college students, especially low-income students, could improve dropout rates. The results pertain only to 4-year college students and thus have no implication for students at 2-year schools. Also, the frontloading experiment took place at a university that combined it with other programs to reduce dropouts, and the results are not generalizable beyond that school. However, we believe the sum total of our results shows that frontloading grants holds promise. (For detailed information on the analyses that led to these results, see app. II.) Comments from financial aid directors and students we interviewed helped us interpret the statistical results. One opinion arising in the directors’ panels, for example, was that some low-income students are reluctant to borrow, especially during their first year or two in college. This observation is consistent with our statistical findings about grants being more effective than loans in increasing the likelihood that first-year, low-income students will stay in school. The directors we spoke with were generally positive about the potential benefits of frontloading grants, several saying it could help low-income students stay in college by giving them time to become acclimated to college and reducing financial pressures when students are most vulnerable to dropping out. One concern about frontloading was that students might perceive it as a bait-and-switch policy because it would involve reducing grant awards in later years. In the student interviews, we sometimes heard that borrowing was initially difficult for students and that grant aid made the difference in their being able to start college. Another theme among the students was that year-to-year consistency was important in their aid packaging, so that they could plan ahead without disruptions, and that frontloading seemed contrary to the principle of consistency. (For a discussion of the full range of comments from financial aid directors and students we spoke with, see app. III.) We discussed with Department officials the value and feasibility of their conducting a pilot frontloading program. They thought frontloading held promise and expressed an interest in such a pilot program. They told us that they might have authority under current law (20 U.S.C. § 1094a(d) (1988 and Supp. IV 1992)) to conduct a pilot. This law authorizes the Department to designate institutions that volunteer to participate as “experimental sites.” These institutions help evaluate the impact and effectiveness of proposed regulations or new management initiatives. The Secretary of Education may exempt participating institutions from legal requirements as necessary to conduct the experiments. The officials said that they had not yet determined whether this authority would permit a pilot frontloading program and that they might need specific authority from the Congress to conduct a pilot. We defer to the Department on whether it currently has the authority to do so or needs additional authority. Such a pilot program, moreover, would need to address several implementation issues. The potential benefits of frontloading could be lost if institutional aid policies were changed to offset the federal change. Schools would need to be encouraged to ensure that overall grant aid, meaning federal and institutional aid combined, were frontloaded. Also, because eligibility for federal financial aid is based in part on annual income and other family resources that change over time, the amount of aid a student qualifies for changes each year. Frontloading would entail estimating a 4-year package, requiring methods not currently employed in aid determination. It would also involve adjusting loan limits for third- and fourth-year students at pilot schools and developing aid award rules for students who transfer between pilot and nonpilot schools. In evaluating a pilot program, changes in dropout rates would have to be interpreted carefully. A policy of frontloading grants might attract students to college who would not have attended otherwise. Although some of these students would graduate, on the whole their dropout rate could be higher than that of the current student population. Frontloading might reduce the number of dropouts among students who now attend college, but high dropout rates among this new college population could leave the overall dropout rate unchanged or higher. Our statistical analysis indicates that loans and grants are not equal substitutes in terms of affecting education outcomes for low-income students. Aid packages with relatively high grant levels may improve low-income students’ access to higher education more than packages that rely more on loans. In addition, our analysis indicates that the earlier low-income students receive grant assistance, the more likely they are to stay in college. Departure from the conventional approach to dispersing student financial aid—relatively proportionate amounts each year—could further improve low-income students’ dropout rates. Given that the dropout rate is highest in students’ first 2 years, frontloading grants would appear to provide low-income students with the most effective means of financial support when they are most likely to benefit from it. Restructuring federal grant programs to feature frontloading could improve low-income students’ dropout rates without changing any student’s overall 4-year allocation of grants and loans. Given our statistical results, the mixed views of aid directors and students we spoke with, and the limited experience with frontloading, we believe the Department needs to shed light on the matter by undertaking a pilot program. We recommend that the Department of Education conduct a pilot program of frontloading federal grants at a limited number of 4-year schools to evaluate the impact of frontloading on reducing dropouts among low-income college students. If, upon review, the Department concludes that it lacks authority to conduct this pilot, we recommend that the Department seek legislation from the Congress to authorize the pilot. As agreed, we did not obtain written comments on the report from the Department of Education, but we discussed our findings with program officials. The officials generally agreed with our results and made suggestions, which we incorporated in the report as appropriate. We conducted our review between March 1993 and December 1994 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Education, congressional committees, and other interested parties. Please call Cornelia M. Blanchette or me on (202) 512-7014 if you or your staff have any questions about this report. Other GAO contacts and contributors are listed in appendix IV. To examine the effects of grants and loans on the probability of students’ staying in college or dropping out, we analyzed two databases: (1) High School and Beyond, a national survey of students begun in 1980, and (2) financial aid data from a large public university. The two databases included different information, but they both contained year-by-year totals for grants and loans each student received, tuition the student paid, and background information on the student. In addition, we could determine the number of years a student remained in school and if and when that student dropped out. We used duration analysis to determine the factors affecting the probability of staying in college or dropping out. To help understand the reasoning and decision-making behind our statistical results, we conducted discussion panels with financial aid directors and interviews with students at selected schools. Our analysis covered only students in 4-year undergraduate programs; we did not include community colleges, proprietary schools, or graduate or professional programs. The High School and Beyond survey was first conducted in 1980. Graduating high school seniors were asked questions about family background, educational attainment, and future plans. To obtain information on activities since high school, these same students were then reinterviewed in 1982, 1984, and 1986. This provided longitudinal information on students in the initial sample. We selected for analysis those students who began college full time at a 4-year school immediately after high school. We followed these students through their college years and noted whether they continued from year to year or dropped out. Our sample consisted of 3,652 students. The High School and Beyond survey oversampled African American and Hispanic students. This oversampling resulted in sufficient observations on these populations for meaningful results to be obtained for them. We weighted our sample data so that the proportions of African Americans, Hispanics, whites, and others would match population proportions.Except when we analyzed data separately by race, we reported weighted means and regression results in all cases. We analyzed financial aid records from a large public university that recently implemented a new financial aid packaging strategy, which included frontloading grant money for certain first-year students. The university designated a group of “high-need” first-year students, who required additional support because they came from economically or academically disadvantaged backgrounds or both. After these students had received Pell grants, Supplemental Education Opportunity Grants (SEOG), and a small Perkins loan, they received university grants to cover remaining need. In the second and later years, their financial aid packages were weighted with more loans. Some of the high-need freshmen were less academically prepared than the university’s average enrollee, officials at the university said, but we could not identify these students separately in the data. Therefore, to measure differences in student academic readiness for college, our analysis included controls for a student’s score on the Scholastic Aptitude Test. In addition, program participants received additional academic and administrative support, such as precollege course work in their first yearand structured advice on course schedules and financial aid options. We thus do not atttribute program outcomes solely to frontloading. The university gave us 5 years of data on a cohort of students that began as full-time, first-year students under the new system in the 1988-89 academic year. We constructed records on the students for the 5 years, noting the type and amount of aid received each year and how long they remained in school. We also had student background data that remained constant over time. The data provided by the university did not indicate whether students who left before graduation had transferred to another school. To identify transfer students, we matched student records with Pell grant and Stafford loan data supplied by the Department of Education. For students who received Pell grants or Stafford loans within three semesters of leaving the university, we recoded the dependent variable so that we would not count them as dropouts. For our analysis, we selected students whose family incomes in their senior year of high school were below 300 percent of the poverty line. We did this to ensure that students in and out of the high-need program were somewhat comparable, although those in the high-need group were still, on average, from poorer families. Our duration analysis examined the probability of a student’s dropping out in a particular year, given that he or she attended school up to the beginning of that year. Duration analysis, also known as hazard analysis, is typically used to estimate factors that result in someone’s remaining in a particular state (for example, “unemployed” or “in college”) for a short or long period of time. As some students leave the database by dropping out, the sample becomes smaller each period. For example, in our data, the first-year dropout probability was computed for all students in the sample, but the third-year dropout probability was computed only for those who completed the first 2 years in college. Our analysis was a modified hazard model. A hazard model treats the length of time as the dependent variable. In our analysis, we would have regressed the number of years in school on the explanatory variables we chose. However, because we included some independent variables whose values changed over time, specifically financial aid levels received each year, this type of hazard model would have been complicated to construct. Instead, we set the data up so that each person-year was an observation. A student in college for 1 year, who then dropped out, appeared in the database only once; someone in school for 4 years appeared as four separate observations. The dependent variable in our regressions was whether or not the student dropped out in a given year. We used a logit model to analyze the resulting database. The independent variables of interest were grants and loans. To see whether the impact of grants and loans varied by certain factors, we analyzed subsamples of the database based on income group, race, and year. We judgmentally selected 12 colleges and universities in three areas. We chose six public and six private schools, and we selected schools that varied by such factors as size, tuition, and urbanicity. The schools we selected are shown in table I.1. Fairfax, Va. Washington, D.C. Washington, D.C. College Park, Md. New Brunswick, N.J. Swarthmore, Penn. Private Philadelphia, Penn. Public University of Pennsylvania Philadelphia, Penn. Private Seattle, Wash., area Pacific Lutheran University Tacoma, Wash. Seattle, Wash. Seattle, Wash. To allow interaction between the financial aid directors, we used discussion panels. For the students, we thought a discussion or focus group might inhibit some from telling us about their financial situations, so we interviewed them individually. We did not project from financial aid director or student responses because we knew our sample was not representative. Instead, we used the comments to illustrate some of the thinking that might have led to our quantitative results. We held three discussion panels with financial aid directors, bringing together the four directors in each region. We asked them to describe changes in federal aid policy that they had observed over time and how these changes had affected institutional or other patterns of financial aid. We also asked them whether the changes had affected student decisions to remain in college until graduation. Finally, we asked their opinions on whether grants are more or less effective than loans and their thoughts on how students made the trade-off between a small grant and a larger loan and on frontloading grants. The colleges and universities identified students for us to interview. We asked them to select both current students and those who had dropped out, but none of the schools could give us names and addresses of dropouts. We did, however, interview some students who had taken time off and returned to school as well as some transfer students. In the interviews, we asked students to describe the role of grants and loans in financing their education and in year-to-year decisions to stay in school. We asked how they would describe the trade-off between grants and loans: that is, in general, did they prefer a small grant or a larger loan? We tried to determine whether debt burden is a major concern and whether it had caused them to reconsider staying in school, which major to choose, or whether to go on to graduate or professional school. We also asked them about work, either as work-study or an outside job, including the effect on their studies of spending time at work. Grants significantly reduced dropout probabilities for most groups of students, including low-income, first-year, and minority students, according to our analysis of the High School and Beyond database. On the other hand, loans reduced dropout probabilities overall and for middle-income students but not for others. The database contained information on the tuition students paid and their grant and loan awards. It also contained a wide variety of student background information, including family characteristics and academic achievement, which we included as controls in our regressions. The variable definitions, as well as means and standard errors for first-year observations—that is, for the initial sample before anyone dropped out—appear in table II.1. Categorical variables (equal 1 if condition is true) Family income grouping (1993 dollars) Lowest income (below $12,300) Second lowest income ($12,300-$21,000) Third lowest income ($21,000-$28,100) Middle income ($28,100-$35,100) Third highest income ($35,100-43,800) Second highest income ($43,800-$66,600) Highest income (over $66,600) Student went to high school in an urban area (continued) Region of United States in which student attended high school Equals zero for all first-year observations. Before conducting our regression analysis, we examined crosstabulations of certain variables with dropouts, the outcome variable. Low-income students were more likely to drop out of college than middle- and high-income students. In addition, in our sample, second-year students were more likely than first- or third-year students to drop out. We also examined those who dropped out in the first year to determine their income group; low-income students were again the most likely to drop out. The sample dropout probabilities are shown in table II.2. Dropout rate (percent) Grants reduced dropout probabilities more than equal-sized loans in the baseline model, although both grants and loans had a statistically significant effect (see table II.3). Because “dropout” is the dependent variable, the negative coefficient for grants and loans means that an increase in the value of either variable led to a reduced probability of dropping out. Results for other variables are as expected: students with good high school grades and test scores, with parents who went to college, and from higher income families were the least likely to drop out of college. Two other dollar variables had significant effects on dropouts. First, tuition was negatively associated with the probability of dropping out. Holding all else constant, higher tuition might be expected to lead to a greater likelihood of dropping out. However, we did not have a measure of the quality of the college the student was attending; high tuition might, in fact, have been a proxy for a high-quality college. If high-tuition colleges enrolled relatively better quality students who would be less likely than average to drop out, then tuition would be negatively correlated with the probability of a student’s dropping out. Second, cumulative loans had a positive effect on dropping out. This result indicates that although loans in the current year helped students stay in school, accumulation of loans over several years may have led students to drop out. The year 2 coefficient was positive and the year 3 coefficient negative, indicating that dropouts were more likely in the second year than the first but least likely of all in the third year. Because we used a logit regression, changes in independent variables could not be directly interpreted as changes in the probability of dropping out. Instead, we made a set of assumptions about a student, computed the probability of that student’s dropping out, and then changed the assumptions, one at a time, to examine the effects of individual variables. We first took the baseline results and, holding other variables constant, changed the amount of grants and loans by $1,000 each. We then examined the effects of differences in other variables, such as income and race. Under our initial assumptions, a student had a 9.9 percent probability of dropping out of college in a given year. If the student received $1,000 in additional grants in the year, the dropout probability fell to 9.0 percent, or by 9 percent (see fig. II.1). With an additional $1,000 loan, on the other hand, the probability fell to 9.4 percent, a 4-percent decline. Differences in values of other variables significantly affected dropout probabilities as well. For example, a student from the lowest of the seven income groups had a 57 percent greater probability of dropping out than a middle-income student; one from the highest income group had a 50 percent lower probability. Dropout Rate (percent) All results are based on coefficients statistically different from zero at the 5-percent level. To further analyze the impacts of grants and loans on different types of students, we performed regressions for subsamples of our sample. We set the regressions up in the same way as the baseline regressions except for including only certain observations in each regression: for example, only students from the two lowest income groups, only first-year observations, or only African American or Hispanic students. We report first the coefficient results for selected variables and then probability results. For low-income, minority, and first-year students, grants were more effective than loans in reducing dropout probabilities, although the differences between the effects of the two types of aid varied across groups (see table II.4). For low-income students, grants reduced the dropout probability the most in the first year, and they were decreasingly effective in the second and third years. Loans never significantly reduced the dropout probability for low-income students and actually increased the probability in the third year. The regressions include all other relevant variables from the baseline regression, but results for these variables are omitted from this table. Low income (income categories 1 and 2) Middle income (income categories 3 through 5) High income (income categories 6 and 7) (continued) Low income: year 1 Low income: year 2 Low income: year 3 (Table notes on next page) Omitted from regression because value was zero for all observations. For low-income students, grants decreased the probability of dropping out, while loans did not (see table II.5). These calculations are based on the regression results shown in table II.4. Dropout probability (percent) Change in probability from baseline (percent) Low income (income categories 1 and 2) We analyzed financial aid data provided to us by a public university to examine (1) the relationship between different types of financial aid and whether students remained in college from year to year and (2) the effectiveness of a program involving an alternative form of financial aid packaging. Beginning in the 1988-89 academic year, this university embarked on a program of giving some of its high-need freshmen aid consisting entirely, or almost entirely, of grants and having those students take on loans only in later years. In addition, these students received additional academic and administrative support. We refer to this group as the high-need group and the special aid program as the high-need program. Our sample consisted of 1,414 first-year students in 1988-89 whose families had incomes below 300 percent of the poverty line, and we followed this cohort for 4 years. We restricted the sample so that the students in and out of the high-need program would be somewhat comparable. We analyzed the effect of grants, loans, and participation in the program, controlling for income, Scholastic Aptitude Test (SAT) score, and other factors. Variable definitions, means, and standard deviations for first-year students are shown in table II.6. Continuous variables (thousands of 1993 dollars) Categorical variables (equal 1 if condition is true) Participant in the university’s high-need program Family income grouping Lowest income (below poverty level) Middle income (between poverty and twice poverty level) Highest income (between two and three times poverty level) Lowest score (lower than 800 combined math and verbal) Middle score (from 800 to 1190 combined math and verbal) Highest score (1200 or higher combined math and verbal) In our sample, students in the high-need program received more grants than those not in the program during all 4 years of college, and their loan amounts were generally low in the first year (see figs. II.2 and II.3). These students were more likely to come from relatively low-income families compared with those not in the program (see table II.7), so the higher overall amount of grants is not surprising. The differences between students in and out of the program hold even though our entire sample was restricted to students from families with income below three times the poverty line. Lowest income (percent) Middle income (percent) Highest income (percent) Total (percent) Participation in the high-need program reduced the probability of dropping out, even controlling for financial aid (see table II.8). The coefficient result for the high-need program means that a student in this program is 39 percent less likely to drop out than one not in the program if other factors are held constant. As in the High School and Beyond data, grants were more effective in reducing the dropout probability than loans. The coefficient on grants translates into a 25-percent reduction in the probability of dropping out for a $1,000 increase in grants. Loans did not have a statistically significant effect. We also analyzed subsamples of the data separately. Participation in the high-need program was a significant factor for second-year students and the lowest and highest income groups (see table II.9). For the lowest income students, a program participant was 64 percent less likely to drop out than a nonparticipant. Grants were more effective than loans in reducing the probability of dropping out for students in all years, except for the fourth year when neither had a significant effect, and in all income groups. Loans did not significantly reduce dropout probabilities for any of these groups. (continued) Omitted from regression because value was zero for all observations. Some of the financial aid directors in our discussion panels told us that reductions in federal grants have required students to borrow and work more while in college. They said that some low-income students are reluctant to borrow, especially during their first year or two in college. Some low-income students we talked to told us that borrowing was initially difficult. Several of them said that with less grant aid, they would have either not attended or chosen a lower cost college. The directors we spoke to were generally positive about potential benefits of frontloading grants, while students tended to emphasize the importance of year-to-year consistency in their aid packages. The federal financial aid shift from grants to loans has put cost pressures on students, according to financial aid directors we spoke to. Students have generally borrowed more and, in some cases, worked more than in the past to meet their educational expenses, according to some of the directors, but most of them did not believe dropout rates had increased as a result of the changes. However, some told us this was only because of institutional aid increases, while one noted that the effects of very recent increases in borrowing have not yet been felt. Individual student attitudes toward debt vary, many directors said, and these attitudes can change over students’ years in college. Some directors expressed concern about increases in students’ working and the effects on their studies. The directors generally reacted positively to the idea of frontloading grants, and they told us some potential advantages as well as pitfalls of such a program. Many directors noted that in the last 10 to 15 years, federal funding for postsecondary student financial aid at their institutions, especially grant aid, has been level, actually decreasing in constant dollars. This decrease has put pressure on educational institutions, states, and students to fill the gap between the federal financial aid available and rising costs. Schools have responded by substantially increasing their institutional grant budgets, some directors said. In addition, some schools have redefined “high-need students,” recognizing that they can adequately serve only those with the very highest need. Some directors expressed concern about (1) reaching the limits of their abilities to draw upon endowment and other outside resources to bolster their financial aid budgets or (2) the impact this may have on diversity goals for their student body. Several directors said that some states have responded by developing strong state financing programs. Because most state treasuries are not in a position to fill the gap created by declining federal dollars, discussion in the financial aid community has explored new and innovative financing strategies for public institutions. One example is a high-tuition/high-financial-aid model, under which tuitions are raised and some of the increased revenue is used to aid students who could no longer afford to attend. Students tend to borrow more and, at some schools, work more now than in the past, some directors said. One director observed that students are borrowing more to make up the gap between what his school expects them to save during the summer and what they are able to save, based on their earnings. Several directors also noted a large upturn in borrowing in the last year or two. Some directors believe students now hold jobs during the school year more than they used to, but others said that students work at about the same rate as in the past. In general, most directors said that changes in federal financial aid have not greatly affected dropout rates for the student population as a whole, but some directors were concerned about dropout rates for specific groups. They also stressed the efforts their schools make to retain students, and they noted that students leave school for nonfinancial as well as financial reasons. Some directors were most concerned about educational access for specific types of students, such as those from working-class families; minorities, particularly African American males; and out-of-state students at public institutions. One director expressed concern that some low-income and minority students do not even apply for college because of perceptions about high costs and limited financial aid. Another director stressed that it is not the prospect of large loan balances that deters low-income students from enrolling at his institution but the difference between the total education costs and the available financial aid. Another director stated that the federal government needs to (1) concentrate grant dollars on needy families who do not have other resources and (2) give loan money to those who have the means to pay it back. For needy students, he said, more loans may not help as much as more grants, but, for less needy students, more loans may help keep them in school. Some of the directors discussed their schools’ efforts to retain students and suggested that changes in federal financial aid would have hurt students more if their schools had not made such efforts. One director described his school’s posture toward retaining students as aggressive. He explained that if a student is withdrawing from his institution for financial reasons, the financial aid office will work with the student and try to come up with a solution that will allow him or her to stay. Another director stated that his office is also geared toward keeping students in school and that at least for students considering dropping out for financial reasons, the school is successful approximately 99.5 percent of the time. Nonfinancial factors also cause students to leave school. For example, one director said, some students, particularly first-generation students, must contend with competing demands from their families. Academic performance also affects whether students remain in college. In fact, another director stated, students’ grade-point averages are the best retention indicators because they reflect how well the students are doing academically and how well students like their academic programs. Finally, some directors described factors that cause students to take longer to graduate than they used to, even if they do not drop out. For example, students may take time off to work because of concern about indebtedness, or they may change their fields of study several times. Student attitudes towards debt vary, financial aid directors said: Some students are very concerned about borrowing, while others borrow large amounts to finance their education. Some directors said that low-income or minority students are more reluctant to borrow than other students. Directors’ opinions also varied on the effects of larger debt on the choices students make, such as field of study or postgraduate plans. Directors’ opinions varied on the degree to which students worry about accumulating debt. A student’s concern about borrowing depends on a number of factors, several directors noted, including the student’s year in college and individual or family attitudes toward accruing debt. For example, one director thought that students become more concerned about borrowing as they approach graduation; a second director was convinced that students are more concerned about debt at the beginning of their college careers and, over time, develop more confidence about their ability to support themselves (and therefore pay off debt). In general, certain types of students—older, independent students, students from low-income backgrounds, and graduate or professional students—tend to be more concerned about indebtedness than others, according to several of the directors. One director noted that many college students do not pay attention to how much they have borrowed; they are just trying to get registered at the beginning of each semester. Another director stated that parents are more concerned about borrowing than students, especially once students hit the maximum loan levels. The directors discussed some of the barriers to higher education for minority students. For example, one director said low rates of high school graduation reduce the pool of minority candidates. In addition, some directors saw the need for these students to borrow more to finance higher education as a barrier. According to one director, placing greater emphasis on loans to finance higher education has clearly negatively impacted on his public school’s capacity to recruit talented minority nonresident students. The high-need minority students who get a full range of aid, including grants, work-study, and loans, are reluctant to borrow, but they borrow anyway and enroll; those who get only loans, however, tend not to come. He and another director also pointed out that the minority students who are highly qualified academically are sought after by many schools; therefore, these students are likely to receive attractive financial aid packages. This director and one other mentioned that reluctance to borrow is found not only among minority students and their families but also among many first-generation, low-income college students. These students and their families fear the unknown, including what their investment in higher education will actually achieve for them and whether they will be able to repay the loan after graduation. Several directors thought that financial considerations were not significantly affecting students’ choice of majors, although directors opinions varied. One director observed that, for the first 2 years, college is not the real world for students—it is an extension of their comfortable family life—and that students do not address career issues and the effect of their debt until later. She observed that while most students are concerned with just getting a job after graduation, many also want to “study their passion” and will not choose a field just for high pay. A second director explained that his institution has not experienced changed enrollment patterns at either the undergraduate or the graduate/professional level; one would expect to see such changes if students were greatly concerned about their debt. In contrast, other directors said students are looking for higher paying jobs because of high debt levels. At one institution, this has resulted in increased enrollment in fields such as engineering and decreased enrollment in fields such as education and nursing. Finally, a few directors cannot tell what effect increased indebtedness will have on student choices because much of the increase has taken place in the last year, they said. It is thus hard to tell what impact the cumulative debt will have on students when they graduate. Students were not currently changing majors because of concerns about increased debt, these directors said, but they were not sure what impact the current increases in loans will have on students in the future. Several directors provided a variety of reasons—both financial and nonfinancial—that students work while attending school. Opinions varied on whether students are working too much, but some directors agreed that working more than 20 hours per week is too much. Some directors spoke enthusiastically about the benefits of the work-study program. Directors mentioned several finance-related reasons why many students today work while attending school, for example, to help pay educational costs, to keep debt levels as low as possible, and to make up for gaps in their expected family contribution. Directors also mentioned that students work for nonfinancial reasons—for example, to gain work experience. Whether students choose to work while in school can also vary by the individual student’s residence, according to one director—commuters tend to work more than students living on campus. Finally, a few directors stated that it is unfortunate that some federal financial aid programs—specifically the Pell grant program—contain disincentives for students to work because increased earnings can decrease a student’s financial aid award. Working too many hours is only a problem in isolated cases, one director said. Even if students are working more, according to another, no evidence shows that this has had a qualitative impact on their academic work. Another director listed the risks students face when they choose to work more than 20 hours per week while attending school full time, including eroding the quality of their academic experience, isolating them from campus activities, and extending the time it takes them to graduate. Some directors cited the numerous and varied benefits of the work-study program, especially compared with off-campus work. Several directors mentioned that work-study helps students stay in college because they become more connected to the institution, develop relationships with mentors, and learn more about the school. Other benefits they mentioned included higher academic achievement because hours are controlled and tend to be more flexible; new skill acquisition, if the work is related to career goals; and reduced resentment among other students toward financial aid recipients because they are not being given something for nothing. Several directors mentioned the immediate need for more work-study dollars at their schools. Frontloading grants could be beneficial, according to some directors. A potential benefit of frontloading, according to one director, is that it would give students more confidence in their ability to manage their debt: They would not need to borrow until they were sure they could do the work and finish their college education. Some directors also mentioned that frontloading could help with retention and increase accessibility for students from special populations. Some noted that it could assist institutions in maintaining a more consistent aid policy over time and result in more uniform aid packages across institutions. Some directors raised concerns about frontloading. One concern was that it could be perceived as a bait-and-switch policy, because students were attracted to schools with large grants only to find that those grants were not available for all 4 years. Other concerns were that frontloading might still waste federal resources when students drop out, might not work in the absence of additional support services, and could concentrate federal grant dollars in 2-year institutions. In addition, the idea of frontloading is not based on data about the impact of grants on helping students stay in college, one director noted. One director’s recommendations for structuring a frontloading program included targeting specific populations and combining the program with income-contingent loans in the later years. Income-contingent loans, for which monthly repayment amounts are adjusted depending on income, would make it easier for graduates in low-paying jobs to repay. Another director stressed that whatever option the federal government chooses, it is important to stick to it. According to her, one of the most difficult problems students face, when beginning their college careers, is that they cannot be confident that the financial aid they receive the first year will be available in subsequent years; therefore, they cannot plan accordingly. Many students we interviewed said that without grants they would not be in school or would not be at that particular school. Although they generally preferred grants to loans, their answers varied when asked to choose between small grants and larger loans. The students were generally concerned about the levels of debt they were accumulating during college, but a number of them did not believe their debt levels would affect future decisions they made about careers or postgraduate work. They wanted to keep loan amounts as low as possible, but many of them would borrow whatever necessary to finish their college education because they knew the value of the degree, they said. Most of the students we interviewed worked while attending school, and many cited benefits of working in addition to earning money. However, some said the amount they worked threatened their ability to focus on schoolwork or hurt their grade-point averages. Students we spoke to generally preferred grants to loans, and grant availability sometimes influenced their choices. Some students, however, indicated they would prefer larger loans to smaller grants, simply because they needed the larger amount of money to remain in school each year. Students also had different opinions on whether grants early in their college careers were more important than grants as they approached graduation, with many saying year-to-year consistency was important to them. For some students, the availability of grants helped determine the schools they attended. Some of these students chose private schools and said they would not be at those schools without grants. These students often received grants from their schools of over $10,000, or more than four times the maximum federal Pell grant, and many of them specifically mentioned public or community colleges as alternatives if they had not received these grants. Some students at public schools also said that they might not have been able to stay in school without grants. Finally, several students said that they would have worked more or taken time off, extending the time they needed to complete college. The absence of grants also affected some students’ choices. Some of the students we interviewed began postsecondary education at a community college, and then transferred to a 4-year school, to minimize costs or debt. One student who transferred to a public school said that if more grants had been available in her first year, she would have started at the 4-year school she now attends. However, other students began at community colleges for nonfinancial reasons. For example, one student said she may have started at the community college even if more grant money had been available her first year because she was returning to school after being out for several years and the community college made for an easier transition. We asked students what they would do if their aid package left them short of what they needed and they had to choose either a small grant or a larger loan to complete their financial aid offer. The federal cost of a grant is three to four times that of a loan per dollar of aid, meaning that a grant of $1,000 costs the federal government about the same as a $3,000 to $4,000 loan. We asked students which they would prefer. A small grant might not be enough to keep them in school, some students said; if their need was such that only a large loan would be what they needed to pay for costs through the year, they would choose the loan. Some specifically mentioned not wanting to work more than they already did. Several others said they did not know how they would raise additional money to cover the remaining gap. Others would choose small grants over large loans, preferring to make up the difference with either additional work, reduced living expenses, or an increased parental contribution. Some of these students said they would do whatever they could to avoid borrowing more than necessary. We asked students whether they would have preferred an aid packaging scheme that frontloaded grant aid. Many students said they would not favor such a packaging plan, preferring grants “spread out” over their college years. Some saw frontloading as a departure from “consistency” in aid packaging and said consistency from year to year was important to them. On the other hand, some students saw advantages to such aid packaging. One student said that it would be an incentive to start school and that after 2 years students know the system better and know how to succeed. Another student reacted positively to the idea that students would have an opportunity to “prove you can do the work” before borrowing. Students we interviewed generally did not like borrowing to finance their education, but many expected to have to do so and thought the education or degree they would receive was worth going into debt for. Some students told us that their anticipated debt at graduation worried them or influenced what they planned to do after graduation, but others said that their choice of major or planned career was not at all influenced by earnings potential or the need to repay their loans. Among those whose attitudes toward borrowing had changed over time, some said that they had become more reluctant to borrow; others said that they found borrowing easier as they went further in school. Many students said they were aware of the need to borrow before they began college. They sometimes mentioned that a parent, sibling, or other acquaintance had borrowed to attend college; some said borrowing was “expected,” “the price you have to pay,” or “a necessary evil.” On the other hand, several students were the first in their families to go to college, so they told us that accumulating educational debt was a new phenomenon for them. Generally, students were in agreement that borrowing was worthwhile, given the rewards of higher education. Many students spoke of it as an “investment.” In addition, a number of students said they would borrow whatever was necessary to remain in school. Many students told us that they selected a major or career without regard to potential earnings or ability to repay loans, but repayment did affect the choices others made. Some of these students said that they were studying a certain field because they had always wanted to. Several said that they would worry about repayment when the time comes. Others, however, were either worried that their field was not high paying and loan repayment would thus be difficult or were not concerned because they knew their field was high paying. Debt levels also played a role in some students’ plans for further education in graduate or professional schools. One student said that she was considering going to law school immediately after graduating because she knew she could then defer repayment of her undergraduate loans. Other students, however, wanted to take jobs immediately and begin paying off their accumulated debt. Some said that they knew they would need to borrow for additional schooling and (1) did not want to borrow any more than necessary while undergraduates or (2) wanted to work to repay their undergraduate loans before borrowing more for postgraduate work. Students’ thinking about loans often changed while they were in college. For some students, borrowing grew easier as time went on. For these students, taking out the first loan was “scary” and the families were hesitant. Several students who began in community colleges and then transferred to 4-year schools mentioned that they did not need to borrow until they got to the 4-year school. One of these students, as well as another who began at a 4-year school, mentioned that it is easier to borrow with several years of completed schooling under one’s belt. Others said that borrowing became easier or “routine” after the first loan. Other students, however, found that borrowing became more difficult as they approached graduation. For these students, the first loan came at a time when repayment was far in the future, but repayment loomed much closer at graduation. One mentioned that the thought of loans accumulating stayed in the back of her mind; others said the cumulative amount of their debt, not the amount they borrowed in any one year, was what concerned them. Work played a large role in the lives of most of the students we interviewed. Students worked for the money they earned but also for other benefits, such as learning about time management, gaining job experience, and discovering networking opportunities with different offices or departments in their schools. Those in on-campus jobs told us that they had more flexibility in scheduling their work hours and also were better able to make contacts with their schools. Some students said that they worked as much as they could, but others said that they were working too much and their studies were suffering. Earning money was the benefit of working that students cited most often. Many students said they used the money they earned for living expenses. Others saw work more as one component of their overall plan to finance their education. For example, several students mentioned that working helps reduce the amount they need to borrow. Several students we talked to were concerned enough about finances that they chose jobs not for convenience but for higher pay, turning down work-study jobs because of fears the money would run out or because other jobs paid more. Another student, however, said she wanted a work-study job because it paid more than the job she currently held. Many students said that working helped them budget or manage their time or that it adds structure or discipline to their schedule. Another benefit of working was gaining job experience, including particular job skills. Some students worked in an office setting for the first time and learned to work with computers. Several also said that work looks good on their resumes or when applying for future jobs. A number of the students we talked to said they preferred on-campus jobs to off-campus ones. These students said that the main advantages to working on campus were convenience and flexibility. Some on-campus jobs allowed students to shift their hours if their school work or other demands became burdensome; others allowed students to set their own schedules around their class schedules. Several students working on campus told us that they could sometimes study while at work, although at least one student with an off-campus job was also able to study occasionally. Finally, several students said that the on-campus location was important simply because they did not have to spend time commuting to work. For example, one student said she did not have a car and would not have been able to work off campus. On-campus jobs also gave some students a sense of being more connected with their school. Through work, these students said, they made contacts with campus offices that helped them later on. For example, working in the financial aid office helped some students learn more about the financial aid system. In contrast, students working off campus sometimes mentioned inconveniences associated with their work. The time spent commuting to work was an important concern for some. In addition, off-campus jobs tended to have less flexible hours and schedules. Some students, however, preferred off-campus work because they could earn more than in an on-campus work-study job. Some students said that working affected their academic studies. These students worked a range of weekly hours, one student as few as 8 hours but most over 15 hours per week. One student said that he worked 40 hours per week in 1 year because he had no other financial support; he had to drop out because of bad grades that year. He transferred, received financial aid, and was currently working 22 hours, earning a 3.7 grade-point average. Other students, with a similar range of hours worked, said that working did not affect their study time or hurt their grades. Although their hours varied, these students generally worked fewer than 20 hours per week. In addition, several said that (1) if they were not working, they would probably not be using that time for additional studies or (2) students who work perform better academically than those who do not. We asked some of the students how much they could work without hurting their studies or how much would first begin to hurt their studies. Most responses were in the 15- to 20-hour per week range. In addition to those named above, the following individuals made important contributions to this report: Jane A. Dunkel assisted conducting the interviews and discussion panels and helped write the report, Charles M. Novak assisted with the original conceptualization of the study, Thomas L. Hungerford developed the statistical model and conducted initial analyses, Steven R. Machlin and Robert Bifulco performed additional statistical analyses, Elsie A. M. Picyk performed data processing, and Luann Moy and Linda Stinson provided methodological advice on the interviews and discussion panels. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Summary: Pursuant to a congressional request, GAO reviewed how student financial aid affects low-income students' dropout rates, focusing on whether: (1) the timing of loan and grant aid influences students' dropout rates; and (2) restructuring federal grant programs could improve low-income students' dropout rates. GAO found that: (1) grants and loans do not have the same effects on reducing low-income college students' dropout rates; (2) although grant aid generally lowers low-income students' dropout rates, loans have no significant impact on these students' dropout rates; (3) the timing of grant aid greatly influences students' dropout rates; (4) grant aid to low-income students is more effective during the first school year than in subsequent years; (5) although financial aid program participants have substantially lower dropout rates than other comparable students, financial aid directors and students have mixed views on the potential efficacy of frontloading aid packages; (6) a pilot program could be valuable in evaluating the cost effects of frontloading student aid for low-income college students; and (7) Department of Education officials need to further review their legislative authority to determine whether they are authorized to conduct such a pilot project.