The Veterans’ Education Assistance Act of 1984 created the current Montgomery GI bill program. Under the GI bill program (Title 38 United States Code Chapter 30), veterans who have met their duty obligation and were honorably discharged are eligible to receive GI benefits. Active-duty personnel are also eligible to use GI benefits. In fiscal year 2000, approximately $923 million was paid to veterans through the GI bill program. The GI bill program is a contributory program, which requires service members, upon enlistment, to contribute $100 per month for their first 12 months of service. Although service members have the option to decline participation at enlistment, almost all are enrolling in the GI bill program. In fiscal year 1999, 96 percent of all active-duty eligible enlistees enrolled in the GI bill program. GI benefits end 10 years from last discharge, and if veterans do not use their GI benefit within that time period, the amount is not refunded to them. Veterans may use GI benefits for a variety of postsecondary education programs, including an undergraduate or graduate degree; courses that lead to a certificate or diploma from a business, technical, or vocational school; correspondence training; on-the-job training or apprenticeships; and vocational flight training. The monthly benefit amount will vary depending on the type of coursework in which the veteran enrolls and whether the student attends part-time or full-time. For veterans who enroll full-time in an undergraduate degree program in academic year 2001-02, the monthly GI benefit is $672 per month for a maximum of 36 months—a total of $6,048 for each of 4 academic years. The Veterans Education and Benefits Expansion Act of 2001 (P.L. 107-103) increases the monthly GI benefit to $800 per month as of January 1, 2002. Additionally, the law increases the GI benefit to $900 per month on October 1, 2002 and to $985 per month beginning on October 1, 2003—a total of $8,100 in 2002-03 and $8,865 in 2003-04. Most veterans use their GI benefits to pursue an undergraduate degree. For example, in fiscal year 2001, 88 percent of GI bill beneficiaries were pursuing an undergraduate degree. In addition, 62 percent of GI bill beneficiaries were enrolled in school full-time. Title IV of HEA of 1965, as amended in 1998, authorizes the federal government’s financial aid programs for postsecondary education. Title IV programs include the following: Pell grant—grants to undergraduate students who are enrolled in a degree or certificate program and have financial need. Subsidized Stafford loan—loans made to students enrolled at least half- time in an eligible program of study and have demonstrated financial need. The federal government pays the interest costs on the loan while the student is in school. Unsubsidized Stafford loan—loans made to students enrolled at least half-time in an eligible program of study. Although the terms and conditions of the loan (e.g., interest rates) are the same as those for subsidized loans, the federal government does not pay the interest costs on the loan while the student is in school. Students are therefore responsible for all interest costs. PLUS loans—loans made to parents of dependent undergraduate students enrolled at least half-time in an eligible program of study. Borrowers are responsible for paying all interest on the loan. Campus-based aid—allocated to participating institutions by the U.S. Department of Education. The institutions then award the following aid to students: Supplemental Educational Opportunity Grant (SEOG)—grants for undergraduate students with financial need. Priority for this aid is given to Pell grant recipients. Perkins loans—low-interest (5 percent) loans to undergraduate and graduate students. Interest does not accrue while the student is enrolled at least half-time in an eligible program. Priority is given to students who have exceptional financial need. Work-study—students are provided on- or off-campus jobs in which they earn at least the current federal minimum wage. The institution or off-campus employer pays a portion of their wages. Education is responsible for administering $46 billion a year through these programs. As shown in figure 1, most of these funds are subsidized and unsubsidized Stafford loans. In addition to the Title IV programs, there are tax provisions that students and their families may be eligible to use for postsecondary education. The Taxpayer Relief Act of 1997 (P.L. 105-34) created several provisions to help families pay for postsecondary education, such as the HOPE tax credit, Lifetime Learning tax credit, and the student loan interest deduction. The act also created tax-exempt savings accounts, called education individual retirement accounts (IRA), to help families save for college. See table 1 for further detail about the tax provisions created under the Taxpayer Relief Act. The act also made changes to the tax treatment of state tuition savings plans, extended the exclusion for educational assistance provided by employers from students’ taxable incomes, and exempted IRA distributions for qualified higher education expenses from early withdrawal penalties. In 2001, the Economic Growth and Tax Relief Reconciliation Act (P.L. 107- 16) expanded and modified several of the tax provisions previously mentioned. Most notably, the act created a new tax deduction for tuition and fees for taxpayers, even those who do not itemize. In 2002 through 2005, taxpayers will have the option of using either the HOPE tax credit or the tuition deduction. The 2001 act also made changes to the student loan interest deduction and education IRAs. To obtain financial aid under Title IV programs, students must apply using the Free Application for Federal Student Aid (FAFSA). Information from the FAFSA is used to determine the amount of money—called the expected family contribution (EFC)—that a student, or student’s family, is expected to contribute to the student’s education. A student is classified as either financially dependent on his or her parents or independent in the financial aid process. This classification is important because it affects the factors used to determine a student’s EFC. For dependent students, the EFC is based on both the student and parent’s income and assets, as well as whether the family has other children enrolled in college. For independent students, the EFC is based on the student’s and, if married, spouse’s income and assets and whether the student has any dependents other than a spouse. By law, veteran students are automatically classified as independent students, and GI benefits are not included as veterans’ income for purposes of calculating EFC. Once EFC is established, this information is compared to the cost of the institution at which the student will attend to determine a student’s financial need. In the federal financial aid process, an institution’s cost of attendance includes tuition and fees, room and board, books, supplies, transportation, and miscellaneous personal expenses. The type of institution that a student attends will affect the cost of attendance. Typically, public 2-year institutions cost significantly less than public 4- year institutions or private 4-year institutions. For example, on average, the annual cost to attend a public 2-year college as a commuter student was $7,024 compared with $11,338 for resident students at public 4-year institutions and $24,946 for resident students at private 4-year institutions. If the EFC is equal to or greater than the cost of attendance, then the student is not considered to have financial need for federal aid programs. If the EFC is less than cost of attendance, then the student is considered to have financial need. Financial aid administrators at the school the student is attending then create a federal financial aid package that could include grants, loans, and work-study. The basic premise for awarding need-based aid is that a student’s “total financial aid package must not exceed a student’s need.” Veterans are an exception to this rule, and in some cases, those who receive GI benefits may receive a combined federal aid package of GI benefits and need-based aid, such as Pell grants and subsidized Stafford loans, that is greater than their financial need. Figure 2 highlights these key steps in determining a student’s financial need for Title IV programs. Most students, whether receiving a GI benefit or not, enroll in a public 2- population and 89 percent of GI bill students enroll in a public institution, while 19 percent of all students and 11 percent of GI bill students enroll in a private institution. Due to the fact that small proportions of the general student population and GI bill students enroll at private 2-year institutions, we focused our analysis on the other three types of institutions. Veterans’ eligibility for some federal grants, loans, and tax incentives may be affected by the receipt of GI benefits. Veterans can apply for federal Title IV aid; however, receiving GI benefits may affect their eligibility for some Title IV aid. Pell grant aid is awarded to students based mainly on income. The amount awarded to students is the difference between the maximum Pell grant award for that academic year and the student’s EFC. GI benefits are not included in the formula used to calculate EFC and therefore receiving them does not affect veterans’ eligibility for Pell grants. For all other Title IV aid, EFC and the amount of other financial assistance students receive is subtracted from the cost of attendance to determine financial need. Depending on the aid program, GI benefits may or may not be considered as another source of financial assistance for veteran students, thus affecting veterans’ eligibility for these programs. By law, GI benefits are specifically excluded as another source of assistance for veteran students when awarding subsidized Stafford loans. Since GI benefits are excluded from the calculations used to award subsidized Stafford loans, veterans and nonveterans are equally eligible for these loans. On the other hand, when determining eligibility for unsubsidized Stafford loans and campus-based aid, GI benefits are considered another source of assistance. Regulations issued in 1999 allow financial aid administrators some flexibility to exclude the value of GI benefits in the calculations for campus-based aid, but only if the GI bill student also receives a subsidized Stafford loan. If this flexibility is used, veteran students’ eligibility for campus-based aid may not be affected by receipt of GI benefits. With regard to various federal tax incentives available for postsecondary education, receiving GI benefits does not prevent veterans from claiming such benefits, but may affect the amount they would be eligible to claim. On average, veterans and nonveterans with similar characteristics are awarded about the same amount of federal Title IV aid, and when GI benefits are included, the total amount of federal assistance for postsecondary education is greater for veterans than nonveterans. When GI benefits are combined with Pell grant and Stafford loan aid, veterans receive aid packages that include a lower proportion of loans than nonveterans. Veterans receive smaller campus-based aid awards than nonveteran dependents, but more than nonveteran independent students at 4-year institutions. Although the actual amount claimed in HOPE and Lifetime Learning tax credits by veteran and nonveteran students is unknown, there are several factors that affect the amount a student may be eligible to claim. At each type of institution, veterans are awarded total federal aid packages of Pell grant, Stafford loans, and GI benefits that are greater than those awarded to nonveteran students. When veterans and nonveterans have similar characteristics, such as family income, they are awarded on average the same Pell grant and subsidized Stafford loan aid. In contrast, veterans and nonveterans who have similar characteristics are awarded different amounts of unsubsidized Stafford loans. This is largely due to the fact that GI benefits are included in the formula used to award unsubsidized Stafford loans. The only exception is at private 4-year institutions where veteran and nonveteran independent students are awarded the same amount of unsubsidized Stafford loan aid because the average cost of attendance is much greater at these institutions, thus making veterans eligible for unsubsidized Stafford loans. When comparing total federal aid packages of Pell grants, Stafford loans, and GI benefits, veterans’ aid packages have a lower percentage of loans and a larger percentage of grant aid than nonveterans’ at each type of institution. As shown in figure 4, among students who attended public 2- year institutions, veterans received aid packages that were greater than nonveterans and consisted of primarily grants. Both nonveteran independent and dependent students at public two-year institutions typically received federal aid packages that were comprised primarily of loans. Among students attending public 4-year institutions, veterans also received federal aid packages that were larger than nonveterans and most veterans’ packages had a lower percentage of loan aid than nonveteran students, as shown in figure 5. Only low-income, nonveteran dependent students received an aid package with a greater proportion of grant aid than loan aid. Among middle-income students, nonveteran independents were awarded almost the same amount of aid as veterans; however, nonveteran independents’ aid package was 78 percent loans while veterans’ aid package was 39 percent loans. Middle-income nonveteran dependents’ federal aid package was comprised entirely of loans. Among students attending private 4-year institutions, veteran students were awarded total aid packages that were greater than those awarded to nonveterans. As shown in figure 6, veterans’ aid packages were more evenly balanced between grants and loans, with the exception of high- income veteran students whose aid package was comprised of slightly more loans than grants. In several cases, nonveteran students at private 4- year institutions received aid packages that were entirely loans. See appendix I for detailed data on estimated federal Title IV aid awarded to veteran and nonveteran students at each type of institution. The amount of campus-based aid awarded to veteran and nonveteran students varied across type of institution attended and by a nonveteran student’s dependency status. As shown in table 2, in academic year 1999- 2000 veteran students received lower awards than nonveteran dependent students at all institutions and nonveteran independent students at public 2-year institutions, while veterans who attended public 4-year and private 4-year institutions received larger campus-based aid awards than nonveteran independent students. Information on the exact amount that veteran and nonveteran students claimed for the HOPE and Lifetime Learning tax credits and the student loan interest deduction is not known; nonetheless there are several factors that are known to affect the amount one may be eligible to claim. The amount of HOPE or Lifetime Learning tax credit one may be eligible to claim is affected by several factors, including the amount of tuition and fees paid, amount of GI benefits and grant aid received, and family income and taxes owed. Generally, veteran and nonveteran students who pay higher tuition and required fees, such as students who attend private 4- year institutions or those with a tax liability greater than the HOPE credit, may claim the full credit of $1,500. Veterans and nonveterans who pay lower tuition and required fees may claim a partial HOPE tax credit. Additionally, veterans who receive GI benefits or nonveteran students who receive grants that equal or exceed the amount of tuition and fees paid may not claim a HOPE tax credit. Likewise, veterans and nonveterans who pay higher tuition and fees may claim the full Lifetime Learning credit of $1,000; while veterans who receive GI benefits or nonveterans who receive grant aid that equal or exceed the amount of tuition and fees paid may not claim a Lifetime Learning tax credit. Any student whose income is not higher than $55,000 ($75,000 if a joint filer) and who pays interest on a qualified education loan is eligible to deduct up to $2,500 per year for the first 60 months that interest has been paid on an education loan. In written comments on our draft report the Department of Veterans Affairs generally agreed with our reported findings. Veterans Affairs suggested that we include education awards provided through the AmeriCorps program in our review as well. Our analysis focused on comparing benefits that students receive in exchange for their military service to benefits that are awarded under Title IV of HEA and for which no service is required. We did not include AmeriCorps education awards in our review because they are not part of Title IV and because education awards are provided in exchange for community service. In addition, the number of students who earn AmeriCorps education awards is small compared to students who receive benefits through Title IV aid programs. In fiscal year 2000, about 27,000 participants earned an AmeriCorps education award compared to approximately 7.6 million students who received aid through Title IV programs in fiscal year 2001. Veterans Affairs’ written comments are printed in appendix II. The Department of Education provided technical clarifications on our draft report and we have incorporated these where appropriate. We are sending copies of this report to the secretary of education and secretary of veterans affairs and other interested parties. We will also make copies available to others upon request. The report is available at GAO’s homepage, http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-8403. Other major contributors include Jeff Appel and Andrea Romich Sykes. The following three tables provide estimates of the amount of Pell grant, subsidized Stafford loan, and unsubsidized Stafford loan aid awarded to veteran and nonveteran students at public 2-year, public 4-year, and private 4-year institutions and the amount of GI benefits available in academic year 1999-2000.

Summary: The Montgomery GI Bill provides a monthly stipend to pay postsecondary education expenses for veterans and eligible service members. Concerns have been raised about whether GI benefits adequately cover educational costs and whether the receipt of GI benefits affects other federal financial assistance available to postsecondary students under Title IV of the Higher Education Act and the Internal Revenue Code. Under Title IV, GI benefits do not affect the amount of aid veterans receive under the Pell grant and subsidized Stafford loan programs but may affect the amount they receive in unsubsidized loans and through campus-based aid programs. Depending on the program, GI benefits may be considered as another source of financial assistance for students, which may decrease a veteran student's financial need and thus the amount of need-based aid provided. With regard to available federal tax incentives, the receipt of GI benefits does not preclude veterans from claiming such benefits but may affect the amount they would be eligible to claim. On average, veterans and nonveterans with comparable characteristics are awarded similar amounts of federal Title IV aid. When GI benefits are included, the total amount of federal assistance is greater for veterans than it is for nonveterans. Moreover, veterans' total aid, including Pell Grants, Stafford loans, and GI benefits has a lower proportion of loans compared with nonveterans' packages. On average, veteran students received slightly lower average campus-based aid awards than did nonveteran dependent students, but they received more than nonveteran independent students at four-year institutions. The actual amount of HOPE and Lifetime Learning tax credits by veteran and nonveteran students is unknown. However, the amount of tuition and fees paid, amount of GI benefits and grant aid received, and family income and taxes owed will affect the amount of tax credit one may claim.