The following programs are authorized under Title IV of the Higher Education Act, as amended: Pell grants—grants to undergraduate students who are enrolled in a degree or certificate program and have federally defined financial need. Stafford and PLUS loans—these loans may be made by private lenders and guaranteed by the federal government (guaranteed loans) or made directly by the federal government through a student’s school (direct loans). Subsidized Stafford loans—loans made to students enrolled at least half-time in an eligible program of study and have federally defined financial need. The federal government pays the interest costs on the loan while the student is in school. Unsubsidized Stafford loans—non-need-based loans made to students enrolled at least half-time in an eligible program of study. Although the terms and conditions of the loan (i.e., interest rates, etc.) are the same as those for subsidized loans, students are responsible for paying all interest costs on the loan. PLUS loans—non-need-based loans made to credit worthy 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. Dependent students may borrow combined subsidized and unsubsidized Stafford loans up to $2,625 in their first year of college, $3,500 in their second year, and $5,500 in their third year and beyond. Independent students and dependent students without access to PLUS loans can borrow combined subsidized and unsubsidized Stafford loans up to $6,625 in their first year, $7,500 in their second year, and $10,500 in their third year and beyond. There are aggregate limits for an entire undergraduate education of $23,000 for dependent students and $46,000 for independent students or dependent students without access to PLUS loans. Campus-based aid—participating institutions receive separate allocations for three programs from Education. The institutions then award the following aid to students: Supplemental Educational Opportunity Grants (SEOG)—grants for undergraduate students with federally defined 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 federally defined financial need. Students can borrow up to $4,000 for any year of undergraduate education with an aggregate limit of $20,000. Work-study—on- or off-campus jobs in which students who have federally defined need earn at least the current federal minimum wage. The institution or off-campus employer pays a portion of their wages. The amount of nonfederal financial aid has been increasing faster than the amount of federal grants for financial aid while the amount of federal loans for financial aid has increased the most. As figure 1 shows, from 1991-92 to 2001-02, the total financial aid awarded from nonfederal grants more than doubled, while the amounts from federal grant programs increased much more slightly. During this time, the amount of aid borrowed through federal loan programs nearly doubled. Growth in the amount borrowed through nonfederal loans from 1995-96 to 2001-02 also rose, but it remains the smallest source of the four categories. As a result of increasing reliance on loans to pay college costs, there is growing concern about the level of loan debt students are accumulating. The median cumulative amount borrowed from all loan sources for graduating seniors increased (in constant 2001 dollars) from $9,800 in 1992-93 to $18,000 in 1999-2000. Even though income of graduates may have increased over the same period, some analysts have expressed concern about the increased reliance on the use of loans in lieu of other options for financing a college education, such as resources the student and family already have. Education is responsible for, among other things, formulating the federal postsecondary education policy, overseeing federal investments in support of students enrolled in postsecondary education, and managing the distribution of Title IV funds. Part of its role in fulfilling these responsibilities is to ensure that Title IV funds are used effectively. Education has established a performance indicator of maintaining borrower indebtedness and average borrower payments for federal student loans at less than 10 percent of borrower income in the first year of repayment. This indicator was established based on the belief that an educational debt burden of 10 percent of income or higher will negatively affect a borrower’s ability to repay his or her student loans. Schools are responsible for determining individual students’ eligibility for specific sources of financial aid and compiling these sources to meet each student’s need—a process known as packaging. Part of this process involves deciding which types or sources of aid should be awarded first— for example, grants or loans, federal or nonfederal aid, need-based or non- need-based aid. Another factor to consider in packaging aid is whether to reduce aid from any source in a student’s package to offset an aid award from another source. Such a reduction might be done, for example, when a student who has been awarded a significant amount of need-based aid subsequently obtains a substantial non-need-based aid award from a source outside of their school’s financial aid office. In school year 1999-2000, an estimated 732,000 out of 3.4 million full- time/full-year federal aid recipients (22 percent) received $2.96 billion in financial aid greater than their federally defined financial need, either because they or their parents received substitutable loans or because they received nonfederal financial aid, such as scholarships, in addition to federal aid. Figure 2 shows how the number of aid recipients receiving aid greater than their federally defined need compares to the total number of financial aid recipients. Figure 3 shows how the amount of aid greater than federally defined need compares to total aid received. Of all federal aid recipients, about 19 percent (628,000) received total financial aid that was greater than their federally defined need solely as a result of receiving substitutable loans. We estimate this to be $2.72 billion with an average amount of about $4,300. These students received aid that was greater than their federally defined need because, under the Higher Education Act, students and their families can borrow substitutable loans—unsubsidized Stafford and PLUS loans—to offset the amount of their expected family contribution (provided they do not exceed the annual and cumulative borrowing limits established for these programs). The way that schools package student financial aid could contribute to students receiving substitutable loans that increase their aid beyond their federally defined need. For example, of the 12 schools that provided information on their aid packaging practices, 7 automatically package substitutable loans for students that are greater than their federally defined need while 5 require that a student or family who wishes to obtain such a loan apply for it. Another 3 percent of federal aid recipients (104,000) received aid that was greater than their federally defined need as a result of receiving nonfederal aid in addition to their federal aid. We estimate this to be a total of $238 million with an average of about $2,300. This group of students continued to have aid greater than their federally defined need even after any substitutable loans they received were accounted for. Further, there was no pattern among these students in terms of the sources from which they received their financial aid, except that the majority received unsubsidized Stafford loans. (See table 1.) In addition, there was no pattern in terms of the types of schools they attended. The lack of any such pattern may be due to factors not captured in NPSAS data, such as the sequence in which financial aid was packaged. While we did not identify any common patterns or characteristics associated with students receiving aid greater than their federally defined need as a result of combinations of federal and nonfederal aid, there are a number of possible reasons why this may occur: In limited circumstances, students who receive Title IV assistance are allowed to receive aid that is greater than their federally defined need. In the first situation, schools cannot reduce the amount of a Pell grant even if it results in a student receiving aid greater than federally defined need. We found, however, that only 17 percent of the students in this group received Pell grants. Also, if aid greater than federally defined need is $300 or less, campus-based assistance does not need to be reduced and subsidized Stafford loans do not need to be reduced if the student is also receiving federal work study. Finally, after any Stafford loan funds have been delivered to the student, the student is allowed to receive aid from a non- Title IV source, even if that aid results in aid greater than federally defined need. This could, for example, explain some of the 39 percent of students in this group who received subsidized Stafford loans. In some cases, rules for nonfederal assistance can increase the likelihood of students receiving aid greater than their federally defined need from sources such as private scholarships. Benefactors of private scholarships may sometimes prohibit schools from reducing the amount of the scholarship even if a student’s total aid package will be greater than their federally defined need. Also, several of the schools that provided information to us specifically cited students who receive both Pell grants and state, merit, or athletic scholarships that are greater than their federally defined need as cases in which they would not reduce total aid in order to stay within their federally defined need. We found that, among the students whose aid was greater than federal need due to combinations of federal and nonfederal aid, less than 5 percent received both Pell grants and state or institutional merit scholarships or athletic scholarships. Some schools—primarily private 4-year institutions—use different factors than those used by the federal government to determine eligibility for institutional need-based aid. These need formulas, known as institutional methodologies, may identify a higher level of need for a student than the federal government would. However, schools that use institutional methodologies must still use the federal definition of need to award federal need-based aid. By filling this higher level of need from aid sources that are not counted towards federally defined need, the student could receive more aid than his/her federally defined need would dictate. NPSAS does not capture whether any nonfederal need-based aid was distributed using these institutional methodologies. Under Title IV, financial aid officers have discretion to recalculate a student’s need if the family’s financial circumstances change dramatically, such as a parent’s loss of employment. This discretion, known as professional judgment, could result in an increase to a student’s financial need. NPSAS does not capture whether a student’s aid package was adjusted due to professional judgment. However, the 12 schools that provided information to us generally said they changed aid awards as a result of professional judgment for 5 percent or fewer of federal aid recipients. These cases describe situations under which federal aid recipients may legitimately receive more financial aid than their federally defined need. While each of the situations described provides a plausible explanation of how a combination of federal and nonfederal aid can raise overall aid above federally defined need, we cannot determine with certainty, without looking in detail at each case, why these aid recipients received more aid than their federally defined need. Compared to those federal aid recipients who did not receive aid greater than their federally defined need, the 732,000 who did were more likely to have higher family incomes, be dependent, or attend public universities. They are also more likely to have higher grade point averages or attend schools in the Southwest or Plains states. Among those variables that proved statistically significant, table 2 shows selected student and school characteristics that were associated with receiving aid greater than federally defined need. Appendix II more fully describes all of the variables used in our analysis and more completely discusses their levels of statistical significance. These patterns generally held regardless of whether the aid greater than federally defined need could be attributed to substitutable loans or a combination of federal and nonfederal aid. The one exception we found was that students who received aid greater than their need as a result of a combination of federal and nonfederal aid were more likely to be white. In addition, these 732,000 students were more likely to have financial aid packages consisting mostly of non-need-based federal aid or nonfederal aid. Among those variables that proved statistically significant, table 3 shows selected financial aid package characteristics that were associated with receiving aid greater than federally defined need. (See app. II for a more complete description of variables and their significance levels.) Based on NPSAS data alone, we cannot say why the characteristics listed in tables 2 and 3 are associated with a greater likelihood of receiving aid greater than federally defined need. Changing the Higher Education Act to limit the receipt of aid that is greater than students’ federally defined financial need is not likely to achieve significant federal savings. However, the use of substitutable loans could increase overall student indebtedness. Any cost savings from changing the Higher Education Act to limit the receipt of aid that is greater than students’ federally defined financial need would likely be very modest, much less than the dollar amount of such aid—the $2.96 billion. In the case of the larger group of students and their families whose aid greater than federally defined need is attributable to substitutable loans, the actual cost to the government is not the face value of the loans. For guaranteed loans, the government incurs costs—primarily insurance claims payments to lenders for defaulted loans and special allowance payments made to lenders to ensure a guaranteed return on the loans they make. For direct loans, interest from loan repayments offsets costs the government incurs for defaults and interest payments to the treasury on funds Education borrows to make loans. These interest earnings produce savings for the government. Determining the net cost of federal substitutable loans would require comparing savings generated by direct loans with the net costs associated with guaranteed loans. We could not estimate these costs given the data available in NPSAS. For the smaller group of cases involving combinations of federal and nonfederal aid, any savings would depend on how aid is packaged. Assuming that most schools package loans and work study last—8 of the 12 schools that provided us with information said this was the typical practice at their institutions—loans and work study would most likely be eliminated first to keep aid packages within federally defined need limits. Any savings on loans would be derived using the same basic calculation we described above for substitutable loans. In addition, the government would also save the interest it pays on subsidized loans while students are still in school. Thus, these savings would be considerably smaller than the face value of the loan. With regard to work study, it is likely that schools rather than the federal government would obtain most of the savings. According to our analysis of the NPSAS data, this would occur because a larger percentage of these students received institution-funded work study rather than federally funded work study (29 percent versus 12 percent). Although changing the Higher Education Act to limit receiving aid greater than federally defined need is not likely to result in any substantial cost savings, continuing this practice may affect some students’ loan indebtedness. The one fifth of federal aid recipients who received substitutable loans may face higher monthly loan repayments that might constrain their other financial choices. In addition, as student loan indebtedness rises, borrowers could experience difficulty in meeting their monthly payments, particularly under weak economic conditions. The widespread use of substitutable loans might also affect Education’s ability to help students and their families maintain their loan indebtedness at manageable levels. Officials at Education told us that the agency is committed to tracking overall student debt burden. However, the 19 percent of students and their families who borrowed substitutable loans may have higher monthly repayments and spend a larger share of their income on loan repayments than other students. This could increase the average debt burden of these students above that of other students. While students and their families have a range of options for paying for college, the money students borrow could influence their later debt burden. Given Education’s performance indicator of maintaining borrower indebtedness at less than 10 percent of income in the first year of repayment, this relationship should be of interest to the agency. Education may find it more difficult to meet this standard if indebtedness continues to grow through the use of substitutable loans. Such information might prove useful to help inform federal policymakers on how best to minimize student indebtedness. To ensure that the use of substitutable loans will not lead to unmanageable student loan indebtedness, we recommend that the Secretary of Education, over time, monitor the impact of substitutable loans on student debt burden and, if debt burden associated with substitutable loans rises substantially, develop and propose alternatives for the administration or Congress to consider to help students manage student loan debt burden. Such alternatives could range from shifting students into repayment plans that would lower their debt burden to limiting the use or amount of substitutable loans. In written comments on a draft of this report, Education agreed that student indebtedness is of concern, however, Education disagreed with what we included in our analysis. Specifically, we included PLUS loans to a student’s family—usually to the parents—as part of our analysis. Education stated that by including these loans we were mischaracterizing student debt and that loans to families should be excluded from our analysis. Education also stated that we should distinguish between students and their families as the recipients of federal financial aid. We modified the report to more clearly detail when non-students were responsible for the loans. However, based on the 1999-2000 NPSAS data, 1.3 million federal aid recipients received unsubsidized Stafford loans while 323,000 federal aid recipients received PLUS loans, indicating to us that far more substitutable loans are likely to be made to students. Education also had technical comments, which were incorporated when appropriate. See appendix III for a printed copy of Education’s comments. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Health, Education, Labor and Pensions and the House Committee on Education and the Workforce; and the Director of the Office of Management and Budget. We will also make copies available to others on request. This report is also available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-8403. Major contributors are listed in appendix IV. The objectives of this study were to determine how often students who were federal financial aid recipients received aid that was greater than their federally defined financial need, identify the student, school, and financial aid package characteristics associated with receiving such aid, and determine what the implications might be, if any, of changing the Higher Education Act to limit the receipt of aid that is greater than a student’s federally defined need. When students receive financial aid from multiple sources or some aid that is not need-based, the potential exists for some students to receive aid that is greater than their federally defined need. Most Title IV aid is based on a student’s federally defined financial need, which is the difference between the student’s cost of attendance and the family’s federally determined ability to pay these costs—known as the expected family contribution (EFC). To meet their EFC under Title IV, families can obtain non-need-based loans, which we refer to as substitutable loans. To carry out our objectives, we used the National Postsecondary Student Aid Study (NPSAS) data collected by the Department of Education’s National Center for Education Statistics. We also contacted 19 college and university financial aid officers to obtain information on their schools’ financial aid packaging policies and practices. We received responses from 12 of these officials. To determine the extent to which students received financial aid greater than their federally defined need, we analyzed the NPSAS data to identify the amount and source of financial aid received by full-time, full-year undergraduates who received aid from any federal source whether or not it was a Title IV program. We identified two distinct groups of students who received aid greater than their federally defined need. We first identified all students who received aid greater than the federally defined need, regardless of the source of that aid (see block A in fig. 2). The first group of students were those whose aid greater than federally defined need was accounted for by the substitutable loans they received (see block A-1 in fig. 2). The second group of students were those whose aid still remained greater than their federally defined need, after accounting for any substitutable loans in their aid packages (see block A-2 in fig. 2). To determine what student and school characteristics were associated with receiving aid greater than federally defined need, we again used NPSAS data for our analysis. For all of the students receiving aid greater than federally defined need and the second group of these students, we employed logistic regression models to estimate the association between student and school characteristics and the likelihood of receiving aid greater than federally defined need. We chose logistic models due to the dichotomous nature of the phenomenon of interest—whether or not students received aid greater than their federally defined need. We did not perform a similar analysis on the first group because, since it was such a large portion of the students receiving aid greater than their federally defined need and since the aid that was greater than need could be attributed entirely to receiving substitutable loans, it was not likely the results would show this group to be different in any other ways. The variables that we used are listed and defined in appendix II. In general, we included student characteristics such as race, marital status, and dependency status. We included such school characteristics as graduation rate, geographical location, and whether or not a school was public. We also included some characteristics of the aid packages the students received. To report the results of the regressions, we use odds ratio tables. (See app. II.) Some variables proved not to have a statistically significant association with receiving aid greater than federally defined need. For all of the students receiving aid greater than their federally defined need, these included whether the student was white, the graduation rate of the school, and if the majority of a student’s aid package was composed from federal need-based loans. For the second group, whether the student was a veteran, was a U.S. citizen, and whether the majority of aid was received from federal need-based loans or nonfederal loans were statistically insignificant. In analyzing the results for the second group of students, we sought to determine if a large proportion of these students had characteristics in common, such as receiving aid from specific programs or attending schools with a certain common characteristic (e.g., public versus private, regional location). We did not undertake any further analysis to identify how these students received aid that was greater than their federally defined need. This would have entailed individually analyzing each of the over 400 cases and obtaining additional information directly from the school. This analysis would have been beyond the scope of our review. To analyze the student and school characteristics that are associated with receiving aid greater than federally defined need, we ran logistic regressions from variables in the 1999-2000 NPSAS. We sought to determine which student, school, and aid package characteristics were significantly associated with the receipt of aid greater than the federally defined need. We included variables representing dependency status, grade point average (GPA), region of the country, race, veteran status, income, a private college indicator, the source of the majority of the student’s aid, and the number of different aid source in the aid package. The results for the models we used are odds ratios that estimate the relative likelihood of receiving aid greater than federally defined need for each factor. Table 4 shows these odds ratios for all students receiving aid greater than their federally defined need (see blocks A-1 and A-2 in fig. 2). Table 5 shows the results for the students whose aid greater than their need could not be attributed entirely to receiving substitutable loans (see block A-2 in fig. 2). If there were no significant differences between those who received aid greater than federal need and those who did not with regard to a particular characteristic then the odds ratio would be 1.00. The more the odds ratio differs from 1.00 in either direction, the larger the effect. The odds ratios were generally computed in relation to a reference group; for example, if the odds ratio refers to being a dependent student, then the reference group would be independent students. Some variables, such as GPA and income, are continuous in nature. In these cases, the odds ratio can be interpreted as representing the increase in the likelihood of receiving aid greater than federally defined need given a 1 unit increase in the continuous variable. An odds ratio greater than 1.00 indicates an increase in the likelihood of receiving aid greater than the federally defined need relative to the reference group, whereas an odds ratio less than 1.00 indicates a decrease in the likelihood of receiving aid greater than the federally defined need relative to the reference group. Both tables also include the 95 percent confidence intervals around the odds ratios. If these intervals contain 1.00, then the difference is not statistically significant. Table 6 shows the means for all the variables considered. Dependent. All else equal, dependents are more than twice (2.62) as likely to receive aid greater than federally defined need. Currently Married. All else equal, being currently married (as opposed to single or separated, divorced or widowed) increased the likelihood of receiving aid greater than federally defined need by a factor of 1.63. Veteran. Veterans were almost twice as likely (1.83) than nonveterans to receive aid greater than the federally defined need. Household Size. As the size of a household increases, the likelihood of receiving aid greater than the federally defined need decreases. For example, a student from a two-member household is 1.4 times more likely to receive aid greater than federally defined need than a person from a three-member household. GPA. GPA is usually calculated on a 4-point scale. In the NPSAS data set, GPA is multiplied by 100 or reported on a 400-point scale. In our analysis, we have GPA ranging from 0 to 40, such that a unit increase in our GPA variable (say from 37 to 38) represents a 0.1 change in grade point average as it is usually calculated (3.7 to 3.8). An odds ratio of 1.03 should thus be interpreted as follows: On a 4-point GPA scale, increasing GPA by one- tenth of one point (2.53 to 2.63) increases the likelihood of receiving aid greater than federally defined need by 3 percent. Thus, a change of one grade point (2.5 to 3.5) increases the likelihood of receiving aid greater than federally defined need by 35 percent (1.0310 = 1.35). Income. For every $5,000 change in income, the probability of receiving aid greater than federally defined need increases by 24 percent. A person earning $50,000 more than another, all else equal, is 8.6 (1.2410 = 8.59) times more likely to receive aid greater than federally defined need. Private Not-for-profit University. Attending a private university decreases the likelihood of receiving aid greater than federally defined need. Someone who attends a public university increases his/her chances of receiving aid greater than federally defined need by a factor of 2.86 (1/0.35). Four-year School. All else equal, attending a 4-year institution increases the likelihood of receiving aid greater than federally defined need by a factor of 1.5. Urban. All else equal, attending a rural (rather than urban) institution increases the likelihood of receiving aid greater than federally defined need by a factor of 1.5 (1/0.68). Plains-Southwest. A student attending school in the Plains states or the Southwest is 1.7 times more likely to receive aid greater than federally defined need than a similar student attending school in other regions of the country. The aid package variables represent the source of the “majority” of the student’s aid, if there was a majority source. The omitted reference group is the category of people whose majority of aid comes from federal grants such as Pell and Supplemental Educational Opportunity Grants (SEOG). About 17 percent of the sample falls into the reference group. In general, the people who had a majority of their aid coming from federal grants were less likely to receive aid greater than the federally defined need than any other group (as defined by majority of aid source). Majority from Non-Need-Based Federal Loans. Holding all else equal, a student who receives a majority of aid from federal, non-need-based loans was almost 5 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Federal Work Study and PLUS Loans to Parents. Holding all else equal, a student who receives a majority of aid from federal work study and PLUS loans is about 6 (6.02) times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Nonfederal Grants, Scholarships and Work Study. Holding all else equal, a student who has a majority of aid coming from nonfederal grants or scholarships, work study, Veterans/Department of Defense benefits, Vocational Rehabilitation assistance or other non-loan sources is about 6.12 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Nonfederal Loans. Holding all else equal, a student who receives a majority of aid from nonfederal loan sources is about 7.8 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. No Majority. A student who has no distinct majority source of aid is 2.33 times more likely to receive aid greater than federally defined need than a student who the majority of aid from federal grants. Number of Aid Components in Aid Packages. Having more aid sources in a student’s aid package results in a higher probability of receiving aid greater than the federally defined need. Having an additional aid component increases the likelihood of receiving aid greater than federally defined need by a factor of 1.33. This means that having five sources of aid, rather than one source of aid, can cause a three-fold increase in the likelihood of receiving aid greater than federally defined need (2.994 = 1.314). Substitutable Loans. Receiving loans that can be substituted for EFC is associated with a great increase in the likelihood of receiving aid greater than federally defined need. This can be attributed to the fact that aid greater than federally defined need can be accounted for by substitutable loans for over 85 percent of the students who received such aid (628,000 out of 732,000). Dependent. All else equal, being a dependent increases the probability of receiving aid greater than federally defined need three–fold. White. Being white as opposed to nonwhite almost doubles the chances of getting aid greater than federally defined need (1.75). GPA. GPA is usually calculated on a 4-point scale. In the NPSAS data set, GPA is multiplied by 100 or reported on a 400-point scale. In our analysis, we have GPA ranging from 0 to 40, such that a unit increase in our GPA variable (say from 37 to 38) represents a 0.1 change in grade point average as it is usually calculated (3.7 to 3.8). An odds ratio of 1.05 should thus be interpreted as follows: On a 4-point GPA scale, increasing GPA by one- tenth of one point (2.53 to 2.63) increases the likelihood of receiving aid greater than federally defined need by 5 percent. Thus, a change of one grade point (2.5 to 3.5) increases the likelihood of receiving aid greater than federally defined need by 63 percent (1.0510). Income. For every $5,000 change in income, the probability of receiving aid greater than federally defined need increases by 6 percent. Thus, a $50,000 increase in income (say between someone earning $25,000 and someone earning $75,000) results in a 79 percent (1.0610 = 1.79) increase in the likelihood of receiving aid greater than federally defined need. Plains-Southwest. A student attending school in the Plains states or the Southwest is 1.77 times more likely to receive aid greater than federally defined need than a similar student attending school in other regions of the country. Private University. Attending a private university decreases the likelihood of receiving aid greater than federally defined need. Someone who attends a public university increases his or her chances of receiving aid greater than the federally defined need by a factor of 1.35 (1/0.74). The aid package variables represent the source of the “majority” of the student’s aid, if there was a majority source. The omitted reference group is the category of people whose majority of aid comes from federal grants such as Pell and SEOG. About 17 percent of the sample falls into the reference group. In general, the students who had a majority of their aid coming from federal grants were less likely to receive aid greater than federally defined need than any other group (as defined by majority of aid source). Majority from Non-Need-Based Federal Loans. A student who receives a majority of aid from federal non-need-based loans is 6.6 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Majority from Federal Work Study and PLUS Loans to Parents. A student who receives a majority of aid from federal work study and PLUS loans is 3 times more likely to receive aid greater than federally defined need than a student who receices the majority of his aid in the form of federal grants. Majority from Nonfederal Grants, Scholarships and Work Study. Holding all else equal, a student who receives a majority of aid from nonfederal grants or scholarships, work study, Veterans/Department of Defense benefits, Vocational Rehabilitation assistance or other nonloan sources is about 20 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. No Majority. A student who has no distinct majority source of aid is about 7 times more likely to receive aid greater than federally defined need than a student who receives the majority of aid from federal grants. Number of Aid Components in Aid Packages. Having more aid sources in a student’s aid package results in a higher probability of receiving aid greater than federally defined need. Having an additional aid component increases the likelihood of receiving aid greater than federally defined need by a factor of 1.2. This means that having seven sources of aid rather than one source of aid can double the likelihood of receiving aid greater than federally defined need (2.14 = 1.214). In addition to the name above, Mary Crenshaw, Patrick diBattista, Nagla’a El-Hodiri, Kathy Hurley, Joel Marus, John Mingus, Doug Sloane, and Wendy Turenne made important contributions to this report.

Summary: Over half of the $80.4 billion in financial aid provided to college students in the 2000-01 school year came from the federal government in the form of grants and loans provided under Title IV of the Higher Education Act (HEA). To help finance their education, students and families may have received other funds from states, private groups or lenders, and/or the schools themselves. We initiated this study to, among other things, determine how often federal financial aid recipients received aid that was greater than their federally defined need and what cost or other implications might result from changing HEA to limit such aid. We found that in school year 1999-2000, of the 3.4 million full-time/full-year federal aid recipients, 22 percent (732,000) received a total of $2.96 billion in financial aid that was greater than their federally defined financial need. Of these, 628,000 received an estimated $2.72 billion in such aid by obtaining non-need-based loans--which we identify as substitutable loans--that families borrow to meet their expected family contribution. Title IV allows for students and families to obtain these non-need-based loans to meet their expected family contribution. Another 104,000 federal aid recipients received an estimated $238 million in such aid as a result of receiving a combination of aid from federal and nonfederal sources. Changing the HEA to limit the receipt of aid that is greater than students' federally defined financial need is not likely to achieve significant federal savings, although, the use of substitutable loans may increase overall student indebtedness. In terms of cost implications, limiting those instances where federal aid recipients receive substitutable loans--which is the main reason why students received aid greater than their federally defined need--will not likely result in significant savings. While the government will not have to pay default claims or special allowance payments on loans it guarantees, it would forego any interest earnings on loans it makes directly. Any savings from limiting these loans would be substantially less than the total amount of the loans made--the $2.72 billion. However, the widespread use of substitutable loans may increase the average debt of borrowers and may affect Education's ability to help students and their families maintain their loan debt at manageable levels.