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.