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.