Federal Financial Aid: Life Ring for Students or Sinking Ship of Policy?


Given the challenges faced by those who are trying, or preparing, to pay for college — rising tuition costs, competition for student aid dollars, low investment and savings returns — it is clear that something must change in the world of financial aid. The Higher Education Act, which is the piece of legislation that dictates everything from Pell Grant award levels to interest rates on student loans, is up for renewal this year. President Obama, who has been a vocal supporter of higher education and student aid, is entering his second and final term. Legislators, after rasslin’ with the whole fiscal cliff thing, seem to have received the message that student aid is important. If change in financial aid policy is going to happen, now seems like as good a time as any.

Inside Higher Ed” reports that the policy makers and pundits appear to be circling in the waters of higher education funding. The College Board, lawmakers and even the leviathan Bill and Melinda Gates Foundation, one of the largest philanthropies in the world, have something to say about how federal student aid should work. Discussion regarding federal grant money for students is at the top of most such agendas.

Although the Pell Grant program, which is the keystone of federal aid — and what most are trying to qualify for when they apply for financial aid as an undergraduate — was spared in the agreement made to avoid the fiscal cliff at the beginning of 2013, there are no plans in the offing to raise the amount of the grants to come into line with actual tuition costs. Moreover, other types of non-loan aid, such as federal work-study and Federal Supplemental Educational Opportunity Grants (FSEOG), are still on the chopping block. Unless a deal is made to avoid sequestration by March 1, many students who rely on aid in the form of work study or FSEO grants may be forced to borrow (or borrow more) money to fund their educations.

A recent paper (available here in .pdf format) issued by the National Bureau of Economic Research points out that while the financial aid system involves huge sums of money, and the value vs. cost of education is under more scrutiny than ever, the “system has received comparatively little attention from economists.” The paper’s authors, Susan M. Dynarski and Judith E. Scott-Clayton, examine the current student aid system from the perspectives of behavioral economics and optimal tax theory, and deride it for being too complex.

After sifting through decades of historical data, the scholars conclude that such “complexity is a serious obstacle to both efficiency and equity in the distribution of student aid.”

The authors believe that a handful of basic premises are involved in addressing the current set of issues that face the financial aid system. Doug Lederman, in his “Inside Higher Ed” piece, sums them up nicely:

  • Money matters for college access. “[W]hen students know that they will receive a discount, enrollment rates increase,” they say, citing numerous pieces of research. And while this is a newer line of inquiry, early indications are that money “can improve persistence and completion,” too, they write (though with one important caveat, to be discussed later).
  • Program complexity undermines aid effectiveness. “Programs … that have clearly demonstrated impacts on college enrollment tend to have simple, easy-to-understand eligibility rules and application procedures,” Dynarski and Scott-Clayton write. The authors, who are strong proponents of simplifying the Pell Grant Program, argue that Pell’s application and eligibility is not nearly simple enough, limitations that “may be obscuring its benefits and dampening its impact among the individuals who need it most — those who are on the fence about college for financial reasons.”
  • Evidence on the effect of loans is limited but suggests that design is important. The authors note that there has been relatively little rigorous research to answer the question of whether loans affect college enrollment, performance or completion, or to compare the impact of loans to that of grants (which need not be repaid).  “A more interesting question than whether [loans] increase college enrollment or completion at all is whether some types of loans are more effective than others,” they write.
  • Academic incentives appear to augment aid effectiveness, particularly after enrollment. The authors cite several studies to suggest that scholarships tied to students’ academic performance “can bolster the impact of financial aid on college performance and completion,” and that “dollars with strings attached produce larger effects than dollars alone.”

Dynarski and Scott-Clayton argue that the complexity of the historic system of student aid is unnecessary. In fact, the way the current system operates flies in the face of its own presumptive goals. The “complexity disproportionately burdens those with the least ability to pay and undermines [the system's] redistributive goals.”

If the system is burdening poor students and failing to redistribute financial aid dollars to those who need them most, then what is it doing? I know it gives me the occasional headache, but I admittedly think about financial aid more (I hope) than the typical fellow. I do think that there is a lot of pressure put on students who need aid; and the sheer number of people out there who are willing to charge you to fill out the FREE Application for Federal Student Aid (FAFSA) is a pretty good indicator that the system is overly complex. Dynarski and Scott-Clayton believe that “a radically simplified aid process can reproduce the current distribution of aid using a fraction of the information now collected.”

This is great. If they can talk the policy-makers into it, a simpler FAFSA would be a vast improvement. What I did notice, however, was an absence of advice on bringing more equity into the distribution of student aid. Maybe the Gates Foundation is handling that problem.



  1. It’s been awhile, but what I remember of my experience was this. I married early and applied for different programs. The problem was that both The Wife and I worked. So we made to much money to qualify for anything. In then end, it was a mix of us and parental help. Not what we wanted but in working full time and going to school at a “commuter college”, my options were limited. Times were tight, but I’m glad I accomplished a degree. Thanks for the post. Yours is a great place for solid info.

    The Cheeky Daddy

Leave a Comment

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>