The Department of Education’s Office of Federal Student Aid (FSA) provides roughly $120 billion annually in financial aid to promote student access and affordability in higher education. FSA programs include Pell Grants; campus-based aid, which includes Federal Supplemental Opportunity Grants and Federal Work-Study; and federal student loans. To qualify for federal aid, students must complete the Free Application for Federal Student Aid (FAFSA), which collects financial information to determine eligibility for these programs.
This brief provides background on these FSA programs and highlights several challenges in the current system.
The FAFSA collects information on sources of income, assets, family size, and the number of college-enrolled family members. This information is used to generate an Expected Family Contribution (EFC) for every student based on federally determined formulas. EFC is a measure of financial strength and not necessarily indicative of what a family will pay for college—EFC is considered in relation to the cost of attendance (COA) at a given institution to establish eligibility for federal student aid. (In the 2022-23 application season, the term “student aid index” will replace EFC.)
The form must be completed every year that a student is enrolled, although recent legislation—once implemented—will reduce the burdens associated with filing the FAFSA. These efforts include shortening the form from 108 to 36 questions and authorizing automatic data sharing between the Internal Revenue Service and the Department of Education, reducing the burden on students and families, particularly in lower-income brackets.
The Pell Grant program is the federal government’s largest source of need-based grant aid for higher education. More than 6.8 million undergraduate students received a total of $28 billion in Pell Grants in the 2019-2020 academic year.
Who Receives a Pell Grant?
Eligibility for Pell Grants is determined by information submitted on the FAFSA, the cost of attendance at a given institution, and whether a student is enrolled full- or part-time. Changes to the eligibility formula in the Consolidated Appropriations Act will allow more students to automatically qualify for the maximum grant if they are from families with income up to 175% of the federal poverty line (225% for students who are single parents). Students from families who make up to 275% of the poverty line (325% for single parents) are now also guaranteed to receive at least the minimum award, equivalent to 10% of the maximum award in a given year.
As such, the program is fairly well-targeted, directing grant aid toward those with the greatest financial need. Adult learners, those with dependents, first-generation students, and students of color disproportionately rely on Pell Grants to finance their education. Pell Grants have some limitations: students generally cannot use Pell Grants to enroll in short-term programs.
Pell Grant Funding
Historically, Pell Grants have been funded entirely through the annual discretionary appropriations process, but in 2007, Congress enacted additional mandatory funding for the program. With enrollment levels fluctuating from year to year and the standard annual appropriations process concluding before the academic year begins, the Pell Grant program can accumulate a surplus or a shortfall in a given year. The mandatory funding stream was established to smooth these fluctuations and ensure resources would be available for all eligible students. In 2020, Congress appropriated $22 billion in discretionary and $7 billion in mandatory funding for the program, but more resources will be needed to keep pace with the ever-increasing cost of higher education.
The Diminishing Value of the Pell Grant
Over time, the value of the Pell Grant has dramatically eroded, driven in part by the rising price of tuition, fees, room and board (TFRB)—which have outpaced inflation. In the 2000-2001 academic year, the maximum Pell Grant covered 39% of in-state TFRB at public four-year schools. In the 2020-21 academic year, the $6,345 maximum award covered only 29%. The COVID-19 relief bill passed in December 2020 increased the maximum award for the 2021-22 academic year by $150.
Source: College Board, Trends in Higher Education, 2020.
Note: All figures are measured in 2020 dollars.
The federal government also provides resources directly to institutions to distribute to their students based on financial need. These campus-based aid programs include Federal Supplemental Educational Opportunity Grants (FSEOG), which are need-based grants for undergraduates, and Federal Work-Study (FWS), which supports part-time employment for students.
- FSEOG range from $100 to $4,000, and institutions disburse these funds at the beginning of each term, prioritizing low-income students. Institutions must match at least a third of their federal allocation, which in fiscal year 2020 totaled $865 million.
- FWS supplements wages for low- and moderate-income students’ part-time employment. Institutions must provide at least 25% of students’ earnings, with the federal government funding the remaining costs of the program. In FY2020, the FWS program received $1.2 billion in federal funding.
Federal Funding Formula
Campus-based aid flows to institutions based on two formulas. A base guarantee is applied first, which ensures institutions receive at least as much aid as the prior year. After the base guarantee, a fair share calculation distributes the remaining funds in proportion to a school’s calculated need, as determined by the total unmet need for students at an institution.
Because unmet need is a function of the price of an institution, schools that charge high prices receive outsized allocations as a result of the fair share calculation. Consequently, a disproportionate share of these resources flow to older, often wealthier institutions that enroll a smaller share of low-income students. Despite private nonprofit schools comprising just 21% of total postsecondary enrollment—and an even smaller share of Pell-eligible students—these institutions receive close to 40% of all federal campus-based aid, including 32% of total FSEOG funds and 42% of FWS funds.
The federal government disburses about $95 billion in student loans annually. Since 2007, the balance of federal student loan debt has more than doubled in real terms—from $658 billion to $1.54 trillion. At the same time, the number of loan recipients has grown from 28.3 million to 42.6 million, a 51% increase.
Types of Loans Lent Directly by the Federal Government
Source: Department of Education, Federal Student Aid.
Despite large increases in total cumulative lending, most borrowers (55%) owe less than $20,000, with 76% owing less than $40,000. Still, loan repayment outcomes are lackluster—and getting worse. Less than 70% of borrowers who completed a bachelor’s degree are able to reduce their principal balance within five years. From 2016 to 2020, the volume of federally managed loans more than 31 days delinquent has increased by more than 10%, from $86 billion to $95 billion, and the cumulative volume of loans in default has increased by 55%, from $108 billion to $168 billion.
Loan Repayment and Debt Forgiveness
Borrowers can choose from a variety of repayment plans and forgiveness options designed to help them manage their monthly payments. The default option is a 10-year plan with fixed monthly payments. Borrowers also have the option of enrolling in an Income-Driven Repayment (IDR) plan, which ties borrowers’ monthly payments to their earnings and offers loan forgiveness on the remaining balance after a specified number of years. IDR provides an important cushion for struggling borrowers, but each IDR plan has slightly different terms, which can make it difficult for borrowers to determine which is in their best interest. In order to reduce complexity, Congress could consider consolidating all of the IDR plans into a single plan, serving as the default option for borrowers.
The federal government also offers loan forgiveness to government and nonprofit workers after making 10 years of payments through the Public Service Loan Forgiveness (PSLF) program. The program is unduly complex, however, and has been plagued with administrative challenges, resulting in just 2% of applicants receiving loan forgiveness. Additionally, PSLF disproportionately benefits borrowers with higher loan balances, as they have larger amounts forgiven. These borrowers are also more likely to hold advanced degrees and have higher earnings, which calls into question the progressivity of the program—it also creates an incentive for borrowers to take on additional debt. While many borrowers will eventually repay their student debt with interest, uncertainty surrounds the federal costs associated with the federal student loan portfolio. Not only is it unclear how many borrowers will ultimately receive loan forgiveness under IDR and PSLF, but differing forecasting methodologies bring forth drastically different estimates of the portfolio’s long-term federal budgetary effects.
Repayment Plans Offered by the Federal Government
*Under current law, balances forgiven under IDR plans are treated as taxable income.
Source: Department of Education, Federal Student Aid.