By: Saul Spigel

This report describes the types and sources of college financial aid and presents national and state trends in the amount of aid distributed.

Student financial aid addresses diverse policy purposes: providing access to college for students who cannot otherwise afford it, relieving parents' financial burden, supporting colleges, attracting particular students and rewarding specific types of students, and retaining students in state. To address these many purposes, aid takes varied forms: need-based and merit grants, subsidized and unsubsidized loans to students and parents, work opportunities, tuition waivers, and tax breaks.

Over the past decade, college costs rose nationally while most families' incomes stagnated. The total amount of federal and state grants increased and partially bridged the growing gap between costs and income. But the number of students receiving grants grew even more, which meant that per student grant aid did not keep pace, especially after adjusting for inflation's effects. Consequently, students and families increasingly resorted to government-subsidized and private loans, and colleges tapped their revenue to give out more institutional aid to make up the difference.

Connecticut's experience matches these national trends. Connecticut families at all income levels must now spend more of their income to send a child to a college, especially one in Connecticut, which typically cost more to attend than those in other states. While state aid increased over the decade, inflation and growing numbers of recipients diminished its effects. Colleges spent more of their own money to fill the aid gap.

Student financial aid serves several public policy purposes. It (1) enables students who could not otherwise afford to go to college the opportunity to attend; (2) reduces the financial strain on middle-income families, potentially giving their children more college options; (3) enables colleges to attract particular students; and (4) enables states to support their colleges, retain state residents as students, attract students from other states, and reward specific groups, like veterans. To address these varied purposes, financial aid takes diverse forms: grants based on financial need, academics, or other skills; subsidized and unsubsidized loans to students and parents; tuition waivers; tax breaks; and work opportunities.

Loans and grants are the principal types of aid. They are available from state and federal governments, colleges, and private sources. Work-study programs and tax credits and deductions help students and their families offset college costs. Some people, like veterans, receive tuition waivers at public colleges and universities. Several aid programs, such as Pell Grants and student loans, are also available to students attending private occupational schools.

Attachment 1 displays the array of financial aid programs available to Connecticut students, many of which are referenced in this report.

A variety of loans are available to undergraduate, graduate, and professional school students and those attending other postsecondary schools (e. g. , proprietary trade schools) and their parents. They can obtain loans through financial institutions, colleges, the U. S. Department of Education (DOE), and the Connecticut Higher Education Supplemental Loan Authority (CHESLA, funded through state general obligation bonds).

The federal government sets the interest rate on some loans and subsidizes interest payments on them while students remain in school. And, acting through the quasi-public Connecticut Student Loan Foundation (CSLF) and similar agencies, it guarantees repayment of loans. Students who take out multiple loans during their college careers can consolidate them once they leave school.

Grants can be based on financial need, other criteria (academic or athletic talent), or a combination of these factors. Some state-funded grants go directly to students; others go to individual colleges based on a formula, and the colleges use them as part of a package to help meet individuals' financial need. In addition, state policy requires each public college or university to use at least 15% of its tuition revenue for need-based financial aid.

Students need financial aid because (1) they cannot otherwise attend college at all or (2) the cost of attending the institution of their choice is a financial strain. Consequently, an examination of financial aid trends must look at multiple factors—college costs, family income, and the amount and sources of available aid.

(Except where noted, amounts are presented in constant dollars, that is, adjusted for inflation. )

College costs climbed faster than most families' incomes over the past decade, but increased financial aid narrowed the potential gap. Tuition and fees rose 59% at public four-year colleges between the 1994-95 and 2004-05 academic years and 42% at private, four-year colleges. But the median income of all families with heads of households between age 45 and 54 (those most representative of families with children in college, according to the College Board) rose just 2% during that period.

But available financial aid funds doubled between 1994-95 and 2004-05, closing the gap between rising college costs and stagnating income. Thus, the net cost of college for a full-time student (tuition, fees, and room and board minus average grant and education tax benefits) rose 21% at private four year colleges; 29% at four-year public colleges (16% for commuting students); and only 7% at public community colleges.

Because family income grew unevenly across income groups, the decade's changes in net college costs affected families differently. While all families paid a greater percentage of their income to send a child to college in 2003 than in 1992, the pinch was much greater on lower income families than higher income families.

In 1992-93, a family in the lowest median income quartile ($ 19,100 or less) had to spend 41% of its income for tuition, fees, room and board, and other expenses at a public four-year college; 10 years later it had to spend 47%. In contrast, a family in the highest quartile ($ 136,000 or more) paid 11% of its income to send a child to a public college in 2002-03, up just 1% from 1992-93.

An even greater divergence faced families sending a child to a private college. By 2003, this choice would cost a family in the lowest quartile 83% of its income, up from 60%, while a high-income family would spend 19% (up from 17%).

Table 1 shows the array of financial aid sources and their funding history over the past 10 years.

Grants come from college, state, and federal sources. Colleges grant the most money, over $ 24 billion in 2004-05, up 83% over the past decade. And states added another $ 6. 2 billion, up 78% during the decade.

Pell grants are based entirely on a student's financial need. State and institutional grants, though, can be based on need, merit, or a combination of these factors. State need-based aid nearly doubled in the past decade, to nearly $ 5 billion (in current dollars), according to a National Association of State Grant and Aid Programs survey. But nonneed-based aid grew by about 350% and now totals over $ 1. 775 billion. It now constitutes about 25% of all grants compared to 10% in 1993-94.

Private loans (those made outside the federal loan structure) are a relatively new feature in the college financing picture. In 1995-96, these loans totaled $ 1. 7 billion; in 2004-05 they totaled $ 13. 8 billion, a 735% rise. Professional school students (e. g. , medical and law students) are most likely to use them, the American Council on Education reports. Thirty percent of such students took out private loans in 2003-04 compared to just 8% of undergraduates.

Grants and Tax Benefits. While the total amount of grants and tax benefits grew during the past decade, the number of students eligible to receive them grew even faster. Consequently, the amount of aid per student rose more slowly than total aid.

The Pell grant fund pool grew by 76%, but the average grant grew only 29%, to $ 2,469 in 2004-05. While this was $ 555 higher than the 1994-95 average, it was nearly $ 100 less than in 2002-03. The average award for other federal grants and work-study funds and the average amount of federal tax benefits barely increased or actually dropped after adjusting for inflation.

Source: College Board, Trends in Student Aid, 2005

Most students now graduate with more debt than their peers 10 years ago, although debt levels have dropped for many since the 1999-2000 academic year. Table 3 shows these trends. (Note: the table does not contain data on loan defaults, which are an important measure of debt burden. )

Table 3: Cumulative Federal Student Loan Debt by Degree Recipients, 1995-96 to 2003-04 (constant dollars)

Note: Figures do not include private loans. They reflect loan borrowing as of the year indicated. Graduate students' debt includes debt incurred as undergraduates.

Source: American Council on Education, “Federal Student Loan Debt, 1993 to 2004,” June 2005

Congress made several significant changes in federal financial aid policy in 2006.

• It fixed the interest rate on new student loans at 6. 8%; interest rates on loans made before July 1, 2006 were variable but capped at 8. 25%.

• It increased the amount of subsidized loans students can borrow in their first two years of college to $ 3,500 from $ 2,625 for freshmen and to $ 4,500 from $ 3,500 for sophomores. But it kept the $ 23,000 gross limit on such loans for undergraduates. (They can borrow another $ 23,000 in unsubsidized loans. ) This means students who borrow the maximum in their first two years can obtain only smaller subsidized loans thereafter (or rely on unsubsidized or private loans) to pay for rising college costs.

• It permitted graduate and professional school students to take out PLUS loans (which could lower their reliance on higher interest private loans).

• It created two new grant programs for Pell Grant-eligible students. One gives freshman $ 750 and financially needy sophomores $ 1,300 if they completed a “rigorous” secondary school program and maintain a 3. 0 point average in college. The other provides up to $ 4,000 a year for juniors and seniors who major in certain subjects and maintain a 3. 0 point average.

Attending college in Connecticut costs more than most other states. UConn and the Connecticut State Universities (CSUs) each rank among the 10 most expensive public universities of their type in the nation, while the community-technical colleges (CTC) are in the top 20, according to the Department of Higher Education (DHE). But they may still be relatively affordable compared to their peers because family income in Connecticut is among the highest in the nation. And UConn is the second least expensive public flagship institution in New England.

Between 1996 and 2006, DHE reports UConn's tuition and fees grew 64%, the CSUs, 86%, and the CTCs, 54% (in current dollars). Most of this growth occurred between 2003 and 2006. But Connecticut colleges'

tuition grew more slowly than their peers across the nation, and UConn, for example, remains less expensive than the colleges with which it competes for students.

Connecticut families, like their peers across the country, must spend more of their income to send a child to college here today than they did in 2000, according to Measuring Up, a biennial report from the National Center for Public Policy and Higher Education. Today, an average-income Connecticut family must spend 25% of its income to send a child to a community college (up from 20% in 2000), 33% to send a child to a public four-year college (25%), and 76% to a private college (61%).

These averages, though, mask the effect of Connecticut's income disparities. As in the rest of the nation, increasing college costs affect the state's lower income families more than upper income families. According to Measuring Up, Connecticut's lower-middle income families (those with incomes in the second lowest quintile, averaging $ 37,230 in 2005) must now use 34% of their income to send a child to a public four-year college in Connecticut; just five years ago they used 27%. Sending a child to a private college now costs 78% of their income, up from 68% in 2000. In contrast, the burden on upper income families (whose income averaged $ 154,000 in 2005) for sending a child to a public college rose from 7% to 9% and from 16% to 19% for a private college.

As a group, UConn, CSU, and CTC students received more than twice as much financial aid in 2006 as they did in 1996. Aid grew from $ 89 million to $ 216 million (in current dollars) during that time, according to DHE, a 142% increase. Institutional aid accounted for over half of this increase, particularly since 2002 when state aid declined slightly and federal aid leveled off. It now comprises nearly 60% of all financial aid to students in Connecticut public colleges.

Need-based aid comprises about 60% of all aid, DHE reports. This proportion has remained steady over the past 10 years, but the ratios at each constituent unit changed during that time. UConn's need-based aid declined slightly, from 44% to 42%, between 1999 and 2006 largely due to flat federal and state funding. It increased at both CSUs and CTCs—from 70% to 75% and 88% to 91%, respectively. Most of UConn's nonneed-based aid goes to graduate students.

Connecticut has three college grant programs: Connecticut Aid to Public College Students (CAPSC), Connecticut Independent College Student (CICS) Grants, and Capitol Scholarships. The first two are based solely on financial need; the latter addresses both financial need and academic ability. (See attachment 1 for more details).

As Table 4 shows, total funding for all three grants rose from 1997 to a peak in 2002, then dropped through 2004. Funding increased in FYs 05 and 06 but is still below its peak years. This decline, coupled with inflation and more students receiving aid, means the average award for CIGS Grants and Capital Scholarships has dropped or remained flat (in constant 2006 dollars). And, while the average CAPSC grant grew about 33% (inflation adjusted) over the entire decade, it has dropped significantly since its peak in 2000.

Table 4: Total Spending and Average Awards for State Financial Aid Programs, 1997-2006

Source: DHE

While state General Fund spending on financial aid has remained relatively flat, its public colleges and universities have tried to fill the growing gap with their own funds. The increased levels of institutional aid they give results, in part, from two factors: (1) the Board of Governors of Higher Education's policy that each school set aside at least 15% of its tuition revenue for need-based aid and (2) schools' need to increase tuition to offset reduced state support for their operations.

Table 5: UConn Institutional Aid, FY 02-07 (current dollars)

^{1 Scholarships, tuition remission, SEOG matching funds, work study match, and internal funds}

^{2 Pell grants, federal SEOG funds, and federal work study funds}

^{3 Aid from private and other nonuniversity sources and statutory waivers}

The number of students receiving these funds increased from 4,337 to 5,486. Even so, because of the increased funding, the average set-aside grant for each recipient also rose substantially, from $ 1,917 to $ 2,786.

Table 6: CSU Institutional Aid, FY 02-07 (current dollars)

1 Scholarships, tuition remission, SEOG matching funds, work study match, and internal funds

2 Pell grants, federal SEOG funds, and federal work study funds

3 Private, need-based aid; statutory waivers; and other (board awarded) waivers

But the number of students receiving aid also grew significantly; consequently, the aid amount per student remained flat. The total number of aid recipients grew by 6,000 between 2001-02 and 2005-06. Now, over 40% of CTC students receive financial aid; but they receive virtually the same amount as students five years ago ($ 2,606 vs. $ 2,595).

Table 7: CTC Institutional Aid, FY 02-07 (current dollars)

1 Scholarships, tuition remission, SEOG matching funds, work study match, and internal funds

2 Pell grants, federal SEOG funds, and federal work study funds

3 Includes CAPSC and Capitol Scholarships

A US DOE publication, Funding Education Beyond High School, is a detailed guide to federal aid programs, particularly how to fill out a FAFSA and apply for loans. It is available at http: //studentaid. ed. gov/students/attachments/siteresources/StudentGuide. pdf.

Most of the information on national trends comes from The College Board's Trends in Student Aid, 2005 an annual look at the financial aid system that provides detailed information on the total amount of student aid, aid per student, the composition and distribution of aid, and college costs. The complete report is available at http: //www. collegeboard. com/prod_downloads/press/cost05/trends_aid_05. pdf.

The College Board also publishes Trends in College Pricing each year. This publication examines tuition, fees, and other charges; enrollment patterns; and cost impact on family incomes. The 2005 edition is available at http: //www. collegeboard. com/prod_downloads/press/cost05/trends_college_pricing_05. pdf.

Aggregate state grant information comes from the National Association of State Grant and Aid Programs' (NASSGAP) annual survey of state-sponsored financial aid for the 2004-05 academic year. It is available at http: //www. nassgap. org/.

The American Council on Education published an information brief in June 2005 on trends in federal student loan debt from 1993 to 2004. It is available at http: //www. acenet. edu/AM/Template. cfm?Section=CPA&Template=/CM/ContentDisplay. cfm&ContentID=10777

The liberal Center for Economic and Policy Research issued a briefing paper, “Student Debt: Bigger and Bigger,” in September 2005. It is available at http: //www. cepr. net/publications/student_debt_2005_09. pdf.

“Costs, Prices and Affordability,” one of the issue papers commissioned by the secretary of education's Commission on the Future of Higher Education, identifies broad issues affecting prices, costs and the growing challenge of student affordability to postsecondary education. It is available at http: //www. ed. gov/about/bdscomm/list/hiedfuture/reports/wellman. pdf. Another paper discusses the complexity and strategic goals of federal aid programs. It is available at http: //www. ed. gov/about/bdscomm/list/hiedfuture/reports/burgdorf-kostka. pdf.

Internal Revenue Service Publication 790 describes federal education tax benefits. It is at http: //www. irs. gov/pub/irs-pdf/p970. pdf.

Two DHE publications provide information about financial aid in Connecticut. System Trends 2006 provides data on state grant programs and overall trends. Higher Education Counts, 2006 reports the state's and constituent units' progress toward achieving six, statutorily defined state goals, one of which is to ensure access and affordabilty. They are available at http: //www. ctdhe. org/info/pdfs/2006/2006SystemTrends. pdf and http: //www. ctdhe. org/info/pdfs/2006/2006AccountabilityReport. pdf.

Attachment 1: Major Sources of Financial Aid for Connecticut Students*