Two Sides of the Coin
The Importance of—and Problems with—Postsecondary Financial Aid
Federal and state aid make college a reality for low-income students across the United States, but they also place tremendous burdens on recipients and their families. CTB takes a look at what the research says about the benefits of financial aid, and how the process can be improved.
Financial Aid: Its Origins and Importance
A postsecondary credential is a must-have in the 21st century economy. Individuals with bachelor’s degrees earn $1.2 million more in lifetime earnings than high school graduates and the wage premium for associate degrees ($400,000), while smaller, is also significant. For many of the same reasons, a postsecondary credential is also a crucial lever of social mobility for young people from low-income households who are often the first in their family to attend college. However, by definition, students from low-income and low-wealth backgrounds lack access to the financial resources that many families draw upon to pay for college. Absent intervention, this disparity has obvious implications for potential inequities in college access and completion.
In 1965, Congress took a major step toward ensuring college access for low-income students by passing the Higher Education Act of 1965, which established the first federal financial aid programs. Initially, this aid came in the form of direct grants to colleges and universities who committed to enrolling students with ‘exceptional financial need,’ but in 1972 the establishment of the Basic Educational Opportunity (BEOG) Grant initiated the practice of providing direct payments to students (Dynarski & Scott-Clayton, 2013).
The Pell Grant
In 1980, BEOG was renamed the Pell grant, and the program has continued in largely the same form to this day, albeit on a much larger scale. Between 1972 and 1992, the number of recipients of these direct financial aid grants grew twentyfold (Dynarski & Scott-Clayton, 2013). As scholar Bridgette Davis notes in her interview with CTB, today the Pell grant is the second most accessed means-tested government benefit for young adults 19-26 behind only Medicare. Currently, there are approximately seven million Pell recipients, representing roughly one third of all undergraduate students.
To qualify for a Pell grant, students complete the Federal Application for Federal Student Aid (FAFSA), providing a variety of different data points and sources of documentation about their household income, family size, and other factors. The output of the FAFSA is a ‘Expected Family Contribution,’ (EFC) which determines eligibility for Pell grants and other forms of government and institutional aid. The lower one’s EFC, the larger the size of one’s Pell grant, with a maximum award of $6,496 for 2022-2023.
Because it is a means-tested program, Pell recipients are overwhelmingly from very low-income backgrounds. Indeed, more than half of Pell recipients are from households earning less than $20,000 and more than two-thirds are from households making below $30,000 (CBPP). Pell grants can be used at any accredited postsecondary institution, but they are time limited. A Pell recipient must apply each year to maintain eligibility, and the grant can only be used for twelve semesters (representing six years of enrollment). Nor is this a trivial distinction; many students take six or more years to graduate with a bachelor’s degree.
The Benefits of Pell
An important empirical question is whether Pell grants and other forms of need-based aid achieve their intended objectives. Intuitively, it stands to reason that providing money for low-income students to attend colleges they would not otherwise be able to afford would have a net impact of increasing college enrollment, graduation rates, and earnings. However, validating this intuition with rigorous research is important, given the size of the investment from the federal government; as of 2020, Pell grant payments totaled $27 billion.
Thankfully, there is a rich research literature on need-based aid with several key findings, nicely summarized by Dr. Judith Scott Clayton during her recent (2020) congressional testimony. Scott-Clayton notes, “Financial aid can improve college enrollment, completion, and post-college outcomes.” For example, recent research from Denning et al (2019) found that eligibility for additional Pell aid “significantly increases first-time students degree completion and later earnings.” In fact, the earnings premium for Pell receipt was significant enough that the program paid for itself in additional tax revenue in less than ten years. Other recent scholarship suggests that additional grant aid allows students to reduce work hours and focus on academic outcomes instead (Kofoed, 2022).
The Rising Cost of College
The size of Pell grant payments has grown since 1980, when the maximum award was $1,800. Unfortunately, however, the costs of attending college have risen much more dramatically, vastly outstripping the pace of inflation—and the pace of Pell increases. Making matters worse, states—under pressure to pursue fiscal austerity, especially in the wake of the Great Recession—have reduced subsidies for public universities, which had historically kept tuition prices (or at least increases) down. The result? Despite the increase of nearly $5,000 in the size of the maximum award over the last four decades, the Pell grant now represents an all-time low in terms of the proportion of the total cost of college (28.9% in 2016-2017), down from a peak of nearly 80% in 1976.
Administrative Burden
Beyond the shrinking value of Pell grants, there is another major affordability factor undermining college access in the United States: the burden placed on low-income students and their families to even qualify for Pell, state, and institutional aid. Indeed, despite the many positive findings about the impact of grant aid for low-income students, some observational studies of the Pell grant have actually found null or statistically non-significant effects. What explains this phenomenon? Recently, researchers have pointed to the inherent complexity in the financial aid process, including the FAFSA. In the words of educational researcher Susan Dynarski, “Complexity, delay, and lack of transparency in the aid process mean that students and their families have little idea how much aid they will receive until after they have applied for college, which students may never do if they think they cannot afford to go.” Substantiating this point (as Dynarski notes), Eric Bettinger and colleagues (2012) found that providing personalized information and support related to FAFSA filing substantially increased FAFSA completion, enrollment, and Pell receipt.
In recent years, policymakers have tried to address the overwhelming complexity of the FAFSA. Recent legislation such as the FUTURE Act (2019) and other reforms will reduce the number of items on the FAFSA from 130(!) to 33 while also providing more streamlined data exchange processes between the Department of Education and the IRS to reduce the amount of redundant paperwork. However, even with these simplifications, the process is still far more complex than it needs to be. In fact, only two easily accessible data points, adjusted gross income and family size, can be used to accurately predict the eventual size of one’s Pell grant.
Inequities in FAFSA Verification
Nor is the FAFSA’s complexity its only problem. Once the FAFSA is submitted, a process known as verification begins. Similar to a tax audit, a percentage of FAFSA applications are flagged for review (based on an algorithm) to determine if the information is factually accurate. The difference between FAFSA verification and an IRS audit, however, is that verification occurs far more frequently (at ten to twenty times the rate of IRS audits) and much more disproportionately impacts low-income individuals (more than half of Pell students are flagged for verification—six times the rate of non-Pell students). Verification requirements can take many forms, but the process is frequently extremely burdensome. Making matters worse, these burdens make little difference; the verification process almost never changes the eventual amount of aid provided (Evans & Nguyen, 2017), with a federal audit finding “no measurable assurances that verification processes effectively identify FAFSAs with errors.” This conclusion is particularly frustrating because the process is difficult enough that one quarter of those flagged for verification never complete the process, preventing them from access financial aid.
While students and their families bear the brunt of the verification process, it also impacts the institutions that they hope to or do attend. This is especially true for institutions that serve large numbers of low-income students, which are often two-year colleges and less selective four-year schools. Importantly, these institutions often have far fewer resources than highly selective colleges and universities. Recent research from Guzman-Alvarez and Page (2020) finds that verification costs exceed over $500 million annually, with disproportionate impacts on two-year colleges.
Spillover Burdens
Verification can be frustrating and stressful for students and their families, but the logistical challenges associated with additional paperwork are rarely the only issues that arise from the process. Herd and Moynihan (2015) offer a helpful framework for considering the various types of administrative burdens that processes like the FAFSA impose including compliance costs, and learning costs. More specifically, Campbell et al (2015) describe financial aid processes as yielding a ‘climate of penalty’ for low-income students.
As part of her research presentation on April 4th hosted by CTB, Bridgette Davis will share an important contribution to the growing research literature on the negative impact of verification. In her ethnographic study of 31 students navigating the college matriculation process in Chicago, Davis finds that verification challenges frequently hinder key aspects of a successful college transition; she describes how financial aid issues subtly but routinely undermine the ability of students to complete key transition activities such as summer orientation, class registration, and figuring out where to live on campus. These follow-on effects do not show up in National Clearinghouse Data on enrollment and matriculation, but can profoundly affect student’s college experiences and, ultimately, their lives.
Recommendations
As a response to the COVID-19 pandemic, the Department of Education scaled back the verification process, acknowledging the burdens that were already facing low-income students and their families and focusing only on identity theft and fraud. However, in September 2021, federal administrators announced that verification would return to ‘normal in 2022-2023, with rates expected to rise back to 22%, a target established in 2022. Given the recent findings on verification’s lack of impact on ultimate awards and concretely negative effects on student outcomes, this policy decision is unfortunate. In her interview with CTB, Bridgette argues for the pause on verification to continue indefinitely. Here are some other recommendations on improving financial aid systems:
Double the size of the Pell Grant. For decades, tuition costs have outstripped aid amounts. Increasing the Pell grant would dramatically improve student outcomes in a number of important domains.
Use IRS Data to Automate Aid. The IRS has sufficient data to determine EFC without the FAFSA. Policymakers can eliminate hours of unnecessary paperwork for students.
Fix Pell Eligibility for Several Years. Making students apply for federal aid each year is an unnecessary source of administrative burden and stress. While it is important to allow for the occasional demonstration of newly arising need, for most students one determination of EFC is sufficient to ensure an appropriate calculation eligibility for Pell and other aid sources.
Proactively Communicate Likely Awards to Eligible Students. To ensure students know what aid they can rely on, IRS data can be used to proactively provide students and their families with an estimate of their EFC and likely Pell award amounts, thus increasing transparency in a critical time period.