NCPA - National Center for Policy Analysis


December 31, 2008

Ten million individuals annually seek student aid for college.  However, the complexity and uncertainty in the federal financial aid system for college students - primarily Pell Grants and Stafford Loans - undermine its efficacy, while doing little to improve the targeting of loans and grants to those who need them most, according to researchers Susan Dynarski and Judith Scott-Clayton.

They also suggest that targeting aid to the neediest students can be achieved with a much simpler process. The current system is so complicated that families cannot predict how much aid they will receive; for students from low-income families, this could mean not applying to college at all.  Consider:

  • Individuals applying for aid must complete a 5-page form, the Free Application for Federal Student Aid (FAFSA), containing 127 questions -- slightly longer than the tax form 1040.
  • The authors estimate it takes 10 hours on average to complete the form, and costs about $1.75 billion a year in lost productivity.
  • Colleges spend over $2 billion a year on staff to administer financial aid based on the federal formula.
  • Colleges are also required to audit at least 30 percent of the aid applications, at an estimated compliance cost of $4 billion a year.

Furthermore, the variation in which students receive aid is explained by only a handful of more than 70 variables used in determining student aid.  Adjusted Gross Income, marital status, family size and the number of family members in college account for over three-quarters of the variation in federal grant aid.   However, by using a simplified formula that includes only a subset of income items rather than all 70 variables, the FAFSA produces grants within $100 of those generated by the current formula.

Source:  Donna Zerwitz, "The Federal Student Aid Process is Not Efficient," NBER Digest, October 2008, and Susan Dynarski and Judith Scott-Clayton, "Complexity and Targeting in Federal Student Aid: A Quantitative Analysis," National Bureau of Economic Research, Working Paper 13801, February 2008.

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