Higher Education

As college tuition has soared during the past 15 years, grant aid to students has not kept pace, and loans accounted for an ever-increasing proportion of student aid. Although the trend in federal funding for higher education is toward fewer grants and more loans, grant aid is more likely to improve graduation rates for some minorities. The shift in federal funding from grants to loans may save federal budget dollars initially but could cost the economy in the long run. Both grants and loans reduce the current outlay required of the student and his or her family. However, because of principal and interest repayment, loans--unlike grants--do not reduce the net cost of education to the student over time. Although the federal cost of a grant exceeds that of a loan or an equivalent amount, grants may be more cost-effective if they better encourage students to finish their college education and, as a result, boost their earnings potential.