Federal Student Aid Formula
Cost-of-Living Adjustment Could Increase Aid to a Small Percentage of Students in High-Cost Areas but Could Also Further Complicate Aid Process Gao ID: GAO-09-825 August 14, 2009In fiscal year 2008, the Department of Education (Education) oversaw the distribution of approximately $96 billion in federal student financial aid, including $14.6 billion in Pell Grants to low- and middle-income students, to help students and their families pay for higher-education expenses. Much of this aid was distributed based on a formula specified in the Higher Education Act, as amended, that is used to identify students who need financial assistance to pay for higher education. To apply for federal financial aid, such as Pell Grants, students submit a Free Application for Federal Student Aid on which they report their own or both their own and their families' income and assets. Students who are financially dependent on their parents or other family members are required to report their own and their family's income and assets, while those who are financially independent report only their own income and assets (and their spouse's, if they are married). To determine if a student has financial need, the aid formula compares how much it costs a student to attend a particular college and an estimate of how much the student or student and family can afford to pay toward the cost--called the expected family contribution (EFC). How much a family can afford to contribute to college costs depends on a variety of factors, including the cost of living where a family resides. Some observers have questioned whether the federal aid formula appropriately accounts for geographic cost-of-living differences. As required by the Higher Education Opportunity Act, we are providing information on options for adjusting the federal student aid formula for geographic cost-of-living differences. Specifically, this report addresses the following questions: (1) How does the current federal financial aid formula affect students in different geographic areas? (2) What options exist for modifying this formula to reflect geographic cost-of-living differences? (3) How would adding a cost-of-living adjustment (COLA) to the formula affect the federal financial aid system, including the distribution of Pell Grants?
In general, we found that while data suggest that the cost of living is higher in some areas than in others, the current aid formula accounts for these differences in only a limited way. How these differences affect a family's ability to pay for college is unclear, in part because no official measure of geographic cost-of-living differences exists. We identified three possible COLA options that could be used in the federal aid formula. These COLAs could increase Pell Grants and other financial aid for a small percentage of students from high-cost areas but could also further complicate the process for calculating and administering federal student aid.
GAO-09-825, Federal Student Aid Formula: Cost-of-Living Adjustment Could Increase Aid to a Small Percentage of Students in High-Cost Areas but Could Also Further Complicate Aid Process
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Could Also Further Complicate Aid Process' which was released on August
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
August 2009:
Federal Student Aid Formula:
Cost-of-Living Adjustment Could Increase Aid to a Small Percentage of
Students in High-Cost Areas but Could Also Further Complicate Aid
Process:
GAO-09-825:
Contents:
Letter:
Appendix I: Briefing Slides:
Appendix II: Scope and Methodology:
Appendix III: Counties Where Students Could See a Change in Financial
Aid under Different COLA Options:
Appendix IV: Summary of Effects of Adding a COLA to the Federal Needs
Analysis Formula on Expected Family Contribution Levels and Pell Grant
Awards:
Appendix V: Change in Pell Grant for Example Students in High-Cost and
Low-Cost Areas for Each COLA:
Appendix VI: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Change in Pell Grants for Full-Time, Dependent Student from a
Family of Four with Home Rental Cost COLA:
Table 2: Change in Pell Grants for Full-Time, Dependent Student from a
Family of Four with Regional Price Parities COLA:
Table 3: Change in Pell Grants for Full-Time, Dependent Student from a
Family of Four with Housing Expenditure COLA:
Table 4: Change in Pell Grant for a Full-Time, Independent Student with
No Dependents with Home Rental Cost COLA:
Table 5: Change in Pell Grant for a Full-Time, Independent Student with
No Dependents with Regional Price Parities COLA:
Table 6: Change in Pell Grant for a Full-Time, Independent Student with
No Dependents with Housing Expenditure COLA:
Figures:
Figure 1: Counties Where Students' Aid Could Increase or Decrease with
Regional Price Parities COLA:
Figure 2: Counties Where Students' Aid Could Increase with Housing
Expenditure COLA:
Figure 3: Estimated Percentages and Total Number of Financial Aid
Applicants and Potential Changes in Their Expected Family Contributions
for Each COLA:
Figure 4: Estimated Average Pell Grant Increase for Students Receiving
a Pell Increase for Each COLA:
Abbreviations:
BEA: Bureau of Economic Analysis:
COLA: cost-of-living adjustment:
CPI: Consumer Price Index:
Education: Department of Education:
EFC: expected family contribution:
HUD: Department of Housing and Urban Development:
IPA: income protection allowance:
MSA: Metropolitan Statistical Area:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
August 14, 2009:
The Honorable Edward M. Kennedy:
Chairman:
The Honorable Michael B. Enzi:
Ranking Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
The Honorable George Miller:
Chairman:
The Honorable John Kline:
Ranking Member:
Committee on Education and Labor:
House of Representatives:
In fiscal year 2008, the Department of Education (Education) oversaw
the distribution of approximately $96 billion in federal student
financial aid, including $14.6 billion in Pell Grants to low-and middle-
income students, to help students and their families pay for higher-
education expenses. Much of this aid was distributed based on a formula
specified in the Higher Education Act, as amended, that is used to
identify students who need financial assistance to pay for higher
education. To apply for federal financial aid, such as Pell Grants,
students submit a Free Application for Federal Student Aid on which
they report their own or both their own and their families' income and
assets. Students who are financially dependent on their parents or
other family members are required to report their own and their
family's income and assets, while those who are financially independent
report only their own income and assets (and their spouse's, if they
are married). To determine if a student has financial need, the aid
formula compares how much it costs a student to attend a particular
college and an estimate of how much the student or student and family
can afford to pay toward the cost--called the expected family
contribution (EFC). How much a family can afford to contribute to
college costs depends on a variety of factors, including the cost of
living where a family resides. Some observers have questioned whether
the federal aid formula appropriately accounts for geographic cost-of-
living differences.
As required by the Higher Education Opportunity Act,[Footnote 1] we are
providing information on options for adjusting the federal student aid
formula for geographic cost-of-living differences. Specifically, this
report addresses the following questions:
1. How does the current federal financial aid formula affect students
in different geographic areas?
2. What options exist for modifying this formula to reflect geographic
cost-of-living differences?
3. How would adding a cost-of-living adjustment (COLA) to the formula
affect the federal financial aid system, including the distribution of
Pell Grants?
On July 6 and 7, 2009, we briefed cognizant congressional staff on the
results of this study, and this report formally conveys the information
provided during this briefing (see appendix I for the briefing slides).
In general, we found that while data suggest that the cost of living is
higher in some areas than in others, the current aid formula accounts
for these differences in only a limited way. How these differences
affect a family's ability to pay for college is unclear, in part
because no official measure of geographic cost-of-living differences
exists. We identified three possible COLA options that could be used in
the federal aid formula. These COLAs could increase Pell Grants and
other financial aid for a small percentage of students from high-cost
areas but could also further complicate the process for calculating and
administering federal student aid.
We used the following methodology to develop our findings. To
understand the financial aid formula, we interviewed Education
officials and reviewed relevant federal laws, regulations, and program
guidance. To determine how the current formula affects students in
different geographic areas and to identify possible COLA options, we
interviewed economists and higher education experts; representatives
from seven higher education associations; and financial aid officials
from 19 postsecondary institutions that represent a mix of 2-year and 4-
year public, not-for-profit, and proprietary schools in different
geographic areas, including both urban and rural locations. We also
reviewed relevant literature and interviewed experts to identify COLAs
that could be used in the federal aid formula and identified three
possible options.[Footnote 2] We applied these three COLA options to an
Education dataset of a sample of students who applied for federal
financial aid for the 2007-2008 school year to determine their impact
on students' expected family contribution estimates, the impact on
students' Pell Grant amounts, and the number of Pell recipients that
could see a change in their Pell Grants. While we discuss generally how
changes in the expected family contribution can affect other sources of
financial aid, our detailed analyses focus on the distribution of Pell
Grants and the impact on Pell Grant spending. To assess the reliability
of Education's dataset, we interviewed agency officials knowledgeable
about the data and reviewed relevant documentation. We determined that
the data were sufficiently reliable for the purposes of this report.
For additional information on our scope and methodology, see appendix
II.
We conducted our work from December 2008 to August 2009 in accordance
with all sections of GAO's Quality Assurance Framework that are
relevant to our objectives. The framework requires that we plan and
perform the engagement to obtain sufficient and appropriate evidence to
meet our stated objectives and to discuss any limitations in our work.
We believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings.
We provided a draft copy of this report to Education for review and
comment. Education did not provide formal comments on this report, but
did provide some technical comments that we incorporated as
appropriate.
We are sending copies of this report to relevant congressional
committees, the Secretary of Education, and other interested parties.
In addition, this report will be available at no charge on GAO's Web
site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-7215 or scottg@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made key contributions to
this report are listed in appendix VI.
Signed by:
George A. Scott:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Briefing Slides:
Federal Student Aid Formula: Cost-of-Living Adjustment Could Increase
Aid to a Small Percentage of Students in High-Cost Areas but Could Also
Further Complicate Aid Process:
Briefings to Congressional Staff: July 6 & 7, 2009:
Overview:
* Introduction;
* Research Objectives;
* Scope and Methodology;
* Summary of Findings;
* Background;
* Findings.
Introduction:
Federal Aid Formula Estimates a Family‘s Financial Need but May Not
Account for Geographic Cost-of-Living Differences:
In FY 2008, an estimated $96 billion in federal financial aid was
distributed to almost 11 million students for postsecondary education,
including $14.6 billion in Pell Grants to low-and middle-income
students who need help to pay for college.
The federal formula used to determine how much financial assistance a
family needs to pay for college is based on a variety of financial
factors. Some observers have questioned whether the formula
appropriately accounts for geographic cost-of-living differences”that
is, the amount of money needed to buy a set of goods and services for a
given standard of living.
Some federal programs factor in geographic differences in cost-of-
living, such as Medicare payments to physicians and basic housing
allowances for military personnel.
Research Objectives:
1. How does the current federal financial aid formula affect students
in different geographic areas?
2. What options exist for modifying this formula to reflect geographic
cost-of-living differences?
3. How would adding a cost-of-living adjustment (COLA) to the formula
affect the federal financial aid system, including the distribution of
Pell Grants?
Scope and Methodology:
To address our objectives, we:
* reviewed relevant federal laws, regulations, and program guidance;
* reviewed relevant literature and interviewed experts to identify
possible geographic COLAs that could be applied to the federal aid
formula and applied three COLAs[A] to a sample of financial aid
applications from the 2007-2008 school year to determine their impact
on students‘ expected family contributions, the distribution of Pell
Grants, and the Pell Grant budget; and;
* interviewed Education officials; economists and higher education
experts; representatives from 7 higher education associations; and
financial aid officials from 19 schools. We selected these schools to
represent a balance of 2-year and 4-year public, not-for-profit, and
proprietary institutions in both urban and rural locations.
[A] We reviewed other potential adjusters but determined they were not
appropriate for our purposes. See appendix II for more information.
Summary of Findings:
A Cost-of-Living Adjustment Could Increase Aid to a Small Percentage of
Students in High-Cost Areas but Could Add Some Complexity to Aid
Process:
The federal aid formula accounts for a small degree of geographic cost-
of-living differences, but it is unclear how geographic cost-of-living
differences not accounted for in the formula affect a family‘s ability
to pay for college.
While no official measure of overall geographic cost-of-living
differences exists, we have identified 3 possible COLA options that
could be used in the aid formula. These COLAs have varying geographic
scopes, impacts, strengths, and limitations.
The COLAs we identified could increase Pell Grants and other aid to a
small percentage of students from high-cost areas, but could also
further complicate the calculation and administration of aid.
Background: Federal Aid Formula:
Students Are Eligible for Federal Need Based Aid if the Cost of
Attending a School Is More Than a Family‘s Expected Contribution (EFC):
* EFC is a rough approximation of the financial resources a family has
available to help pay for a student‘s postsecondary education expenses.
* If a school costs $10,000 to attend and a student has an expected
family contribution of $4,000, the student is eligible for up to $6,000
of aid.[A]
Figure: Determining a Student‘s Financial Need:
[Refer to PDF for image: illustration]
Institutional cost of attendance includes:
Tuition and fees;
Books and supplies;
Transportation;
Personal expenses;
Rom and board;
Family expenses;
Disability expenses;
Expected family contribution (income and assets) minus (allowances and
expenses):
Income and assets of the student, parent(s) and spouse, as applicable;
Allowances and expenses for living, tax, and employment expenses.
Institutional cost of attendance, minus Expected family contribution,
equals:
If positive: student has financial need;
If negative: student does not have financial need.
[A] This example applies to financial aid for which a student must
demonstrate financial need according to the federal student aid
formula, including certain grants and certain loans that are subsidized
by the federal government while the student is in school.
Background: Expected Family Contribution:
Expected Family Contribution Varies by Family Size and Composition:
Students are classified as either financially dependent on their
parents or independent in the financial aid process.
* EFC for dependent students is based on both the student‘s and the
parents‘ income and assets.
* EFC for independent students is based on the student‘s (and if
married, spouse‘s) income and assets.[A]
EFC formula varies based on factors such as:
* family size;
* whether the family has other members in college;
* whether an independent student has children or other dependents
(other than a spouse).
[A] An independent student is generally one of the following: at least
24 years old, is married, is a graduate student, has a legal dependent
other than a spouse, is a veteran or in active military service, or is
an orphan or ward of the court (or was a ward of the court until age
18).
Expected Family Contribution Accounts for Certain Allowances and
Expenses:
To estimate the expected family contribution:
* a family reports its income and assets;
* certain allowances and expenses are then subtracted to account for
income the family needs for other purposes, such as taxes, food, and
housing.
* a certain percentage of the remaining available income is the amount
that the family is expected to contribute to college expenses. [The
percentage varies based on income level]
Income and Assets:
* Salary;
* Savings;
* Investments;
* Net worth of business/farm.
Allowances and Expenses:
* Federal income tax paid;
* State and other tax allowances;
* Employment expense allowance;
* Income protection allowance (to protect the income needed to pay for
a family‘s basic living expenses).
Background: Federal Aid Programs:
Federal Formula Is Used to Determine Eligibility for Several Aid
Programs:
Pell Grants: For low-and middle-income undergraduates who have
financial need. The maximum allowable Pell Grant is $5,350 for the 2009-
2010 school year. Students in certain post-baccalaureate teacher
preparation programs may also qualify for a Pell Grant.
Stafford Loans: For undergraduate and graduate students and subject to
maximum loan limits.
Subsidized: Students with financial need are eligible and the federal
government pays the interest while student is in school.
Unsubsidized: Students do not have to have financial need, but are
responsible for paying all interest costs.
PLUS Loans: For graduate students and parents of dependent
undergraduates.
Campus-Based Aid: Participating schools receive separate funds for 3
programs for students with financial need: Perkins Loans, Supplemental
Educational Opportunity Grants, and the Federal Work Study Program.
Background: Other Financial Aid:
Many Schools Use Federal Formula to Distribute Institutional Aid:
Students can receive aid from nonfederal sources, including state
grants and institutional aid from schools.
Schools must use the federal aid formula to award federal aid, but many
also use the federal formula to award institutional aid.
Some schools use alternative formulas to distribute institutional aid.
The College Board offers an alternative formula, which includes an
optional geographic cost-of-living adjustment.
Background: Student Aid Award Totals:
Students Received Over $100 Billion in Federal and Other Aid in 2007-
2008:
2007-2008 Selected Federal Aid Programs (Federal law also provides
several postsecondary tax credits and tax deductions to help families
pay for college):
Pell Grants: $14.6 billion;
Stafford and PLUS Loans: $74.7 billion;
Campus-Based Programs: $3.3 billion.
Source: 2008 Annual Report for Federal Student Aid, U.S. Department of
Education.
2007-2008 Nonfederal Aid Programs:
Institutional Grants: $22.8 billion;
State Grants: $7.8 billion;
Other Grants: $7.5 billion.
Source: Multiple data sources collected by the College Board, Trends in
Student Aid, 2008.
Figure: Estimated Percentage of Undergraduates Receiving Selected Types
of Aid, 2007-2008 (Students included in the ’any aid“ and ’any federal
aid“ columns may be receiving federal aid from more than one source):
[Refer to PDF for image: vertical bar graph]
Any aid: 65.6%;
Any federal aid: 47%;
Student loans: 34.5%;
Pell Grants: 27.3%;
Campus-based aid: 11.7%.
Source: 2007-08 National Postsecondary Student Aid Study.
[End of figure]
Finding 1: Current Formula--Overview:
It is Unclear How Geographic Cost-of-Living Differences That Are Not
Accounted for in the Current Federal Aid Formula Affect Families‘
Ability to Pay for College.
* The federal financial aid formula accounts for a small degree of
geographic cost-of-living differences.
* Differences in cost-of-living could affect available financial
resources.
* Financial aid representatives had mixed views on the need for a cost-
of-living adjustment.
The Federal Aid Formula Accounts for a Small Degree of Geographic
Differences in Costs:
* State and Other Tax Allowance in the formula accounts for geographic
differences in state and other tax liabilities.
- This allowance is set at a specific rate for each state and generally
ranges from 1 to 9 percent of total income.[A]
* Cost of Attendance is calculated by each institution using elements
set forth in federal law and includes room and board; it can therefore
reflect geographic differences in students‘ living expenses.
- Students attending schools with a high cost of attendance may be
eligible for additional financial aid.
* Federal aid formula does not adjust for general cost-of-living
differences when estimating families‘ available resources to pay for
school.
[A] GAO has identified limitations with how the tax allowance is
calculated. See GAO, Student Financial Aid: Need Determination Could Be
Enhanced through Improvements in Education's Estimate of Applicants'
State Tax Payments, GAO-05-105, (Washington, D.C.: January 21, 2005).
Geographic Cost-of-Living Differences May Exist, but It Is Unclear How
Much They Vary:
* It is generally accepted that there are variations in the cost of
living in different geographic areas. Some locations are more expensive
to live in than others.
- However, it is difficult to separate cost-of-living from other
factors like local income, housing quality, and local amenities that
also drive up prices.
* It is unclear how much the total cost of living varies across the
country, but studies have found significant variations in housing
costs.
- For example, median rent for a standard two bedroom apartment in San
Francisco, CA is 2.5 times as expensive as in Cheyenne, WY ($1,679 vs.
$671 per month), according to data from the Department of Housing and
Urban Development (HUD).
Differences in Cost of Living Could Affect Available Financial
Resources:
* Cost-of-living differences could impact families‘ available financial
resources to pay for higher education.
* Similarly situated students with permanent addresses in San
Francisco, CA and Cheyenne, WY would receive the same Pell Grant award
despite potential differences in the cost of living.
Table: Example of the Impact of Cost-of-Living Differences on Available
Resources:
Total family income after taxes:
San Francisco, CA: $35,000;
Cheyenne, WY: $35,000.
Annual rent cost (based on HUD‘s median rent data for standard two
bedroom apartment:
San Francisco, CA: $20,148;
Cheyenne, WY: $8,052.
Available resources for other expenses including education:
San Francisco, CA: $14,852;
Cheyenne, WY: $26,948.
Estimated Pell Grant (2007-2008 school year, family of four, one child
in college):
San Francisco, CA: $2,360;
Cheyenne, WY: $2,360.
[End of table]
Traditional Criticisms of Cost-of-Living Differences Are Not Generally
Applicable to the Financial Aid Population:
Criticism:
Differences in cost of living are offset by income differences. For
example, salaries are generally higher in high-cost areas.
Counterargument:
The federal aid formula already accounts for income but not cost of
living.
Criticism:
High-cost areas are more expensive because they may have more amenities
than low-cost areas, such as:
* proximity to recreational activities and entertainment;
* larger houses.
Counterargument:
Job location and family ties can make it costly for some people,
particularly low-income families, to move out of a high-cost area.
(Citro, Constance F., and Robert T. Michael (eds.), Measuring Poverty:
A New Approach. Washington, DC: National Academy Press, 1995).
Financial Aid Officials and Higher Education Experts Had Mixed Views on
Need for a COLA:
* Several officials believe the current formula disadvantages families
in high-cost areas because they have fewer available financial
resources than the formula suggests.
* Other officials and experts were concerned that adding a COLA might
not improve the formula or might shift the focus of financial aid away
from low-income families.
* However, most other officials and experts did not have strong
opinions, noting that a COLA might improve the formula depending on how
it was implemented.
[End of Finding 1]
Finding 2: COLA Options-Overview:
Several Options Exist for Adjusting for Cost-of-Living Differences, but
They Vary in Scope, Impact, Strengths, and Limitations:
* Measuring cost-of-living differences is difficult.
* We identified three potential cost-of-living adjustments with
different scopes and impacts on aid eligibility.
* Different strategies for implementing a COLA have implications for
students from low-cost areas and for Pell spending.
Finding 2: COLA Options:
Measuring Cost-of-Living Differences Is Difficult:
* There are no official federal measures of overall geographic cost-of-
living differences (Federal programs that currently adjust for cost-of-
living differences use measures focusing on special populations (e.g.,
military personnel) or specific costs (e.g., medical practice costs):
- Existing measures track changes in prices over time rather than
differences in prices across the country.
* A 1995 GAO report identified 12 methodologies that, in some part,
could contribute to the development of a cost-of-living index, but
identified problems with each methodology (GAO, Poverty Measurement:
Adjusting for Geographic Cost-of-Living Difference, GAO/GGD-95-64,
(Washington, D.C.: March 9, 1995).
* Common problems associated with measuring cost-of-living differences
are:
- Challenges developing a common market basket of goods;
- Difficulties accounting for area characteristics;
- Data limitations;
- Difficulties defining an appropriate geographic area;
- Cost of living can vary among and within regions, cities, and
counties.
We Identified Three Potential Cost-of-Living Adjustment Options with
Different Scopes and Impacts on Aid Eligibility:
Table: Cost-of-Living Adjustment Options:
Source:
Home Rental Cost: Department of Housing and Urban Development data;
Regional Price Parities: Multiple data sources including the Consumer
Price Index and American Community Survey;
Housing Expenditures: Consumer Expenditure Survey.
Design:
Home Rental Cost: Developed by GAO based on proposals by the National
Academy of Sciences and the University of California;
Regional Price Parities: Preliminary methodology developed by the
Bureau of Economic Analysis;
Housing Expenditures: Developed by the College Board and currently used
by a number of colleges to calculate institutional aid.
Unit of Measure:
Home Rental Cost: Median rental costs for standard two-bedroom
apartments;
Regional Price Parities: Prices for a broad basket of 211 consumer
goods ranging from housing (owned and rented) to haircuts;
Housing Expenditures: Average annual expenditures on housing (owned and
rented) and utilities.
Scope:
Home Rental Cost: Every county in the U.S.
Regional Price Parities: All 363 metropolitan areas and aggregate
amounts for each state‘s non-metro areas;
Housing Expenditures: 28 major metropolitan areas.
Note: Additional information about the data sources for these COLAs can
be found in appendix II.
[End of table]
Potential Cost-of-Living Adjustment Options Have Various Strengths and
Limitations:
Table: Cost-of-Living Adjustment Options:
Strengths:
Home Rental Cost:
* Available for every county in the U.S.
* Widely used to calculate housing expenses;
Regional Price Parities: Accounts for more than just differences in
housing costs;
Housing Expenditures: Currently used by some colleges to adjust for
cost-of-living differences in the College Board‘s institutional aid
formula.
Limitations:
Home Rental Cost:
* Only captures recent movers rather than the entire rental housing
stock;
* Only measures rental housing costs;
Regional Price Parities:
* Experimental methodology has not been fully vetted;
* Provides same values for all non-metro areas within a state;
Housing Expenditures:
* Only available for a small number of metropolitan areas;
* Only measures housing costs;
* Cannot be used to reduce aid in low-cost areas.
COLA Could Be Based on Students‘ Permanent Residence:
Students‘ ZIP codes could be matched to the COLA for their county of
permanent residence:
* Dependent students would use ZIP codes where their parents live;
* Independent students would use the ZIP codes of their permanent
address.
Impact of COLA on Aid Eligibility Based on Students‘ Permanent
Residence:
Permanent Residence: High cost-of-living county;
Expected Family Contribution (EFC): Decreases or no change;
Pell Grant Award: Increases or no change.
Permanent Residence: Low cost-of-living county;
Expected Family Contribution (EFC): Increases or no change;
Pell Grant Award: Decreases or no change.
[End of table]
Implementing a COLA for Independent Students Would Likely Not Be a
Significant Problem:
According to aid officials, independent students generally change their
permanent residence when moving to a new location; however, the aid
formula would use the location reported on the federal aid application.
* If an independent student moved from Wyoming to California, the COLA
for the first year would be based on the Wyoming address.
* The COLA for subsequent years, however, would be based on the new
California address.
Financial aid officials generally did not view this as a significant
obstacle to implementing a COLA because:
* Officials told us that relatively few independent students move to
attend school (Data from the 2007-2008 National Postsecondary Student
Aid Study suggest that few independent students move to attend school.
For example, only 10.5 percent attended an out-of-state institution).
* Aid officials can use professional judgment to adjust a student‘s EFC
based on special circumstances.
* Some students will benefit from a COLA in their first year if they
move from a high-cost area to a low-cost area.
Different Strategies for Implementing a COLA Have Implications for
Students From Low-Cost Areas and for Pell Spending:
A COLA could be implemented using three different strategies:
* Hold harmless: COLA is only used in high-cost areas where it will
increase student aid. Students from low-cost areas are held harmless
from adjustments. This option would increase Pell spending.
* Across the board: COLA is used to increase aid for students in high-
cost areas and decrease aid for students in low-cost areas. For Pell
spending, increases in aid are offset by reductions in aid.
* Phased in: Current aid recipients are held harmless from any
reductions while the COLA is applied across the board to new applicants
(Education officials said it would be administratively challenging to
operate different aid formulas for current recipients and new
applicants). This approach would increase Pell spending in the short
term, but the long-term costs would be lower.
[End of Finding 2]
Finding 3: COLA Impact--Overview:
Each COLA Would Increase Pell Grants and Other Aid for a Small
Percentage of Students from High-Cost Areas but Could Also Complicate
Aid Process:
* Each COLA would increase aid to applicants in a small number of
counties in high-cost areas.
* COLAs would not greatly increase overall Pell spending because many
Pell recipients already receive the maximum Pell Grant or do not live
in a high-cost area.
* Pell recipients with relatively higher incomes could receive the
greatest benefit from adding a COLA.
* Adding a COLA could be inconsistent with other efforts to simplify
the financial aid process.
Finding 3: COLA Impact on Counties:
Each COLA Would Increase Aid to Applicants in a Small Number of
Counties in High-Cost Areas:
* All three COLAs largely identify similar metropolitan counties as
high-cost areas.
* Each COLA would increase aid to some students who come from a small
number of densely populated counties.
Table: Number of Counties and Population in High-Cost Areas for Each
COLA:
COLA: Home Rental Cost;
Number of High-Cost Counties: 263;
Population in High-Cost Counties: 111 million;
Number of Low-Cost Counties: 2,861;
Population in Low-Cost Counties: 163 million.
COLA: Regional Price Parities;
Number of High-Cost Counties: 206;
Population in High-Cost Counties: 109 million;
Number of Low-Cost Counties: 2,905;
Population in Low-Cost Counties: 164 million.
COLA: Housing Expenditure;
Number of High-Cost Counties: 208;
Population in High-Cost Counties: 106 million;
Number of Low-Cost Counties: N/A[A];
Population in Low-Cost Counties: N/A[A],
[A] The Housing Expenditure COLA only identifies high-cost counties.
Source: GAO analysis of Census, HUD 50thPercentile Rent Data, College
Board Data, and Bureau of Economic Analysis data and Census estimates
for county populations in 2000.
[End of table]
COLAs Could Increase Aid to Students from California, the Northeast,
and a Few Other Areas Around the Country:
Figure: Counties Where Students‘ Aid Could Increase or Decrease with
Home Rental Cost COLA[A]:
[Refer to PDF for image: map of the United States]
The map depicts cost of living in different U.S. counties, in the
following classifications:
Low-cost county (aid decreases);
High-cost county (aid increases);
Very high-cost[B] county (greatest aid increase).
Source: GAO analysis of HUD 50th Percentile Rent data.
[A] Blank counties are neither high cost nor low cost. Low-cost
counties would not lose aid if COLA were implemented ’hold harmless.“
Other COLAs affect similar areas (see appendix III).
[B] Very high-cost areas are more than 15 percent more expensive than
the median.
[End of figure]
Finding 3: COLA Impact on Students:
Many Students Have No Expected Family Contribution under the Current
Formula and Would Not Benefit From a COLA:
Figure: Estimated Percentages and Total Number of Students with No
Expected Family Contribution for 2007-2008 School Year:
Applicants for Federal Aid:
Expected to contribute: 66%; 8.2 million students; (mean EFC is about
$11,500);
No expected contribution [A]: 34%; 4.2 million students.
Pell Recipient:
Expected to contribute: 43%; 2.4 million students; (mean EFC is about
$1,700);
No expected contribution [A]: 57%; 3.1 million students.
Source: GAO analysis of Department of Education data.
[A] Students in this group have low incomes and assets and an expected
family contribution of zero, which means that a COLA cannot reduce the
EFC any further. Graduate students are included and are generally not
eligible for Pell Grants.
[End of figure]
Finding 3: COLA Impact on Aid:
About 17 Percent of Federal Financial Aid Applicants Could Receive More
Aid because They Are From High-Cost Areas:
The COLAs would lower the expected family contribution for students who
are from high-cost areas and for whom the federal aid formula indicates
an expected contribution (For students with no expected family
contribution, the COLA could not reduce the expected family
contribution any further and the student would not be eligible for any
additional aid).
For these students, a lower expected family contribution might result
in increased Pell Grants, Stafford Loans, or increased institutional
aid if their college uses the federal formula.
For example, a student with a reduced expected family contribution
might be eligible for additional amounts of subsidized and/or
unsubsidized Stafford loans, unless:
* the student has already borrowed the maximum allowed;
* the student is offered sufficient additional aid from other sources
to reduce his/her eligibility for a Stafford loan.
About 37 Percent of Federal Financial Aid Applicants Could Receive Less
Aid because They Are from Low-Cost Areas:
The Home Rental Cost or Regional Price Parities COLAs would increase
the expected family contributions and potentially decrease aid for
students who are from low-cost areas”if implemented ’across the board.“
For these students, a higher expected family contribution could
possibly result in decreased Pell Grants, Stafford Loans, or decreased
institutional aid if their college uses the federal formula.
However, if the COLAs were implemented with a ’hold harmless“
provision, then these students would see no change in their aid.
Finding 3: COLA Impact on Pell Spending:
COLAs Would Not Greatly Increase Pell Spending because Many Pell
Recipients Already Receive the Maximum Pell Grant or Do Not Live in a
High-Cost Area:
The Home Rental Cost and Regional Price Parities COLAs would reduce
overall Pell expenditures (if implemented across the board) because
more students would see a reduction in aid than an increase.
Table: Estimated Pell Spending under Different COLA Scenarios, 2007-
2008 Grant Year (in millions of dollars):
COLA Option: No COLA;
Pell Spending (across the board): $14,685;
Pell Spending (hold harmless): $14,685.
COLA Option: Home Rental Cost;
Pell Spending (across the board): $14,465;
Pell Spending (hold harmless): $14,844.
COLA Option: Regional Price Parities;
Pell Spending (across the board): $14,289;
Pell Spending (hold harmless): $14,928.
COLA Option: Housing Expenditure;
Pell Spending (across the board): N/A[A];
Pell Spending (hold harmless): $14,797.
Source: GAO analysis of Department of Education data, Bureau of
Economic Analysis data, HUD 50th Percentile Rent data and College Board
data.
[A] Housing Expenditure COLA is only calculated for a small percentage
of U.S. counties and can not be implemented across the board.
[End of table]
Finding 3: COLA Impact on Pell Grants:
The Proposed COLAs Would Increase Pell Grants for About 10 Percent of
Pell Recipients:
Figure: Estimated Percentages and Total Number of Pell Recipients with
Changes in Their Pell Grants for Each COLAs[A]:
Home Rental Costs:
Increase[B]: 0.5 million (9%);
Decrease: 1.2 million (22%);
No Change: 3.8 million (69%).
Regional Price Parities:
Increase[B]: 0.5 million (9%);
Decrease: 1.2 million (22%);
No Change: 3.7 million (69%).
Housing Expenditures:
Increase[B]: 0.6 million (10%);
Decrease: 0;
No Change: 5 million (90%).
[A] See appendix IV for additional information.
[B] The percentage of students with increased grants in each figure
includes about 1 to 2 percent of students newly eligible for a Pell
Grant.
Source: GAO analysis of Department of Education data, Bureau of
Economic Analysis data, HUD 50th Percentile Rent data and College Board
data.
Notes: Figures reflect across-the-board COLA implementation. Students
would see no decrease in aid if the COLA were implemented as hold
harmless instead of across the board. Students with no change in Pell
Grant already receive the maximum grant, do not live in a high-cost or
low-cost area, or live in a United States territory.
[End of table]
Pell Recipients with Relatively Higher Incomes Could Receive the
Largest Grant Increases:
* Lower income students already receive the maximum”or nearly the
maximum”Pell Grant and would receive either no grant increase or only a
small increase.
- A family in San Francisco earning $31,000 would see their Pell Grant
increase slightly from $4,160 to $4,310 with any COLA.
* Students from high-cost areas with relatively higher incomes would
receive large Pell grant increases.
- A family in San Francisco earning $51,000 could see their Pell grant
increase from $860 to $3,060 with the Home Rental Cost COLA.
- This $2,200 increase is more than 6 times the average increase of
$318 (for those with an increase) with the Home Rental Cost COLA.
Table: Estimated Change in Pell Grant for Family of Four with One Child
and One Other Dependent in College with Home Rental Cost COLA
(Implemented Across the Board):
Family Income: $31,000;
San Francisco, CA: +$150;
Boston, MA: +$150;
Cheyenne, WY: -$500;
Family Income: $41,000;
San Francisco, CA: $1850;
Boston, MA: +$1500;
Cheyenne, WY: -$600.
Family Income: $51,000;
San Francisco, CA: +$2200;
Boston, MA: +$1500;
Cheyenne, WY: $)[A].
[A] Student would be ineligible for Pell Grant with or without a COLA.
Source: GAO analysis of Federal Needs Analysis formula, HUD 50th
Percentile Rent data.
[End of table]
Other COLAs show similar trends, although on average for students with
expected increases in grants:
* Pell increases are greater with the Regional Price Parities COLA;
* Pell increases are lower with the Housing Expenditure COLA (See
appendix V for additional examples).
Finding 3: COLA Impact on Aid System:
COLA Could Be Inconsistent with Broader Federal Efforts to Simplify the
Aid Process:
Many financial aid professionals and economists recommend that the
current aid formula and overall application process be simplified.
Education has also published a proposal to simplify the aid formula and
application (In addition, GAO recently convened a study group, as
mandated by the Higher Education Opportunity Act, to examine options
and implications in simplifying the financial aid process, with a
report on the group‘s results expected in October 2009).
Several aid officials and experts were concerned that a COLA would
complicate the aid formula and process.
* Formula would be more difficult to explain to families.
* Formula would be more complex for aid professionals to administer.
* Guidance on how to deal with address changes and verification of
addresses would be needed.
Any COLA would also have to be updated on a regular basis.
Finding 3: COLA Impact on Formula:
Some Officials Thought Other Problems with Formula Should Be Addressed
before Adding a COLA:
Several financial aid officials and experts described the federal
formula as imperfect and not an accurate measure of a family‘s ability
to pay for college expenses.
Several aid officials commented either that:
* a COLA should be considered as part of a more comprehensive review of
the formula or;
* improving other sections of the formula should be a higher priority.
Some noted that increasing the income protection allowance in the
expected family contribution formula for all families would improve the
formula more than adding a COLA to this allowance.
* Several officials and experts described the income protection
allowance as unrealistic because it is based on old data that have been
updated for inflation, but do not reflect changes in family spending
patterns.
[End of Finding 3]
[End of Briefing slides]
Appendix II: Scope and Methodology:
To address our objectives, we reviewed relevant federal laws,
regulations, and guidance; identified three potential cost-of-living
adjustments (COLA); and analyzed Education's sample file of 2007-2008
financial aid applicants to estimate the impact of potential COLAs. Our
analyses focused mainly on the impact of COLAs on Pell Grants because
they are Education's primary need-based grants. We also interviewed
financial aid experts and economists.
We conducted our work from December 2008 to August 2009 in accordance
with all sections of GAO's Quality Assurance Framework that are
relevant to our objectives. The framework requires that we plan and
perform the engagement to obtain sufficient and appropriate evidence to
meet our stated objectives and to discuss any limitations in our work.
We believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings.
COLA Options:
To research possible COLAs that could be applied to the federal student
aid formula, we reviewed relevant literature and interviewed several
financial aid experts and economists.[Footnote 3] We found a limited
number of available options that could be used in the student aid
formula. For example, we considered the Basic Allowance for Housing
that the Department of Defense uses, but we determined that this COLA
was not appropriate for the financial aid formula because it adjusts
for different income levels in addition to cost-of-living differences.
We ultimately identified three possible COLA options--Home Rental Cost,
Regional Price Parities, and Housing Expenditure COLAs--that could be
used to adjust the federal aid formula for geographic cost-of-living
differences. These three COLAs were the best options we identified
during our research, although it is possible that other options could
be developed. Below is a description of how we implemented these three
COLAs, but we recognize that they could be implemented in alternative
ways.
We standardized our COLAs on a county level, which allowed us to
compare the effects of different COLAs and to simulate the effect of
adding a COLA. However, each of these COLAs was originally calculated
based on geographic areas of varying sizes, most often Metropolitan
Statistical Areas, which often encompass multiple counties. For each
county, we assigned the COLA that applied to the area in which the
county is located. We did not include U.S. territories in any COLA
because they were only available for the Home Rental Cost COLA.
Home Rental Cost COLA:
The Home Rental Cost COLA was generated by GAO using data from the
Department of Housing and Urban Development's (HUD) 50th Percentile
Rent database. HUD estimates 50th Percentile Rents annually for
different areas in the United States.[Footnote 4] These 50th Percentile
Rents are the estimated median price of a two-bedroom apartment in
different areas across the United States.[Footnote 5] HUD calculates
the 50th Percentile Rent by using the decennial Census to provide base-
year information on rents. It then updates this baseline number each
year using random-digit-dialing telephone surveys, consumer price index
information in areas where available, and the American Community
Surveys. HUD publishes 50th percentile rent estimates for all U.S.
counties or county subareas.[Footnote 6] HUD 50th Percentile Rent areas
are often Metropolitan Statistical Areas.
GAO used the following process to convert HUD 50th Percentile Rent data
to a COLA. First, a housing cost index was created from the 50th
Percentile Rent data using the median cost of a two-bedroom rental
unit. A weighted national average rental amount was computed based on
the county population estimates from the 2000 Census. Then, the local
area's average rental amount was divided by the national average to
create the housing cost index.[Footnote 7] We used a 3-year average of
HUD 50th Percentile Rent data (2005 through 2007) to create the housing
cost index. Using the 3-year average helps mitigate the fact that 50th
Percentile Rent data reflect data only on people who have moved in the
last 15 months, which can result in significant year-to-year
fluctuations in some areas because such data only consider the rental
market at that time.
To account for the fact that the 50th Percentile Rent data only
captured housing costs, we weighted the COLA so that it applied only to
the housing portion of the income protection allowance. The Home Rental
Cost COLA is calculated as a sum of 42 percent of our housing cost
index and a constant of 58 percent. The 42 percent weight reflects
housing as a component of overall consumption.[Footnote 8] The 58
percent is the remaining weight that is applied for the other
nonhousing components of consumption since this COLA only captures
housing costs.[Footnote 9]
Regional Price Parities COLA:
The experimental Regional Price Parities COLA was developed by the
Bureau of Economic Analysis (BEA) and provides estimated differences in
the cost of living for a broad market basket of goods, including
housing, transportation and food. BEA analyzed data from several data
sources, including the Consumer Price Index, the Census, and the
American Community Survey, to estimate a COLA for 363 Metropolitan
Statistical Areas and another COLA for each state that is applied to
all counties in the state that are not part of a Metropolitan
Statistical Area.[Footnote 10] We used the Regional Price Parities
COLAs for the counties in the Metropolitan Statistical Areas (which
include over 1,000 counties of the 3,141 U.S. counties and county
equivalents in the U.S.) and a state level COLA for all the
nonmetropolitan counties in a state.[Footnote 11] Because the other two
COLAs included multiyear averages, we averaged the Regional Price
Parities from 2005 and 2006--the most recent 2 years for which the
Regional Price Parities have been computed. Unlike the Home Rental Cost
COLA, the Regional Price Parities can be applied directly to the income
protection allowance because it represents a broad market basket of
goods.
Housing Expenditure COLA:
The Housing Expenditure COLA was developed by the College Board for
schools that use the College Board's Institutional Methodology to award
institutional student aid. According to College Board officials, about
270 schools use the Institutional Methodology and have the option to
use the Housing Expenditure-based COLA to adjust aid levels for
geographic differences in the cost of living. The COLA reflects a 3-
year average of the differences in housing expenditures (for all
renters and homeowners) collected by the Bureau of Labor Statistics for
28 Metropolitan Statistical Areas using the Consumer Expenditure
Survey. Similar to GAO's treatment of the Home Rental Cost COLA, the
College Board weights the Housing Expenditure COLA to only reflect
housing as one component of overall consumption. We used the COLAs
provided directly by the College Board, which do not provide the option
for downward adjustments to low-cost areas.[Footnote 12]
Estimating the Impact of Potential Cost-of-Living Adjustments:
To estimate the impact of potential cost-of-living adjustments, we
multiplied the COLA value for each county by the families' income
protection allowance (IPA) in the formula. We used the COLAs to adjust
the parents' IPA for dependent students and the students' IPA for
independent students. While the aid formula could be adjusted for
regional variation in the cost of living in different ways, the law
mandating this study specifically requested that GAO apply a COLA to
the IPA.[Footnote 13] The IPA is an allowance, adjusted over time for
inflation, that represents the income needed to pay for a family's
basic living expenses. The IPA varies by family size and the number of
family members pursuing a higher education. When the IPA is increased,
a family is expected to contribute less of their income to higher
education expenses and the family's expected family contribution could
be reduced, which could result in an increase in federal student aid.
The values of the COLAs we used range from 60 percent to 151 percent of
the IPA's original size. A COLA below 100 percent would decrease the
IPA and could lead to a higher expected family contribution and reduced
aid. A COLA above 100 percent would increase the IPA and could lead to
a lower expected family contribution and increased aid.
To analyze the impact of the COLAs on students, we recalculated
students' expected family contributions and Pell Grants for specific
example students and also simulated the total effects on a large sample
of students. To determine the change in Pell Grants for our example
students, we created a profile for a full-time, independent student and
a profile for a full-time, dependent student from a family with two
working parents and one other dependent. We used three different income
levels for the two types of student profiles but held all other
characteristics constant.[Footnote 14] We then entered the students'
characteristics in the federal aid formula, adjusting the families' IPA
for COLAs in different areas, to determine the example students'
adjusted expected family contributions and Pell Grants.
To determine the impact of geographic cost-of-living differences on the
total cost of all Pell Grants, we ran a simulation on an Education-
provided sample of federal financial aid applicants from the 2007-2008
school year. This sample file includes undergraduate and graduate
students. Although most graduate students are not eligible for Pell
Grants, they are eligible for other federal financial aid. Education
collects the random sample of more than 500,000 student aid records to
estimate the cost of Pell Grants. We modified Education's Pell Grant
cost-estimation model by applying the three COLAs to the families' IPAs
to estimate expected family contribution. We used students' ZIP codes
in the sample file to determine which county-level COLA would apply to
each student.[Footnote 15] We then used the adjusted expected family
contribution to determine the total estimated change in Pell Grants, as
well as to generate summary statistics on the estimated number of
families with a change in expected family contributions. We applied the
COLAs using two methods to estimate the impact on Pell Grant spending:
(1) applying the COLAs while holding students in low-cost areas
harmless by keeping the original, unadjusted IPA for low-cost areas and
(2) applying the COLAs across the board, where we reduced students'
IPAs in low-cost areas.
We assessed the reliability of the datasets we used for our analyses
and found them sufficiently reliable for our purposes. To assess the
reliability of Education's dataset and HUD 50th Percentile Rents, we
interviewed agency officials knowledgeable about the data and reviewed
relevant documentation. For Education's dataset, we also conducted
electronic testing to assess missing data and other potential problems.
We determined that the data were sufficiently reliable for the purposes
of this report. The BEA Regional Price Parities are an experimental
methodology, but we interviewed relevant agency officials who provided
a general overview of their methodology and concluded that the data
used to generate the Regional Price Parities COLAs were sufficiently
reliable for our purposes. Similarly, we spoke to College Board
officials about the Housing Expenditure COLAs and determined that the
data used to generate the COLAs were sufficiently reliable for our
purposes.
Our methodology and data have some limitations. In the simulation, we
did not produce estimates for the impact of a COLA on the most recent
federal aid formula, the 2008-2009 school year, because a sample file
of those students is not yet available. Therefore, our analysis does
not reflect changes in the federal formula or Pell Grant schedule,
including increases in the IPA amounts for inflation and increases in
the maximum Pell Grant, from $4,310 in 2007-2008 to $4,731 in 2008-
2009. Additionally, Education officials have cautioned that the self-
reported student ZIP codes may be unreliable if applicants report their
school address instead of their permanent mailing address. However, we
checked the reliability of the ZIP code data by comparing the state of
the parents' residence with the state associated with the ZIP code for
all dependent students and found they matched in 95 percent of cases.
Interviews:
We interviewed higher education experts and economists; representatives
from seven higher education associations; and financial aid officials
from 19 postsecondary institutions that represented a mix of 2-year and
4-year public, not-for-profit, and proprietary schools in different
geographic areas.
We identified one expert mentioned in news articles on financial aid
issues and we obtained recommendations from Education and other sources
for additional individuals to contact. We then contacted those
individuals and obtained further recommendations from them on
additional individuals to contact. We also consulted with a panel of
higher education experts and economists convened by GAO for a related
study on simplifying the federal financial aid formula.
We also interviewed officials from the following higher education
associations: the American Association of Community Colleges, the
American Association of State Colleges and Universities, the American
Council on Education, the Career College Association, the National
Association of Student Financial Aid Administrators, the National
Association of Independent Colleges and Universities, and the
Association of Public and Land-grant Universities (formerly the
National Association of State Universities and Land-Grant Colleges).
[End of section]
Appendix III Counties Where Students Could See a Change in Financial
Aid under Different COLA Options:
Figure 1: Counties Where Students' Aid Could Increase or Decrease with
Regional Price Parities COLA:
[Refer to PDF for image: map of the United States]
The map depicts cost of living in different U.S. counties, in the
following classifications:
Low-cost county (aid decreases);
High-cost county (aid increases);
Very high-cost[B] county (greatest aid increase).
Source: GAO analysis of HUD 50th Percentile Rent data.
Notes: Very high-cost counties are more than 15 percent more expensive
than the median. Blank counties are neither high cost nor low cost. Low-
cost counties would not lose aid if COLA were implemented "hold
harmless."
[End of figure]
Figure 2: Counties Where Students' Aid Could Increase with Housing
Expenditure COLA:
[Refer to PDF for image: map of the United States]
The map depicts cost of living in different U.S. counties, in the
following classifications:
High-cost county (aid increases);
Very high-cost[B] county (greatest aid increase).
Source: GAO analysis of HUD 50th Percentile Rent data.
Notes: Very high-cost counties are more than 15 percent more expensive
than the median. Blank counties are unmeasured by the Housing
Expenditure COLA.
[End of figure]
[End of section]
Appendix IV: Summary of Effects of Adding a COLA to the Federal Needs
Analysis Formula on Expected Family Contribution Levels and Pell Grant
Awards:
Figure 3: Estimated Percentages and Total Number of Financial Aid
Applicants and Potential Changes in Their Expected Family Contributions
for Each COLA:
Refer to PDF for image: 3 pie-charts]
Home Rental Costs:
Increase: 4.4 million (36%);
Decrease: 2.2 million (18%);
No Change: 5.7 million (47%).
Regional Price Parities:
Increase: 4.6 million (38%);
Decrease: 2.1 million (17%);
No Change: 5.6 million (46%).
Housing Expenditures:
Increase: 0;
Decrease: 2.3 million (18%);
No Change: 10 million (82%).
Sources: GAO analysis of 2007-2008 Department of Education data, Bureau
of Economic Analysis data, HUD 50th Percentile Rent data, and College
Board data.
Notes: Figures reflect across-the-board COLA implementation. Students
with a lower EFC could see an increase in aid and students with a
higher EFC could see a decrease in aid. Students would see no decrease
in aid if the COLA were implemented as hold harmless instead of across
the board. Percents may not add to 100 due to rounding.
[End of figure]
Figure 4: Estimated Average Pell Grant Increase for Students Receiving
a Pell Increase for Each COLA:
[Refer to PDF for image: vertical bar graph]
COLA Option: Home Rental Cost;
Estimated Average Pell Grant Increase: $318.
COLA Option: regional Price Parities:
Estimated Average Pell Grant Increase: $486.
COLA Option: Housing Expenditures;
Estimated Average Pell Grant Increase: $202.
Sources: GAO analysis of federal needs analysis formula, 2007-2008
Department of Education data,Bureau of Economic Analysis data, HUD 50th
Percentile Rent data, and College Board data.
[End of figure]
[End of section]
Appendix V: Change in Pell Grant for Example Students in High-Cost and
Low-Cost Areas for Each COLA:
Change in Pell Grants for a Dependent Student:
Table 1: Change in Pell Grants for Full-Time, Dependent Student from a
Family of Four with Home Rental Cost COLA:
Family income: $31,000;
San Francisco, CA: +$150;
Boston, MA: +$150;
Cheyenne, WY: -$500.
Family income: $41,000;
San Francisco, CA: +$1,850;
Boston, MA: +$1,500;
Cheyenne, WY: -$600.
Family income: $51,000;
San Francisco, CA: +$2,200;
Boston, MA: +$1,500;
Cheyenne, WY: 0.
Source: GAO analysis of federal needs analysis formula and HUD 50th
Percentile Rent data.
Notes: Table shows across-the-board implementation. In a hold-harmless
implementation, students in low-cost areas, such as Cheyenne, would not
see a reduction in their grant. City indicates student's permanent
address.
[End of table]
Table 2: Change in Pell Grants for Full-Time, Dependent Student from a
Family of Four with Regional Price Parities COLA:
Family income: $31,000;
San Francisco, CA: +$150;
Boston, MA: +$150;
Cheyenne, WY: -$200.
Family income: $41,000;
San Francisco, CA: +$1,850;
Boston, MA: +$1,400;
Cheyenne, WY: -$300.
Family income: $51,000;
San Francisco, CA: +$2,200;
Boston, MA: +$1,400;
Cheyenne, WY: 0.
Source: GAO analysis of federal needs analysis formula and Bureau of
Economic Analysis data.
Notes: Table shows across-the-board implementation. In a hold-harmless
implementation, students in low-cost areas, such as Cheyenne, would not
see a reduction in their grant. City indicates student's permanent
address.
[End of table]
Table 3: Change in Pell Grants for Full-Time, Dependent Student from a
Family of Four with Housing Expenditure COLA:
Family income: $31,000;
San Francisco, CA: +$150;
Boston, MA: +$150;
Cheyenne, WY: $0.
Family income: $41,000;
San Francisco, CA: +$900;
Boston, MA: +$300;
Cheyenne, WY: 0.
Family income: $51,000;
San Francisco, CA: +$900;
Boston, MA: +$300;
Cheyenne, WY: 0.
Source: GAO analysis of federal needs analysis formula and College
Board data.
Note: City indicates student's permanent address.
[End of table]
Change in Pell Grants for an Independent Student:
Table 4: Change in Pell Grant for a Full-Time, Independent Student with
No Dependents with Home Rental Cost COLA:
Family income: $8,000;
San Francisco, CA: +$550;
Boston, MA: +$550;
Cheyenne, WY: -$300.
Family income: $12,000;
San Francisco, CA: +$1,300;
Boston, MA: +$800;
Cheyenne, WY: -$300.
Family income: $16,000;
San Francisco, CA: +$1,300;
Boston, MA: +$900;
Cheyenne, WY: -$400.
Source: GAO analysis of federal needs analysis formula and HUD 50th
Percentile Rent data.
Notes: Table shows across-the-board implementation. In a hold-harmless
implementation, students in low-cost areas, such as Cheyenne, would not
see a reduction in their grant. City indicates student's permanent
address.
[End of table]
Table 5: Change in Pell Grant for a Full-Time, Independent Student with
No Dependents with Regional Price Parities COLA:
Family income: $8,000;
San Francisco, CA: +$550;
Boston, MA: +$550;
Cheyenne, WY: -$200.
Family income: $12,000;
San Francisco, CA: +$1,200;
Boston, MA: +$800;
Cheyenne, WY: -$200.
Family income: $16,000;
San Francisco, CA: +$1,200;
Boston, MA: +$800;
Cheyenne, WY: -$400.
Source: GAO analysis of federal needs analysis formula and Bureau of
Economic Analysis data.
Notes: Table shows across-the-board implementation. In a hold-harmless
implementation, students in low-cost areas, such as a Cheyenne, would
not see a reduction in their grant. City indicates student's permanent
address.
[End of table]
Table 6: Change in Pell Grant for a Full-Time, Independent Student with
No Dependents with Housing Expenditure COLA:
Family income: $8,000;
San Francisco, CA: +$550;
Boston, MA: +$200;
Cheyenne, WY: $0.
Family income: $12,000;
San Francisco, CA: +$500;
Boston, MA: +$100;
Cheyenne, WY: 0.
Family income: $16,000;
San Francisco, CA: +$500;
Boston, MA: +$100;
Cheyenne, WY: 0.
Source: GAO analysis of federal needs analysis formula and College
Board data.
Note: City indicates student's permanent address.
[End of table]
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
George A. Scott, (202) 512-7215 or scottg@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, the following staff made key
contributions to this report: Melissa Emrey-Arras, Assistant Director;
Michelle St. Pierre, Analyst-in-Charge; William Colvin; Susannah
Compton; Patrick Dudley; Jean McSween; Aron Szapiro; and Monique
B.Williams.
[End of section]
Footnotes:
[1] Pub. L. No. 110-315, § 1114.
[2] For example, see GAO, Poverty Measurement: Adjusting for Geographic
Cost-of-Living Difference, GAO/GGD-95-64 (Washington, D.C.: Mar. 9,
1995), and Constance F. Citro and Robert T. Michaels, Measuring
Poverty: A New Approach (Washington, D.C.: National Academy Press,
1995).
[3] For example, see GAO, Poverty Measurement: Adjusting for Geographic
Cost-of-Living Difference, GAO/GGD-95-64 (Washington, D.C.: Mar. 9,
1995); Constance F. Citro and Robert T. Michaels, Measuring Poverty: A
New Approach (Washington, D.C.: National Academy Press, 1995); and Dean
Jolliffe, How Sensitive Is the Geographic Distribution of Poverty to
Cost of Living Differences? An Analysis of the Fair Market Rents Index,
a report for the Economic Research Service, U.S. Department of
Agriculture (Washington, D.C.: June 8, 2004).
[4] HUD estimates the 50th Percentile Rent from the same dataset they
use to develop Fair Market Rents. Fair Market Rents are primarily used
to determine standard payment amounts for the Housing Choice Voucher
program. The Fair Market Rent covers the same 530 metropolitan areas
and 2,045 nonmetropolitan county areas as the 50th Percentile Rent.
[5] We used the two-bedroom rent because HUD generates the two-bedroom
rent first and then adjusts it to apply to housing units of other
sizes. Therefore, if other apartment sizes such as three bedrooms were
used, the end result would be a very similar index.
[6] We used 2006 Census definitions of counties and county equivalents
as the unit of analysis for the Home Rental Cost COLA, as well as the
other two COLAs. However, a few situations where HUD 50th Percentile
Rent Areas did not match the Census file were treated as follows: (1)
HUD provides a 50th Percentile Rent for Columbia City, Md., and
Sullivan City, Mo. Neither of these areas is a Census county or county
equivalent, so we dropped them from the dataset and used the 50th
Percentile Rent for the county in which these areas are located; and
(2) HUD provides a 50th Percentile Rent for Clifton Forge City, Va.,
which is not a Census county or county equivalent. However, its 50th
Percentile Rent is the same as Alleghany County, Va., in which the city
is located, so dropping Clifton Forge City did not change the Home
Rental Cost COLA.
[7] All GAO analysis is at the county level. However, HUD divides some
counties, mostly in New England, into component areas. In these cases,
each county's rent was first computed by generating a population-
weighted average rent for each county, based on its components, by each
year.
[8] Research done by the Bureau of Labor Statistics researchers and
others estimates that housing costs are about 42 percent of the cost of
living within the "market basket of goods." See Bettina H. Aten, Report
on Interarea Price Levels, WP2005-11 (Washington, D.C.: U.S. Bureau of
Economic Analysis, Nov. 30, 2005).
[9] For example, if the housing index were 2.00, the Home Rental Cost
COLA would be calculated as 2.00 times .42 (the housing weight) added
to .58 (the remaining, unadjusted part of the COLA), which would give a
COLA of 1.42.
[10] Bettina H. Aten and Roger J. D'Souza, "Regional Price Parities:
Comparing Price Level Differences Across Geographic Areas," Survey of
Current Business (Washington, D.C.: U.S. Bureau of Economic Analysis,
November 2008).
[11] BEA continues to explore additional methods to estimate regional
price parities for individual nonmetropolitan areas but has not
published any specific measures. GAO used only Regional Price Parities
that BEA has published.
[12] Some of the counties in the 28 Metropolitan Statistical Areas may
have a cost of living below the national average. However, over 2,000
counties have no assigned cost of living. Therefore, if the COLA were
designed to be implemented across the board, it would only reduce aid
for students in a few lower-cost cities, while holding students from
the rest of the country harmless.
[13] Pub. L. No. 110-315, § 1114.
[14] We made the following assumptions: (1) The cost of attendance is
higher than the maximum Pell Grant, which in turn maximizes a student's
potential Pell Grant; (2) the student or both the student and parents
do not have sufficient assets to make a contribution from assets; and
(3) because the federal aid formula has an allowance for federal taxes
paid, we generated a tax estimate assuming the standard deduction (and
a $1,000 child-tax credit for the dependent student's family) but did
not assume any contributions to retirement accounts or other tax
deductions.
[15] In the small percentage of cases where the ZIP code spanned more
than one county, we assigned students a county.
[End of section]
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