A Failing Financial Aid System Keeps Students Out of College

Airis Graham thought she'd be spending this fall in grad school, working toward a pharmacy degree. Instead, she's still one year away from a bachelor's, working 9 to 5 weekdays as a low-paid pharmacy technician at a chain store. On Friday evenings, she walks to the almost furniture-less apartment she shares with her sister, rests for a few hours, and then takes a bus to start her second job—the all-night weekend shift at a McDonald's.

Graham, a B-minus biotech major, has had to leave school and work 70 hours a week for 15 months because the scholarships she got to attend Claflin University in Orangeburg, S.C., didn't keep up with the college's tuition increases. She borrowed and worked as much as she could, but she couldn't scrape up enough to pay her junior-year tuition bill. Claflin now insists that she pay the $7,000 overdue bill before it will release her transcript so Graham can transfer and finish her degree at a less expensive public university near her hometown of Carbondale, Ill.

The oldest daughter of a single mom, Graham believes education is her ladder out of poverty. But can she afford to finish the climb? She's on track to make her last payment to Claflin by the end of the year. But she doesn't quite know how she will scrape together the $7,000 more she'll need to pay her final year's tuition. "I got good grades. I was doing what I was supposed to be doing. But I feel like I've been dealt a bad card," she says. "The only ticket out of poverty is an education, and the only reason I'm not in school is because I don't have any money."

Big numbers. The American dream is founded on the notion that anyone who is smart and disciplined can get an education and succeed. But the financial aid system meant to help needy students afford college is cracking under the strains of skyrocketing tuition and a crumbling economy. This is happening even though taxpayers, colleges, charities, and employers are collectively spending more than ever on financial aid—an estimated $74 billion in grants this academic year, more than double the amount handed out in 2000.

The basic problem is that this big number has been overwhelmed by some bigger ones. In the past decade, college enrollment has jumped by nearly 4 million to more than 18 million, and the annual costs of the typical four-year college have almost doubled to more than $14,000. The result of that one-two punch: The total amount of grant money handed out nationwide per student has risen by less than $2,000 over the past decade. The sticker price for a year at a typical public university, meanwhile, has risen by almost $6,600.

The mismatch between demand for and supply of financial aid is a main reason a panel of the nation's leading education experts is readying a call for dramatic reforms for what even the U.S. secretary of education calls a "fundamentally flawed" system.

Worsening the shortage of funds, they say, is the haphazard and often mysterious way the scarce funds are distributed. The system has become so complicated that more than a million students per year who might qualify for aid fail to pursue it. Students not lucky enough to have grown up in one of the towns or states with generous financial aid or smart enough to win admission to the handful of rich, highly selective schools are often heartbroken because the government and the colleges have unrealistically high expectations of what they can afford. Meanwhile, a growing number of schools and states are choosing to divert scarce financial aid dollars to good but comparatively wealthy students. Studies show states that fund merit grants through lotteries, such as Georgia, Tennessee, and Florida, generally funnel money away from poor, uneducated ticket buyers to wealthier families, who can afford to give their teens the tutoring they need to get good grades and test scores. One researcher estimates that $2.3 billion in state, private, and school scholarships is awarded annually to students from the richest 10 percent of families.

The result: Some smart, diligent, but relatively poor kids are being priced out of college. The College Board calculates that fewer than 30 percent of low-income, college-qualified students are earning college degrees. Almost 75 percent of their rich peers are getting degrees, however. This educational gap appears to be getting worse. The Department of Education reports that 8 percent of academically elite but low-income college freshmen who started in 2004 had dropped out—at least temporarily—by 2006, the latest year for which data are available. That's almost twice the stoppage rate of similar freshmen who started in 1996.

Of course, that's tragic for the individuals. In today's credential-crazed workplace, those job seekers lacking a college degree will have trouble getting anything but low-paying, dead-end jobs. But, more important, it's a disaster for the nation, which needs an educated workforce to sustain its economy against bigger or hungrier competitors around the globe.

Limited options. "Families are under pressure. Heating, food, transportation bills are up," even as state budget cuts and stock market troubles are pushing more colleges to hike tuition, says Marilyn Cargill, president of the National Association of State Student Grant and Aid Programs and director of Vermont's financial aid programs. The only way many families paid tuition bills in recent years was with loans. But the credit crunch has wiped out many families' ability to get a second mortgage or private educational loan, she notes. As a result, some low- and middle-income families may be running out of college funding options. "I have worked in this field for 24 years, and I don't know that it has ever been worse than it is now," she says. "It is scary."

What's scaring parents, students, and college officials ought to concern all Americans, says William Kirwan, chancellor of the University of Maryland system. "I hate to sound apocalyptic," he says. "But the proportion of students who need financial aid is rising at a rate faster than we are responding as a nation. We are going to have huge economic and social problems if we don't do a better job of financing higher education."

When it came time to pay for college, Orenthious "OJ" Hill fell through the cracks. His father was never around much, and his mother left him with his grandfather in Gainesville, Fla., when he was 7. His grandfather kept him in school and encouraged him to pursue his dream of becoming a history teacher. Hill enrolled at University of Florida, but since dropping out for financial reasons in 2003, he's been working full time and taking what classes he can afford. Now he can't even get a federal student loan for school because none of the adults in his life will fill out the Free Application for Federal Student Aid, the single most important form that qualifies students for the vast majority of loans and grants. Now that he's 24, he can apply for need-based aid on his own. If he had been able to at least get some student loans earlier, he figures, he'd be a teacher by now. At this rate, the soonest he'll get into a high school classroom is 2010.

"You hear parents and churches saying, 'Go to college!' But they never really say anything about how to fund college," Hill says. "I didn't know what a Pell grant or that stuff was until my first semester in college." And his grandfather is still suspicious of Hill's desire to take out federal student loans.

Fine print. Research by the American Council on Education indicates there are more than 1 million students like Hill across the country who may very well be eligible to receive aid but are not getting it. One reason: Many don't understand why or how to fill out a FAFSA. And no wonder. The form, with 145 questions, is longer and more eye-crossing than the standard tax form. University of Michigan economist Susan Dynarski estimates that it takes the average applicant about 10 hours to gather all the documents—W2s, tax returns, etc.—and fill out the form. For parents who don't speak English well or who don't want to reveal such exhaustive financial information to the government, this form can be insurmountable. Indeed, Secretary of Education Margaret Spellings says the application is so convoluted that "it is as if we are trying to keep people out of college."

Those who make it past the FAFSA then have to make sense of the fine print surrounding many government, school, and charitable aid programs. Some college financial aid officers, for example, are balking at helping students apply for the new federal $4,000-a-year "TEACH Grants," which are supposed to help aspiring teachers pay for college. The reason: Despite the name, they are not grants. They are loans that will be forgiven only if the student gets certified as "highly qualified" and works full time teaching a "high-need" subject at a federally designated, low-income school for at least four years within eight years of graduation. Those who don't jump through all those hoops could see $16,000 worth of "grants" turn into a $24,000 bill after interest charges. That's one reason Ted Malone, head of financial aid for the University of Alaska, won't process TEACH Grant applications for underclassmen, even though he knows many need the money. "Virtually all of the financial aid officers I know would bleed for our students," he says. "But we have to administer programs that have insane rules."

Mary Borg, an economist at the University of North Florida in Jacksonville, says unrealistic aid rules are one reason her low-income students joke that UNF stands for "U Never Finish." Many of the biggest aid programs will give money only to students who attend full time. But even those programs rarely give enough to fully fund a student's education. So low-income students end up having to work extra hours to cover the costs, which sometimes forces them to drop a course and go part time, a status that disqualifies them from receiving the rest of their aid and forces them then to work even more hours and take even fewer classes. "We're making the kids from low incomes really struggle," Borg says, while richer kids who can afford to attend full time and get good grades often qualify for full-tuition merit scholarships. "It's a reverse Robin Hood effect," she says. Donald Hossler, an Indiana University professor of educational leadership who also managed the college's financial aid programs, says, "It's like the solutions and problems got shaken up in a garbage can."

Despite the difficulty of navigating the financial aid system, a record 9 million parents and students have completed federal applications so far this year—up 15 percent from last year. That also means a record number of students are likely to be disappointed this year. Because there simply isn't enough grant money to go around, governments and colleges are asking families to kick in what many—such as the Rudolphs of Portland, Texas—are finding to be simply unaffordable amounts of money. Solidly middle class, with a house, pickup truck, and health insurance, the Rudolphs completed a FAFSA that showed Jayme and Rick earned about $84,000 last year from jobs at a natural gas company and a small family business. The federal government calculated they should be able to pay about $7,500 apiece for their two older daughters' college educations. Unfortunately, their oldest daughter, Meagan, received no grants to attend Texas A&M University-Kingsville for the coming year, leaving the family with bills in excess of $15,000 just for her. That meant the Rudolphs would have to come up with more than $20,000 to send both daughters to college this year, a prospect that made Jayme "want to tear my hair out."

Out of pocket. What governments and schools think families can afford to pay differs dramatically from the financial realities most households face. The federal government, for example, calculates its Expected Family Contribution by assuming that a family of five, like the Rudolphs, should be able to set aside for college at least 22 cents of every dollar of income above the first $36,000 or so that it earned. The government arrived at that number by looking at the spending patterns of a low-income family in 1967, then adjusting that 41-year-old budget upward by the consumer price index. Never mind that today's parents are under far more pressure to save for their own retirements, face new kinds of health costs, and are paying unprecedented gasoline and utility bills.

The Rudolphs' budget, for example, has been wiped out because their young son was recently diagnosed with autism spectrum disorder and requires expensive therapy sessions that aren't covered by medical insurance. The Economic Policy Institute calculates that a more realistic minimum budget for self-sufficiency—paying for health insurance, living in a safe house, etc.—for a five-member family in the Corpus Christi region last year was $55,200. In high-rent cities such as Washington, San Francisco, and Boston, it was over $80,000.

The final insult: There's not even enough grant money available to make sure that most parents have to pay out only their EFC. The federal Pell grant, the biggest and most common grant awarded solely to lower-income students, is capped this year at $4,731. That will take care of most costs at community colleges but doesn't begin to cover, say, the $23,000 in-state price tag at the University of Michigan. Fewer than 100 of the nation's 4,300 colleges are able to cobble together enough federal, state, and school money to make sure parents have to pay only their EFC. The rest, on average, come up with only enough to ask the parents for about $5,300 more than their EFC. Most also expect the student to kick in anywhere from $2,000 to $4,000 in earnings and loans. Many, especially big private universities, add $10,000 to the parents' EFC.

Ralph Perri, director of financial aid at the Texas A&M-Kingsville campus, says he tries to make sure that the poorest students get enough grants and low-cost loans to cover all their costs. But there simply isn't enough grant money to give students everything they need. The approximately $400 million the state of Texas is spending on grants this year doesn't even cover half the students who qualify. That means that tens of thousands of families such as the Rudolphs, who have proved they need money for college even under today's stingy rules, get no grants at all. They simply have to borrow more, work more, or scale back their educational ambitions.

Meagan Rudolph will fund her sophomore year by working and borrowing more to supplement her parents' contribution of $2,000 to $3,000. Her younger sister, Elizabeth, will work this fall instead of enrolling as a freshman. She's considering taking a correspondence course or two and hopes to enroll at the nearby Corpus Christi campus of Texas A&M this spring. The precariousness of their children's college funding worries the Rudolphs. They each had to leave college for financial reasons. "We really want to make sure our children get an education. We know how important it is," Jayme says. But how to pay for it? "I feel like I am caught in a trap. I have no retirement if I pay for their college," she adds. "It is really scary."

Getting worse. For the short term, at least, plenty more students and parents are likely to be scared. As job prospects for those with less education dry up, enterprising Americans have little choice but to enroll in college. About two thirds of recent high school graduates now enroll in college, up from less than half in 1980, raising the number of college students by 50 percent to 18 million this year. That means financial aid "is helping more people every year. It is also failing to help more people every year," says Sandy Baum, a Skidmore economist and cochair of the blue-ribbon panel that is calling for financial aid reform.

The few recent hopeful developments, such as the nearly $700 increase in the maximum federal Pell grant over the past two years, have been more than overwhelmed by increases in college bills. The cost pressures are only likely to get worse as economic troubles are forcing many states, including California, Rhode Island, and New York, to consider drastic tuition increases. Meanwhile, the housing and credit crunches are reducing the availability of home equity and private educational loans that many parents had counted on as a last resort. All this means that what Baum describes as the "horrible" gap between low-income and high-income college graduation rates could get worse. The aid system is becoming so dysfunctional, she says, that "at some point it will blow up."

A simpler system. As dire as that sounds, it may the best hope for students for the long term. Members of the Rethinking Student Aid Study Group hope that a growing sense of crisis will rally support for their proposals—the details of which they will release next month—for a simple system that "provides every student with enough grants so that they can succeed and get a bachelor's degree with reasonable amounts of work and borrowing."

They have reason to be optimistic. Both presidential candidates are pushing for financial aid simplification and improvements. A growing number of schools, communities, and donors have started making clearer and more generous financial aid pledges, such as the Kalamazoo, Mich., and El Dorado, Ark., promises, which guarantee full in-state tuition scholarships to kids who pass kindergarten through 12th grade in their communities' public schools. Harvard upped the simplicity and generosity ante late last year when it promised enough grants so that families earning up to $180,000 would be asked to pay no more than 10 percent of their income. And a number of highly selective colleges guarantee that students from families that earn less than $60,000 will receive enough aid to graduate debt free. For the lucky students who qualify for these new programs, such as Victoria Rduch of San Antonio, the outlook is bright.

Rduch, the daughter of a single mother who teaches high school Spanish, will graduate from Amherst College next June without a penny in debt. Amherst's recent pledge to provide enough grants to eliminate loans from its standard financial aid offers doesn't mean it is offering free rides to students like Rduch. To scrape together the approximately $10,000 a year Amherst felt the family should be able to afford without borrowing, the Rduchs tapped a small college savings plan a grandparent had set aside. Victoria, who was salutatorian of her high school and scored 1550 on her SATs, worked hard to get several thousand dollars a year in private scholarships. Her mother, Evita, contributed the remaining $2,000 a year or so to cover plane tickets and other costs.

Evita was relieved she didn't have to take out a second mortgage or drain her own retirement savings. "And I got to buy some fruit instead of eating hot dogs for the last few years," she jokes. What's more, her daughter will be able to buy a car, if she needs one, to get to her first postgraduation job. "People claim the middle class get the shaft," Rduch says. "But I'm middle class, so I can tell you no, no, no."

Not, at least, for the brightest or most geographically lucky students. Everybody else, however, is facing a more difficult and uncertain climb.