Cheaper Student Loans, But Shortage of College Grants Likely in 2011 and 2012

Financial aid lags behind soaring college tuition.

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Although the federal government will hand out billions of dollars more in college grants in 2011 and 2012 than ever before, the nation's financial aid programs as a whole are not keeping up with rising tuition, government officials and financial aid analysts say.

That means for millions of America's working and middle class families, "college is going to become less affordable," warns Mark Kantrowitz, publisher and founder of Finaid.org and the scholarship search site Fastweb.com.

 [Learn how to beat the shortage of financial aid.]

The widening gap between college costs and financial resources is forcing a growing number of students into one of three bad choices, says Faith Sandler, executive director of the Scholarship Foundation of St. Louis. More students are choosing cheaper colleges that, she says, often "don't match their capabilities." Too many other students "borrow too, too much." Those who can't stomach either of those options may give up on college altogether, she fears.

[Studies show a college degree is worth $300,000 - after subtracting costs.]

The reasons for the shortage of financial aid boil down to supply and demand. Demand for financial aid has surged because family incomes and housing values have fallen while college tuition continues to soar. Last year, the average private college's tuition jumped 4.5 percent, while the Consumer Price Index eked up just 1 percent. Tuition and fees at public colleges have ramped up even higher as state governments raise cash to fill deficits. Florida and California, for example, hiked their flagship universities' tuition more than 30 percent in the last two years.

Meanwhile, the suppliers of financial aid dollars are struggling. The scholarship endowments of charities and colleges shrank along with the stock market in 2008. And concerns over ballooning government deficits are causing many politicians to try to hold down spending on programs like college aid.

[Check out our guide to paying for college.]

Here is the outlook for the two most popular kinds of financial aid:

Grants or scholarships: Some Republicans in Congress have threatened to cut the nation's single largest college grant program—the federal Pell Grant—but veteran Washington lobbyists expect the government to maintain 2011-12 Pells at the same size as this year. (The funding after that, however, will depend on Washington politics.) The maximum Pell Grant, which typically goes to students with annual incomes below about $20,000, is expected to remain at $5,550 for the 2011-12 academic year. And the smallest Pell Grant, which is usually awarded to students whose families earn no more than $45,000 or so (depending on factors such as the size of the family), is likewise expected to remain at $555.

[Applying for financial aid will be easier in 2011.]

Though the size isn't expected to change, the number is expected to skyrocket. The downturn has dropped so many families into Pell eligibility that Congressional Budget Offices estimates the Department of Education will hand out about $38 billion worth of Pells in the 2012 academic year, up from about $26 billion in 2009-10.

To save money (about $860 million a year), the Obama Administration is canceling the federal SMART and Academic Competitiveness Grant programs, which gave low-income students with good grades up to $4,000 a year extra. Those grants will not be renewed starting in the fall of 2011.

So while tens of thousands of Americans will get new Pell Grants, the typical Pell will lag behind rising tuition in 2011. In addition, tens of thousands of low-income, high-achieving students will receive less in federal grants in the fall of 2011 than they got in 2010. And the outlook for federal grants after the fall of 2012 is murky.

The prospects for state scholarship programs, which handed out about $8.6 billion in grants in 2010, are even bleaker. Some states, such as Michigan and New Mexico, have already slashed their scholarship funding. Other states have kept funding steady, but have not been able to keep up with burgeoning applications and tuition. Illinois turned away nearly 140,000 qualified students from its state scholarship program this year, for example.