Economic Snapshot | Education

Government grants and loans cover less of college costs

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Snapshot for November 15, 2006.

Government grants and loans cover less of college costs

by Joydeep Roy with research assistance by Rob Gray

It is becoming increasingly difficult for students to obtain financial assistance to attend college. Federal grants are covering less of the tuition bill than they used to, forcing students to take on more expensive debt.

The College Board reported that Pell grants, one of the largest sources of federal help for low-income college students, have not kept up with college prices. As the chart below shows, Pell Grants now cover only about a third of the average costs at a four-year public school, compared with 42% in 2001-02 and 57% in 1985-86. The same trends can be seen for four-year private schools, where the grants now cover only 14% of expenses, compared to 26% in 1985-86. The Congress last increased the maximum annual Pell grant in 2003-04, when it was increased by a mere $50 to $4,050. Meanwhile, college costs (average published tuition, fees, and room and board (TFRB) charges) at four-year public colleges are up by about 25% from five years ago.

Maximum Pell grant as a percentage of published tuition, fee, and room and board (TFRB) charges at public and private four-year institutions, 1985-86 to 2005-06

As a result, students are increasingly turning to loans to finance their post-secondary education. However, the helpfulness of government loans has also been declining. Subsidized loans under the Stafford Loan program declined from 69% of student borrowing in 1995-96 to 55% in 2005-06. On the other hand, the percentage of student loans borrowed through banks and other private institutions has significantly increased. These loans, which often carry higher interest rates and can be difficult to acquire for poor and minority students, constituted only 4% of student borrowing in 1995-96, but they account for up to 20% of all student loans in 2005-06.

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