Kim Clark

Financial aid lags behind soaring college tuition

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 and the scholarship search site

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.

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.

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.

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.

And some states are getting ready to pare back their scholarships. Georgia has seen its lottery revenues dip while its Hope full-tuition scholarship program has been squeezed by rising tuition and soaring applications. State officials there are now preparing to make future Hope scholarships harder to get and cover less tuition. "At a time when the need is greatest, states' ability to meet that need is the poorest," laments Paul Palian, spokesman for the Illinois Student Assistance Commission, which oversees that state's scholarship program.

Private charities that hand out more than $3 billion in scholarships annually say they are trying to avoid reducing funding despite the 2008 popping of investment bubbles and a drop-off in philanthropy. But that flat funding is now being chased by a growing number of students with bigger bills. Just a few years ago, the Central Scholarship Bureau of Maryland was able to fund about one-third of those who applied. Now, the CSB can only fund one out of nine applicants, says executive director Jan Wagner.

Colleges, which hand out an estimated $26 billion of their revenues as scholarships, are unlikely to be able to make up all of the gaps left by the other financial aid programs. Most colleges' endowments have not yet recovered from the 2008 stock market downturn. Public colleges say they have to squeeze more out of students to make up for state budget cuts. Private colleges say they have to get more from students to pay for expenses such as staff raises and additional student services. "Every dollar spent on scholarships is a dollar not available for academic programs, student services, and operational expenses," explains Pat Watkins, director of financial aid at Eckerd College in St. Petersburg, Fla. "I don't foresee many schools being able to make up the difference."

Student loans: Perhaps the only bit of hopeful news for students in 2011 is a planned reduction in the interest rate the federal government charges on "subsidized" Stafford loans, which go to students who qualify as needy. The 2010-11 version of those loans charge no interest while the student is in school and 4.5 percent after the student leaves school. The subsidized Staffords made in the 2011 academic year are slated to charge only 3.4 percent after graduation. (The terms for "unsubsidized" Stafford loans taken by students who don't qualify as needy is expected remain unchanged: Annual interest of 6.8 percent starts accruing immediately.)

And students who take out Staffords can sign up for income-based repayment when they leave school, so that their monthly student loan bills won't bust their budgets if they don't get high-paying jobs right away.

But the longer term outlook for student loans worries some experts. Despite tuition inflation, the federal government's maximum Stafford borrowing levels for undergraduates are expected to remain constant, ranging from $5,500 for dependent freshmen to $12,500 for adult upperclassmen. And the government's budget deficit reduction commission has recommended eliminating the interest rate breaks given to needy students starting in the fall of 2012, which could make the loans more expensive for many students.

The growing gap between college costs and students' ability to pay means "families are confronted with tough options," concedes Timothy A. Connell, president of the Georgia Student Finance Commission, which manages the Hope Scholarship program.

At least in his state, however, Connell believes that the aid shortage will not price good students out of college. Even if the size of the state grant is cut, a Hope Scholarship will pay most of the approximately $9,000-a-year tuition and fees bill at the state's most expensive public university, he notes. "This is not to minimize the challenge," he says. But studies show that college graduates tend to earn more money and get better jobs than those who skip higher education. "It is a good investment," Connell says.

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