Day 12: Financial Aid (and a bit about what's in that Big Beautiful Bill)
A series following my new class: The Economics of Higher Education
Day 12 was Honors Convocation at Colorado College, which means a shortened class time (only 1.5 hours instead of the usual 2.5-3). I assigned a shorter and more “just the facts” reading about the higher education financial aid system in the US and I still learned a ton!
Today’s readings
Levine, P. B. (2022). A Problem of Fit. University of Chicago Press. Chapter 1
The first piece of terminology you need to know about financial aid is the cost of attendance. This is also known as the “sticker price” of college. It includes the direct costs of tuition, fees, room and board, and also the indirect or estimated costs of books, and reasonable living expenses, including transportation and health insurance. For CC next year, the COA is estimated to be $99,035.1
The next piece of terminology you need to know is estimated family contribution. Colleges gather financial information from families from either the FAFSA (Free Application for Federal Student Aid) or the CSS (College Scholarship Service) or both, and use that information to calculate how much they think that family can afford to pay for college. If the college uses only information from the FAFSA and the federal methodology for calculating the EFC, they will consider the income of the two parents (if still married) or only the custodial parent (if divorced) and their assets, excluding retirement accounts and home equity. If the college uses the CSS and the institutional methodology for calculating the EFC, colleges have more flexibility in what they include. If they use the CSS colleges often do include home equity in their calculations, but maybe with some carve outs for the primary residence and adjustments for the typical cost of real estate in the area, and they usually ask for financial information from both parents if the parents are divorced.
A student’s Financial Need is then the difference between the Cost of Attendance and the Expected Family Contribution.
Financial Need = Cost of Attendance - Expected Family Contribution
Here’s where I have to pause and point out that all of this (ALL of this) may be completely overhauled this summer. You may have heard that the current Presidential Administration has some quibbles with the higher education industry. President Trump has proposed numerous changes to higher education financing over the years. In fact, the original endowment tax came into effect through his 2017 Tax Cuts and Jobs Act, a.k.a. the Trump Tax Cuts. We talked a bit about the proposed expansion of the endowment tax on Day 8 (here’s a summary of what ended up in the bill). As part of the Big Beautiful Bill that passed last week, the US House of Representatives has proposed lots to changes to the federal financial aid system, starting with changing the federal government’s understanding of Cost of Attendance from the price to attend the student’s school of choice to instead the median price of that type of degree nationwide. This of course changes the government’s understanding of a student’s financial need, and therefore how much and what kind of support the government will provide to help pay for it. But how exactly will they calculate the median price of a specific degree nationwide? Will they look at public and private schools separately? Will they include for-profit colleges? What about online degrees? Will they weight by the number of degrees each school confers or will they just do a simple median across schools? What if some programs require fewer credit hours for their degrees than others? I’m sure you can think of other complications. Who knows how it will all turn out.
Back to how things work now. Students and their families can meet their estimated financial need in three ways: 1) working, 2) loans, 3) grants.
Many schools assume that students can work over summers and earn a few thousand dollars to help pay for their education then. Students can also participate in the federal work-study program. Students with financial need get paid directly for (usually) on-campus jobs, and the government reimburses the school for those expenditures. (I heard that the US House was considering putting changes to the federal work-study program in the Big Beautiful Bill, but I haven’t been able to confirm from a reputable source that it actually made it into the final bill.)
On to loans. There are a few different kinds of loans that students and families can take out to pay for education. Direct Subsidized Loans are only available to students with demonstrated financial need (as linked to the government’s understanding of the cost of attendance). Interest (currently set at 6.53%) doesn’t start accumulating until 6 months after graduation, or for longer if the student qualifies for a deferment (what circumstances qualify for deferment is also up for discussion this summer). First-year students could get up to $3500 in subsidized loans in AY24-25, $4500 for sophomores, $5500 for juniors and beyond. There is a total cap of $23,000 for undergraduate education. (I read one higher ed news source that say the Big Beautiful Bill eliminated Direct Subsidized Loans altogether, but I haven’t seen that confirmed in a source I trust.) Students can also take out Direct Unsubsidized/Stafford Loans. Anybody can take unsubsidized loans regardless of financial need, but interest (also currently at 6.53%) starts accruing immediately. Students can borrow up to $2000 per year if they also take out the full amount of subsidized loans and are dependent undergraduate students, or more if they are independent from their parents. Students who don’t take out subsidized loans can take out the full government allowed amount (so $3500+$2000=$5500 for first-years) in unsubsidized loans. Up to that government recognized cost of attendance. There’s a total cap of $31,000 for subsidized and unsubsidized federal loans for dependent undergraduate students (though under the Big Beautiful Bill this cap would be raised to $50k). Parents can also take out loans from the government to pay for their children’s education. Parents can take out Parent Plus Loans up to the full cost of attendance (which again, how the government calculates this could be changed this summer) minus other financial aid awards. These loans currently go for a 9.08% interest rate, and there is no cap on how much parents can borrow (though again the Big Beautiful Bill is proposing to change this to a maximum cap of $50k per parent, no matter how many kids they support through college). It is also possible to get private loans from banks to pay for college.
Lastly, grants. Most people have heard of Pell Grants. These are federal grants for low-income families, up to $7,395 in AY25-26. (Has the House proposed changes to Pell Grants in the BBB? Of course they have, but I haven’t been able to find a reputable source that spells out the specific proposed changes. It’s amazing to me how hard it is to find out about what exactly is in this Big Beautiful Bill.) Schools also often offer institutional aid, either for financial need or for merit aid. There are also private scholarships that provide grant aid also.
Alright, so how much money does this all add up to for a college like CC? It turns out that IPEDS is not the greatest resource for this kind of information, but there’s another publicly available tool that is pretty great: The Common Data Set. This is actually a set of reporting guidelines that’s put out by the College Board and US News and World Report (presumably so colleges know precisely what information to submit when they “participate” in the USNWR rankings2) but many colleges post their filled out Common Data Set forms on their webpages. Colorado College sure does! Search “My College Common Data Set” to find information for your favorite school.
Here’s what we can learn from CC’s Common Data Set form for AY23-24. (For context, remember we learned on Day 8 that CC was working with $186.6 million in total operating revenue that year.) Students received a total of $56.6 million in grant aid that year, the vast majority (93%) for financial need. CC students received $1.9 million in Pell Grants from the federal government. CC gave out $50.5 million in institutional grants for financial need and $1.8 million in merit aid awards.
Students at CC took out $1.2 million in need-based loans (presumably mostly in direct subsidized and Stafford loans from the federal government) and another $2.8 million in non-need-based loans (presumably mostly Stafford loans, though it could include private loans also I think).
CC students got $650,000 in work-study funds from the federal government, and another $309,000 in work-study funds from other sources (I think this is CC matching students’ federal work-study awards, but I’m not sure).
Parents of CC students took out $1.5 million in loans (presumably mostly through the federal Parent Plus Loan program). CC gave out $550,000 in need-based tuition waivers and $860,000 in non-need-based tuition waivers (is this entirely faculty kids? Unknown). CC also provided $440,000 in need-based athletic awards and $2.1 million in non-need-based athletics awards. That would be our DI men’s hockey and women’s soccer teams (Go Tigers!).
Speaking of Athletics, that’s the topic up next! Why does CC have a DI hockey program? Why do we have DIII lacrosse? Why no DII sports? Stay tuned!
Isn’t it interesting that our estimated CoA came in just barely under $100k this year? What an odd coincidence.
So far as I’ve heard, only Wellesley was willing to break the 6 figure mark this year. Dear fellow employees of colleges near this threshold: you can blame your upcoming year of oddly low raises on left-digit bias. I suspect it happened at Wellesley last year. I know it happened at CC this year. Your year is coming!
It turns out that when a school “drops out” of the US News and World Report rankings, all that really means is that the school stops sending information to USNWR directly. USNWR continues to rank them and they pretend as if they can’t find the Common Data Set information that the school posts on its website. This can lead to very confusing infographics on the USNWR website, such as the one below.
N/A. What does that mean? Does it mean that USNWR simply doesn’t have the information to know how many classes the school offers with fewer than 20 students? Or does it mean that the school has ZERO classes with fewer than 20 students? Confusing. Deliberately misleading? Definitely classy.
If I were a prospective (parent of a) CC student, how would I parse all of this to determine what my out of pocket spend would be over four years? How would I calculate my EFC? Is my EFC the same at every institution or do I have to request a formula from every college? I guess the bigger question is how can I possibly make an informed choice given the opaqueness of the cost structure? Do I just apply and hope I get a letter by April 30th that says here's $360k to attend?
The $550,000 in need-based tuition waivers and $860,000 in non-need-based tuition waivers includes staff kids too!