Student Financial Aid Policies: Do They Promote Universal Education?

Sandy Baum

Federal, state, and local governments devote tens of billions of dollars each year to subsidizing colleges, universities, and their students. Higher education institutions, in addition to using both public and private funds to allow their tuition levels to be significantly lower than their cost of education, award students almost $20 billion a year in direct grant aid. Sandy Baum, professor of economics at Skidmore College, notes that while there is a general consensus that these funds are meant to increase educational opportunities, the reality is that a variety of motivations underlie these policies, and their success in moving us toward universal education is quite mixed. Baum assesses the effects of key federal, state, and institutional financial aid policies and suggests how they might be changed so as to more effectively break down the financial barriers to higher education for all.

Access to Higher Education

Persistent and well-documented differences in college enrollment rates by family income are discouraging. Table 1 shows that in 1980, 42 percent of high school graduates between the ages of 18 and 24 in the lowest income quartile enrolled full-time in college within two years of their high school graduation, compared with 69 percent of students in the highest income quartile who did so. Twenty years later, in 2000, enrollment had risen—but at 54 percent for the lowest and 82 percent for the highest income group—the gap had persisted and grown slightly larger.

Table 1. College Participation Rates by Family Income Quartile, 1980–2000
Source: Data provided by Tom Mortenson, Postsecondary Education Opportunity, 2002.

The percentage point increases in college participation rates have been fairly even across income distribution levels over the past 20 years, although during the 1990s the increase at the top was smaller than for less affluent students. The good news, if any is to be had, is that the proportionate increase in college enrollment has been significantly larger for students from the lowest family income quartile than for other students.

When enrollment differences are broken down by both socioeconomic status (SES) and performance on achievement tests, very real financial barriers to college access become apparent.

As indicated in Table 2, while 97 percent of high school graduates who fall in both the highest achievement test and the highest SES quartiles enroll in college, only 78 percent of those with the same academic qualifications but who fall in the lowest SES quartile continue their educations after high school. Moreover, low-achieving students from the highest SES quartile are more than twice as likely to enroll in college as low-SES students at the same academic level. Further, virtually the same proportion of the most affluent students with the lowest test scores (77 percent) go to college as do the lowest SES students with the highest test scores (78 percent).

Table 2. College Enrollment Rates by Socioeconomic Status and Achievement Test Quartiles, 1994
Source: National Center for Education Statistics, The Condition of Education, NCES 97-388, Washington, DC: U.S. Department of Education.

These data show that we have been more effective at reducing barriers to higher education for the most academically successful students than for others. In this regard, the complexity of the student aid system is a significant problem, interfering with effective access to funding and hampering progress toward the goal of universal education. The basic structure of student aid is not the core problem, however: recent policy decisions have weakened both equity and efficiency. Even as insurmountable financial barriers to college participation and success persist for many low-income students, competing priorities are playing an increasingly prominent role in student aid.

The Financial Aid Partnership

Despite its complexity, it is appropriate that different levels of government, as well as institutions themselves, participate in the financial aid partnership by providing a variety of forms of subsidy.

The Federal Government

The federal government provided about 70 percent of total student aid dollars in 2001–02, including about $13 billion in grants and tax credits—45 percent of the total gift aid awarded. Purportedly, the goal is to encourage enrollment and persistence in appropriate educational institutions for all qualified students. However, recent directions in federal aid policy bring the primacy of the goal of increased access to higher education into question. While funding for Pell Grants—the central federal program for low-income students—did increase by more than 50 percent in real terms from 1996 through 2001, in the mid-1970s the maximum average Pell Grant covered over 40 percent of average tuition at public four-year institutions, whereas today it covers just over 25 percent.

Moreover, an increasing proportion of federal subsidies has been directed at middle- and upper-middle-income students rather than at those with the most limited financial resources. Tax credits for tuition payments now amount to about $5 billion per year, approximately half the total Pell Grant amount. Other tax code provisions, including the tax-free status of interest on a variety of forms of college savings, subsidize only those who are affluent enough to save and to pay taxes. These policies serve a useful purpose in easing the burden of financing college for many middle-income students and families struggling to balance their budgets. However, in addition to being highly questionable on equity grounds, the redirection of federal subsidies away from those who need them most reduces the efficiency of public policy.

Public expenditures are efficient if they change behavior in directions consistent with policy goals. The more financially secure the recipients of aid dollars, the more likely they would have gone to college—and earned a degree—in any case. Low-income students, unlike those with more ample resources, make a decision about whether to go to college, not just about where to enroll. That is, the enrollment patterns of low-income students are much more price sensitive than the enrollment patterns of more affluent students. Federal policies designed to increase access are efficient only if they target those students whose behaviors they can significantly alter, that is, students with very limited financial resources.

The basic structure of federal student aid policy, with Pell Grants for low-income students at the core, guaranteed loans to assure liquidity, and matching funds to provide incentives for states and institutions to provide need-based subsidies to students, is compatible with the fundamental goal of moving toward universal access. However, the system has not evolved to meet the increasing needs of low-income students.

State Governments

Like the federal government, state governments are increasingly targeting financial aid at middle-income students who are unwilling to pay for particular colleges, rather than at low-income students who are unable to pay for any postsecondary educational opportunities. Whereas a decade ago about 90 percent of state grant aid was allocated based on financial need, now more than a quarter of these funds are distributed based on other criteria—generally measures of academic merit defined by either grades or test scores.

A student’s decision to enroll in Georgia instead of Alabama does not constitute a meaningful change in behavior from the perspective of national social welfare. It is unrelated to the goal of universal higher education.

This policy shift, largely designed to keep good students close to home, is both inefficient and inequitable from a national perspective because it generates disproportionate subsidies for relatively affluent students who would enroll in college without this added incentive.

A student’s decision to enroll in Georgia instead of Alabama does not constitute a meaningful change in behavior from the perspective of national social welfare. It is unrelated to the goal of universal higher education.


As is the case with states, the underlying goal of making education accessible to all students does not motivate individual public colleges and universities. As much as we like to think of colleges and universities fulfilling the social mission of providing access to opportunity for all, from each institution’s perspective, it is efficient to use funds to compete with other institutions for desirable students. From 1992 to 1999, institutional grant aid increased more than 60 percent, but the growth was heavily weighted in favor of high-income students. For example, students in the top income quartile received the largest grant increases in both percentage terms—33 percent for the highest versus 21 percent for the lowest income quartile at four-year public institutions—and in absolute dollars—an $800 increase for the highest and a $400 increase for the lowest income quartile at four-year public institutions. Grant increases at private institutions displayed similar trends.

This changing distribution of institutional aid dollars reflects a shift from focusing on access for students with limited financial resources to using aid to compete with other institutions for desirable students. Again, non-need-based aid affects choice, not access, to higher education. Yet colleges engaged in competition for students are not likely to change course on the basis of arguments about social welfare and a national policy agenda. Cognizant as they may be of the reality that scarce resources are being dissipated with no increase in the pool of qualified students and no increase in the opportunities faced by those students, left to their own devices they will likely continue to adopt policies that appear to be in the best interest of their institution as they perceive it.


If we as a society aspire to assuring access to higher education regardless of socioeconomic status, then we should redirect our education financing system toward need-based subsidies. Because the perceived interests of states and institutions are different from the interests of the nation as a whole, it is primarily the federal government’s responsibility to further the goal of increasing access to college. Carrying out this responsibility will require a combination of federal funds and incentive structures that will motivate states and institutions to choose to allocate more of their funds in a manner consistent with national access goals.

The federal government is the only entity with either the mission or the capacity to take responsibility for the national agenda of removing financial barriers to higher education. Beyond funding and incentives, the vital social policy agenda of improving our strong but complex and imperfect higher education financing system will perhaps best be advanced by revitalizing the sense of public responsibility for assuring educational opportunity for all.

Sandy Baum is professor of economics at Skidmore College. She studies and writes about higher education finance, focusing particularly on access and affordability, student aid policy, need analysis, and student debt. Her monograph, Higher Education Dollars and Sense: A Framework for Campus Discussions, was published in 2001 by the College Board.