Since the advent of federal funding for
higher education with the GI Bill in 1944, the
federal government's approach to financial aid
has focused on increasing access to postsecondary
education. The primary focus has been providing
financial help to students and families who otherwise
could not afford to pay for a college education.
That is, most financial aid is need based rather
than merit based.
In general, financial aid is available in three
forms: loans, which must be repaid; grants and
scholarships, which do not have to be repaid;
and work-study programs, which place students
in paying, on-campus jobs.
The federal government continues to play an important
role in helping students pay for college, providing
more than 70 percent of all financial aid. The
majority of federal aid is distributed through
various loan programs. Private sources of aid,
including loans from banks and other non-governmental
organizations, are also available.
Why this heavy reliance on loans rather than
on "free" money like grants and scholarships?
There is no easy-to-find reason, no presidential
edict pronouncing loans as the preferred type
The answer seems to lie more in a general philosophy
of self-reliance, of everyone being responsible
for their own success in a land of opportunity.
Since there is not enough federal money to give
everyone cost-free access to college, the approach
is to use available funds to help those who can't
afford college on their own. By giving students
access to capital they can use for higher education,
the government and private lenders enable students,
in effect, to level the playing field.
As illustrated in Investing in Education, college
graduates enjoy lower unemployment rates and command
higher salaries than those with less education.
When students attain their college degrees, they
are better able to secure well-paying jobs. And,
the thinking goes; graduates with good incomes
can afford to pay off their student loans without
Education loans also give college students flexibility
to choose the type of school that is right for
them. A grant-heavy system, on the other hand,
could raise questions of fairness. After all,
not all colleges are created equal.
Because federal funds for education are limited,
emphasizing grants over loans would likely severely
curtail the amount of money available to potential
college students. Only a relatively small number
of students would receive aid, stifling educational
and economic opportunity and damaging the country's
efforts to stay competitive by developing new
technologies, for example.
By giving almost all students access to education
loans, and allowing them to defer repayment while
in school, the government and private lenders
encourage students to manage their own education
decisions and give more people access to a college
A balanced system of loans, grants and scholarships,
and work-study programs has worked well for decades.
During the 1995-96 school year, for example, 50
percent of all undergraduates received some type
of financial aid. About 63 percent of those in
the lowest income brackets received aid, compared
with only 14 percent of students from high-income
Among full-time undergraduates attending college
during 1995-96, 68 percent received some aid.
About 54 percent received grants, and almost 44
percent received loans. Although more students
received grants than loans, student loan totals
averaged 50 percent more than grant totals.
Considering the steady rise in tuition costs
and inflation, the amount of student borrowing
for college has remained reasonable and under
control. Student loans continue to provide students
from all income levels the opportunity to pay
for a college education and, in turn, enjoy the
tangible and intangible benefits of higher education.