The federal government pays the interest costs on the  loan while the student is in school. An Estimated 22 Percent of Federal Aid Recipients Received Aid above Their Federally Defined Need

In school year 1999-2000, an estimated 732,000 out of 3.4 million full- time/full-year federal aid recipients (22 percent) received $2.96 billion in  financial aid greater than their federally defined financial need, either  because they or their parents received substitutable loans or because they  received nonfederal financial aid, such as scholarships, in addition to  federal aid. We estimate this to be $2.72 billion  with an average amount of about $4,300. In addition, there was no pattern in terms of  the types of schools they attended. We  found, however, that only 17 percent of the students in this group received  Pell grants. Savings from Limiting Aid Greater Than Federally Defined Need Would Likely Be Modest, but Substitutable Loans to Students Could Affect Their Indebtedness

Changing the Higher Education Act to limit the receipt of aid that is  greater than students’ federally defined financial need is not likely to  achieve significant federal savings. However, the use of substitutable loans  could increase overall student indebtedness. For  guaranteed loans, the government incurs costs—primarily insurance  claims payments to lenders for defaulted loans and special allowance  payments made to lenders to ensure a guaranteed return on the loans they  make. The widespread use of substitutable loans might also affect Education’s  ability to help students and their families maintain their loan indebtedness  at manageable levels. This could increase the  average debt burden of these students above that of other students. Appendix I: Objectives, Scope, and Methodology

The objectives of this study were to determine how often students who  were federal financial aid recipients received aid that was greater than  their federally defined financial need, identify the student, school, and  financial aid package characteristics associated with receiving such aid,  and determine what the implications might be, if any, of changing the  Higher Education Act to limit the receipt of aid that is greater than a  student’s federally defined need. To meet their EFC under Title IV,  families can obtain non-need-based loans, which we refer to as  substitutable loans. Majority from Non-Need-Based Federal Loans.
Why GAO Did This Study

Over half of the $80.4 billion in financial aid provided to college students in the 2000-01 school year came from the federal government in the form of grants and loans provided under Title IV of the Higher Education Act (HEA). To help finance their education, students and families may have received other funds from states, private groups or lenders, and/or the schools themselves. We initiated this study to, among other things, determine how often federal financial aid recipients received aid that was greater than their federally defined need and what cost or other implications might result from changing HEA to limit such aid.

What GAO Found

We found that in school year 1999-2000, of the 3.4 million full-time/full-year federal aid recipients, 22 percent (732,000) received a total of $2.96 billion in financial aid that was greater than their federally defined financial need. Of these, 628,000 received an estimated $2.72 billion in such aid by obtaining non-need-based loans--which we identify as substitutable loans--that families borrow to meet their expected family contribution. Title IV allows for students and families to obtain these non-need-based loans to meet their expected family contribution. Another 104,000 federal aid recipients received an estimated $238 million in such aid as a result of receiving a combination of aid from federal and nonfederal sources. Changing the HEA to limit the receipt of aid that is greater than students' federally defined financial need is not likely to achieve significant federal savings, although, the use of substitutable loans may increase overall student indebtedness. In terms of cost implications, limiting those instances where federal aid recipients receive substitutable loans--which is the main reason why students received aid greater than their federally defined need--will not likely result in significant savings. While the government will not have to pay default claims or special allowance payments on loans it guarantees, it would forego any interest earnings on loans it makes directly. Any savings from limiting these loans would be substantially less than the total amount of the loans made--the $2.72 billion. However, the widespread use of substitutable loans may increase the average debt of borrowers and may affect Education's ability to help students and their families maintain their loan debt at manageable levels.