Federal Formula Grants and California: Student Aid and Higher Education

More than two-thirds (71%) of the financial aid flowing to California’s college students comes from federal sources. Indeed, college costs across the nation are increasingly being financed by federal loans. Although most of these loans are paid back, federal postsecondary education spending has grown sharply in recent years. According to a new report by the Public Policy Institute of California (PPIC), federally supported grant and loan assistance to U.S. students and colleges in 2005 exceeded $75 billion, of which California received $6.5 billion, or about 9 percent. Actual federal dollars outlaid that year totaled $24 billion – and more than half of that ($13 billion) was spent as Pell Grants to help low-income students attend college.

As Congress begins to renew the Higher Education Act, which regulates federal moneys for higher education, a great deal is at stake for California. Pell Grants, like subsidized loans and other federal financial aid, depend on a complex eligibility formula that attempts to balance college costs with a student’s ability to pay. Although the “needs test” helps California by not counting home values as assets, the formula poorly considers income disparities and the state’s high cost of living. In all, fewer students in California (26%) receive needs-based aid than in the nation as a whole (35%). In 2005, the state received 11 percent of funds from Pell Grants and even less from the three “campus-based aid” (CBA) programs that use the same test.

Certain special legislative provisions also work against California. For instance, a tuition sensitivity provision cuts Pell Grants to students in schools with very low tuition – the nations only affected institutions are California Community Colleges.

Federal Formula Grants and California: Student Aid and Higher Education is the tenth report in the federal formula series and provides an overview of formula-related federal higher education financing features, California’s performance, and how the state may be affected by current legislative proposals. The series was developed at the request of the bipartisan leadership of California’s congressional delegation and is produced by PPIC in collaboration with the California Institute for Federal Policy Research in Washington, D.C.

We hope you find this and future reports valuable, and we welcome your feedback as we seek to inform the public debate. If you have any questions, please contact us by phone (Victoria: 415/291-4412; Abby: 415/291-4436) or email (bond@ppic.org; cook@ppic.org). You can reach the authors, Tim Ransdell and Shervin Boloorian of the California Institute, at 202/546-3700 or ransdell@calinst.org.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett. PPIC does not take or support positions on any ballot measure or on any local, state, or federal legislation, nor does it endorse, support, or oppose any political parties or candidates for public office.