The Easiest (and Most Underrated) Financial Aid Reform: Replace Cost of Attendance

When the Department of Education determines how much aid to award a student, the two biggest concepts are cost of attendance (CoA) and expected family contribution (EFC). EFC is how much the government thinks the student (and their parents if dependent) can be expected to afford without assistance and is calculated from the information submitted on the FAFSA form. CoA is the college’s determination of how much it costs to attend the college, including tuition, room and board, books, and other expenses.

In general, aid eligibility is equal to the difference between CoA and EFC (aid = CoA – EFC, although many aid programs have maximum award limits).

A growing literature demonstrates that the EFC formula could be radically simplified without a significant impact on the distribution of aid among students This would allow the government to distribute aid without requiring students to fill out the FAFSA, which is a significant obstacle to college enrollment for many students. This is a great line of research, and policy makers should definitely heed its main message: drop the FAFSA and have aid eligibility determined based solely on tax return data that is already submitted to the IRS.

All but neglected however, are ideas to reform the other main determinant of aid eligibility – the cost of attendance (CoA). Fortunately, Beth Akers over at Brookings has come to the rescue:

Student aid programs (Pell grant and Stafford loans) base award amount on cost of attendance. This means that students attending schools with lots of amenities will receive more aid than students attending schools with similar instructional value but fewer amenities. This effect is mitigated by caps on award amounts in both programs, but it still creates bad incentives for both students and colleges. While we don’t want to restrict a student from purchasing a “Cadillac” college degree, we certainly don’t want the government to subsidize it. The simplest way to eliminate this bad incentive is to revise aid award formulas to ignore cost of attendance. Instead, aid awards could be based on average cost within the relevant set of comparable institutions (i.e. community college, four-year, etc.).

I’ve been advocating the abandonment of CoA along similar lines (see page 6 here and footnote 52 here), so I’m extremely happy that others are doing the same.

Photo Credit: Stars and Stripes