Student Aid, California to Cheyenne

More than 10 percent of the nation's college students are from California, and a much higher percentage -- given the country's demographic patterns -- live in and around areas with the highest costs of living. For students and families from those high cost areas, federal financial aid does not go as far as it does for peers from less expensive regions, because the formula for calculating how much a student's family is expected to pay toward his or her college expenses takes its financial resources -- but not its cost of living -- into account.

That reality has long been a low-level source of aggravation for college officials in California and elsewhere; a 2005 report by the Public Policy Institute of California described the problem, and university leaders from California and other high-cost regions have occasionally, though usually quietly, raised the prospect of altering the formula to take regional differences in costs into account. They've done so quietly because depending on how it was done, injecting a cost of living component into the federal financial aid formula could mean less aid for students from lower-cost areas.

A Government Accountability Office report issued Friday examines the pros and cons of applying a cost of living adjustment to the federal financial aid methodology, a study mandated by last year's renewal of the Higher Education Act. The study clearly documents that students from high-cost areas get shortchanged in their federal Pell Grant awards, and that adding a cost of living adjustment to the federal formula could increase awards for up to 10 percent of students from a small number of high-cost counties, especially families with relatively higher incomes.

But in laying out possible approaches the government might adopt to build in geographic sensitivity, the GAO report also points out that incorporating a cost of living adjustment into the Pell formula could diminish aid for more families than it would help, if the COLA was applied across the board rather than only to those with higher costs of living. (Taking that approach, though, would increase the costs of the Pell Grant Program, albeit modestly, GAO says.)

And the federal agency also notes that adding a cost of living adjustment could complicate the federal financial aid formula, arguably clashing with the approach that at least some financial aid experts have laid out as a priority for simplifying the student aid process: calculating a family's financial need based solely on adjusted gross income and family size.

The intricacies of the federal financial aid formula are mind numbing to all but the sharpest experts (of who this reporter is not one), but the key fact one needs to know to understand this issue is that in deciding how much federal financial aid a student qualifies for, the government determines two main numbers: the "cost of attendance" of the institution the student plans to attend, and the "expected family contribution" the student must make toward covering a chosen college's price.

In some small ways, regional differences are already built into those factors. The cost of attendance includes tuition and room and board, so to the extent that the college a student plans to attend charges more in tuition because it is in a high-cost area, or incorporates higher living expenses (for a student at a college in Los Angeles or New York, for instance), he or she may qualify for somewhat greater financial aid as a result.

And the federal financial aid formula does take into account a family's income, so to the extent that families living in high-cost areas on average earn more than other people, that difference is captured. But in calculating an individual student's expected family contribution, the federal aid formula does not account for geographic differences in a family's cost of living, which can vary widely based on such things as annual housing costs.

So, as seen in the table below, families with equal incomes in California's Bay area and Wyoming's largest city would, in the government's eyes, be seen as having significantly different amounts of money to put toward their educations, and qualify for comparable amounts of Pell Grant aid.

Cost of Living Differences for 2 Sample Students

Source: Government Accountability Office

The GAO examined three possible indices currently used by federal agencies to account for geographic differences in cost of living, two of which focus on housing costs and a broader third aimed at regional price disparities, all of which have strengths and weaknesses, the GAO said. All three would increase aid to applicants from a small number of counties in high cost areas, most of which are metropolitan areas, and most of which are in California and the Northeast, though others are dotted around the country, as seen in the map below.

Photo: GAO

The number of students who might benefit from such an adjustment would be diminished by other aspects of the federal aid calculation. Students who have no expected financial family contribution because their incomes are too low and their assets are too few make up about a third of all aid applicants and nearly three in five Pell Grant recipients.

About 17 percent of aid applicants would probably qualify for additional aid because the cost of living adjustment would lower their expected family contribution (by setting aside a larger amount of their income for their needed living costs), although as many as half of those students -- the poorest of them -- might not qualify for more Pell Grant aid because they already qualify for the maximum grant. Those students could, however, qualify for additional subsidized loans for institutional financial aid, since some colleges and universities use the federal methodology to allocate their own institutional need-based student assistance.

More students would actually see their expected family contributions rise (because they are from low-cost areas) and the financial aid they're eligible for shrink if a cost of living adjustment were applied across the board, the GAO said.

Congress would be extremely unlikely to enact a policy that lowered available aid for more students than it helped, however, and would almost certainly -- if lawmakers sought to help Californians and other students from high-cost areas -- put in place a "hold harmless" provision that ensured no student would pay more.

The GAO report asked financial aid officers about whether adding a cost of living allowance to the federal formula would be a good idea, and many expressed concern that such an approach could add confusion (for families and aid officials) to an already complex process.

But many others suggested that a potential COLA be considered in the context of whether the federal financial aid formula is working more broadly -- a review that many favor, but could be a morass given its complexity.