Student Financial Aid:

Monitoring Aid Greater Than Federally Defined Need Could Help Address Student Loan Indebtedness

GAO-03-508: Published: Apr 30, 2003. Publicly Released: Apr 30, 2003.

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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.

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.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Education responded that it believes its current practices already address the recommendation. It currently monitors student loan debt burden as a performance measure within its strategic plan and there are several repayment options available to federal student loan borrowers to help in managing their debts. Education also expressed the belief that if federal substitutable loans were not available, students and families would borrow from private lenders at higher interest rates. No evidence to support this belief was provided. Education has studied changes in student debt burden issuing a study in 2006, which found median debt burden did not change among bachelor's degree recipients between 1992-93 and 1999-2000. The Department has not informed us of any additional actions it has taken to review the impact of substitutable loans on student debt burden. This is an issue that we believe should continue to be monitored as it concerns how best to use federal resources.

    Recommendation: To ensure that the use of substitutable loans will not lead to unmanageable student loan indebtedness, the Secretary of Education should, over time, monitor the impact of substitutable loans on student debt burden and, if debt burden associated with substitutable loans rises substantially, develop and propose alternatives for the administration or Congress to consider to help students manage student loan debt burden. Such alternatives could range from shifting students into repayment plans that would lower their debt burden to limiting the use or amount of substitutable loans.

    Agency Affected: Department of Education


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