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In fiscal year 2008, the Department of Education (Education) oversaw the distribution of approximately $96 billion in federal student financial aid, including $14.6 billion in Pell Grants to low- and middle-income students, to help students and their families pay for higher-education expenses. Much of this aid was distributed based on a formula specified in the Higher Education Act, as amended, that is used to identify students who need financial assistance to pay for higher education. To apply for federal financial aid, such as Pell Grants, students submit a Free Application for Federal Student Aid on which they report their own or both their own and their families' income and assets. Students who are financially dependent on their parents or other family members are required to report their own and their family's income and assets, while those who are financially independent report only their own income and assets (and their spouse's, if they are married). To determine if a student has financial need, the aid formula compares how much it costs a student to attend a particular college and an estimate of how much the student or student and family can afford to pay toward the cost--called the expected family contribution (EFC). How much a family can afford to contribute to college costs depends on a variety of factors, including the cost of living where a family resides. Some observers have questioned whether the federal aid formula appropriately accounts for geographic cost-of-living differences. As required by the Higher Education Opportunity Act, we are providing information on options for adjusting the federal student aid formula for geographic cost-of-living differences. Specifically, this report addresses the following questions: (1) How does the current federal financial aid formula affect students in different geographic areas? (2) What options exist for modifying this formula to reflect geographic cost-of-living differences? (3) How would adding a cost-of-living adjustment (COLA) to the formula affect the federal financial aid system, including the distribution of Pell Grants?

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