The federal government funds higher education primarily through student-based financial aid (i.e. vouchers), in contrast to K-12 education funding, which is mostly institution-based (i.e. much like aid to local school districts). Higher education federal aid is targeted to the financially-neediest students, although in recent years the federal government has expanded higher education funding to include support for middle class families.

Title IV of the Higher Education Act of 1965 (HEA) established the first federal grant and loan programs. When the HEA was first passed, its emphasis was on expanding college access by providing grant aid to low-income students who otherwise would not pursue post-secondary education. As college costs have increased over time, the federal government’s investment in higher education has shifted to also support heightened college affordability by providing relatively low-interest student loans. Today, approximately 70 percent of federal student aid funding is in the form of government guaranteed and subsidized student loans and only 23 percent is in the form of grants. Tax benefits make up about 5 percent of total federal aid.

Grant Programs

The federal government provides $18.6 billion a year in grant aid to help individuals pay for a higher education. Nearly all of the aid is directed to students from lower income families. Grant aid does not need to be paid back and generally may be used to pay for tuition, housing and other expenses at any institution of higher education that the recipient wishes to attend. The largest federal grant program is the Pell Grant program, followed by the Supplemental Education Opportunity Grant program. These two programs award grants based solely on a student’s financial status. Two new grant programs established in 2006, Academic Competitiveness Grants and SMART grants, provide grant aid to students from lower income families who meet additional criteria, such as academic achievement and course of study. These four programs account for almost all federal higher education grant aid.

Tax Benefits

The federal government provides a number of different tax reductions (credits, deductions, and exemptions) to assist individuals and families in paying for a higher education. Generally, federal tax benefits are targeted to middle and upper income individuals and families. In the case of tax credits and deductions, beneficiaries have their federal income taxes reduced in relation to tuition costs incurred that year, thereby indirectly lowering higher education costs. Federal education tax exemptions help boost the value of the savings individuals and families accumulate in special accounts to pay for higher education costs.

Student Loans

Students can borrow federally subsidized loans to pay for tuition, housing and other costs associated with obtaining a higher education. Because students usually have little or no credit and employment history, or collateral, the federal government guarantees and subsidizes loans to help students obtain financing with more favorable repayment terms than they could receive in the private loan market. All students, regardless of personal or family income status, are eligible for federal student loans. Nearly $80 billion in new federal student loans are made each year, representing the main policy method by which the federal government helps support access to higher education.