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entitled 'Federal Student Aid Formula: Cost-of-Living Adjustment Could 
Increase Aid to a Small Percentage of Students in High-Cost Areas but 
Could Also Further Complicate Aid Process' which was released on August 
14, 2009. 

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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

August 2009: 

Federal Student Aid Formula: 

Cost-of-Living Adjustment Could Increase Aid to a Small Percentage of 
Students in High-Cost Areas but Could Also Further Complicate Aid 
Process: 

GAO-09-825: 

Contents: 

Letter: 

Appendix I: Briefing Slides: 

Appendix II: Scope and Methodology: 

Appendix III: Counties Where Students Could See a Change in Financial 
Aid under Different COLA Options: 

Appendix IV: Summary of Effects of Adding a COLA to the Federal Needs 
Analysis Formula on Expected Family Contribution Levels and Pell Grant 
Awards: 

Appendix V: Change in Pell Grant for Example Students in High-Cost and 
Low-Cost Areas for Each COLA: 

Appendix VI: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Change in Pell Grants for Full-Time, Dependent Student from a 
Family of Four with Home Rental Cost COLA: 

Table 2: Change in Pell Grants for Full-Time, Dependent Student from a 
Family of Four with Regional Price Parities COLA: 

Table 3: Change in Pell Grants for Full-Time, Dependent Student from a 
Family of Four with Housing Expenditure COLA: 

Table 4: Change in Pell Grant for a Full-Time, Independent Student with 
No Dependents with Home Rental Cost COLA: 

Table 5: Change in Pell Grant for a Full-Time, Independent Student with 
No Dependents with Regional Price Parities COLA: 

Table 6: Change in Pell Grant for a Full-Time, Independent Student with 
No Dependents with Housing Expenditure COLA: 

Figures: 

Figure 1: Counties Where Students' Aid Could Increase or Decrease with 
Regional Price Parities COLA: 

Figure 2: Counties Where Students' Aid Could Increase with Housing 
Expenditure COLA: 

Figure 3: Estimated Percentages and Total Number of Financial Aid 
Applicants and Potential Changes in Their Expected Family Contributions 
for Each COLA: 

Figure 4: Estimated Average Pell Grant Increase for Students Receiving 
a Pell Increase for Each COLA: 

Abbreviations: 

BEA: Bureau of Economic Analysis: 

COLA: cost-of-living adjustment: 

CPI: Consumer Price Index: 

Education: Department of Education: 

EFC: expected family contribution: 

HUD: Department of Housing and Urban Development: 

IPA: income protection allowance: 

MSA: Metropolitan Statistical Area: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

August 14, 2009: 

The Honorable Edward M. Kennedy:
Chairman:
The Honorable Michael B. Enzi:
Ranking Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate: 

The Honorable George Miller:
Chairman:
The Honorable John Kline:
Ranking Member:
Committee on Education and Labor:
House of Representatives: 

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,[Footnote 1] 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? 

On July 6 and 7, 2009, we briefed cognizant congressional staff on the 
results of this study, and this report formally conveys the information 
provided during this briefing (see appendix I for the briefing slides). 
In general, we found that while data suggest that the cost of living is 
higher in some areas than in others, the current aid formula accounts 
for these differences in only a limited way. How these differences 
affect a family's ability to pay for college is unclear, in part 
because no official measure of geographic cost-of-living differences 
exists. We identified three possible COLA options that could be used in 
the federal aid formula. These COLAs could increase Pell Grants and 
other financial aid for a small percentage of students from high-cost 
areas but could also further complicate the process for calculating and 
administering federal student aid. 

We used the following methodology to develop our findings. To 
understand the financial aid formula, we interviewed Education 
officials and reviewed relevant federal laws, regulations, and program 
guidance. To determine how the current formula affects students in 
different geographic areas and to identify possible COLA options, we 
interviewed economists and higher education experts; representatives 
from seven higher education associations; and financial aid officials 
from 19 postsecondary institutions that represent a mix of 2-year and 4-
year public, not-for-profit, and proprietary schools in different 
geographic areas, including both urban and rural locations. We also 
reviewed relevant literature and interviewed experts to identify COLAs 
that could be used in the federal aid formula and identified three 
possible options.[Footnote 2] We applied these three COLA options to an 
Education dataset of a sample of students who applied for federal 
financial aid for the 2007-2008 school year to determine their impact 
on students' expected family contribution estimates, the impact on 
students' Pell Grant amounts, and the number of Pell recipients that 
could see a change in their Pell Grants. While we discuss generally how 
changes in the expected family contribution can affect other sources of 
financial aid, our detailed analyses focus on the distribution of Pell 
Grants and the impact on Pell Grant spending. To assess the reliability 
of Education's dataset, we interviewed agency officials knowledgeable 
about the data and reviewed relevant documentation. We determined that 
the data were sufficiently reliable for the purposes of this report. 
For additional information on our scope and methodology, see appendix 
II. 

We conducted our work from December 2008 to August 2009 in accordance 
with all sections of GAO's Quality Assurance Framework that are 
relevant to our objectives. The framework requires that we plan and 
perform the engagement to obtain sufficient and appropriate evidence to 
meet our stated objectives and to discuss any limitations in our work. 
We believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings. 

We provided a draft copy of this report to Education for review and 
comment. Education did not provide formal comments on this report, but 
did provide some technical comments that we incorporated as 
appropriate. 

We are sending copies of this report to relevant congressional 
committees, the Secretary of Education, and other interested parties. 
In addition, this report will be available at no charge on GAO's Web 
site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-7215 or scottg@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made key contributions to 
this report are listed in appendix VI. 

Signed by: 

George A. Scott: 
Director, Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Briefing Slides: 

Federal Student Aid Formula: Cost-of-Living Adjustment Could Increase 
Aid to a Small Percentage of Students in High-Cost Areas but Could Also 
Further Complicate Aid Process: 

Briefings to Congressional Staff: July 6 & 7, 2009: 

Overview: 
* Introduction; 
* Research Objectives; 
* Scope and Methodology; 
* Summary of Findings; 
* Background; 
* Findings. 

Introduction: 

Federal Aid Formula Estimates a Family’s Financial Need but May Not 
Account for Geographic Cost-of-Living Differences: 

In FY 2008, an estimated $96 billion in federal financial aid was 
distributed to almost 11 million students for postsecondary education, 
including $14.6 billion in Pell Grants to low-and middle-income 
students who need help to pay for college. 

The federal formula used to determine how much financial assistance a 
family needs to pay for college is based on a variety of financial 
factors. Some observers have questioned whether the formula 
appropriately accounts for geographic cost-of-living differences—that 
is, the amount of money needed to buy a set of goods and services for a 
given standard of living. 

Some federal programs factor in geographic differences in cost-of-
living, such as Medicare payments to physicians and basic housing 
allowances for military personnel. 

Research Objectives: 

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? 

Scope and Methodology: 

To address our objectives, we: 

* reviewed relevant federal laws, regulations, and program guidance; 

* reviewed relevant literature and interviewed experts to identify 
possible geographic COLAs that could be applied to the federal aid 
formula and applied three COLAs[A] to a sample of financial aid 
applications from the 2007-2008 school year to determine their impact 
on students’ expected family contributions, the distribution of Pell 
Grants, and the Pell Grant budget; and; 

* interviewed Education officials; economists and higher education 
experts; representatives from 7 higher education associations; and 
financial aid officials from 19 schools. We selected these schools to 
represent a balance of 2-year and 4-year public, not-for-profit, and 
proprietary institutions in both urban and rural locations. 

[A] We reviewed other potential adjusters but determined they were not 
appropriate for our purposes. See appendix II for more information. 

Summary of Findings: 

A Cost-of-Living Adjustment Could Increase Aid to a Small Percentage of 
Students in High-Cost Areas but Could Add Some Complexity to Aid 
Process: 

The federal aid formula accounts for a small degree of geographic cost-
of-living differences, but it is unclear how geographic cost-of-living 
differences not accounted for in the formula affect a family’s ability 
to pay for college. 

While no official measure of overall geographic cost-of-living 
differences exists, we have identified 3 possible COLA options that 
could be used in the aid formula. These COLAs have varying geographic 
scopes, impacts, strengths, and limitations. 

The COLAs we identified could increase Pell Grants and other aid to a 
small percentage of students from high-cost areas, but could also 
further complicate the calculation and administration of aid. 

Background: Federal Aid Formula: 

Students Are Eligible for Federal Need Based Aid if the Cost of 
Attending a School Is More Than a Family’s Expected Contribution (EFC): 

* EFC is a rough approximation of the financial resources a family has 
available to help pay for a student’s postsecondary education expenses. 

* If a school costs $10,000 to attend and a student has an expected 
family contribution of $4,000, the student is eligible for up to $6,000 
of aid.[A] 

Figure: Determining a Student’s Financial Need: 

[Refer to PDF for image: illustration] 

Institutional cost of attendance includes: 
Tuition and fees; 
Books and supplies; 
Transportation; 
Personal expenses; 
Rom and board; 
Family expenses; 
Disability expenses; 

Expected family contribution (income and assets) minus (allowances and 
expenses): 
Income and assets of the student, parent(s) and spouse, as applicable; 
Allowances and expenses for living, tax, and employment expenses. 

Institutional cost of attendance, minus Expected family contribution, 
equals: 

If positive: student has financial need; 
If negative: student does not have financial need. 

[A] This example applies to financial aid for which a student must 
demonstrate financial need according to the federal student aid 
formula, including certain grants and certain loans that are subsidized 
by the federal government while the student is in school. 

Background: Expected Family Contribution: 

Expected Family Contribution Varies by Family Size and Composition: 

Students are classified as either financially dependent on their 
parents or independent in the financial aid process. 

* EFC for dependent students is based on both the student’s and the 
parents’ income and assets. 

* EFC for independent students is based on the student’s (and if 
married, spouse’s) income and assets.[A] 

EFC formula varies based on factors such as: 

* family size; 
* whether the family has other members in college; 
* whether an independent student has children or other dependents 
(other than a spouse). 

[A] An independent student is generally one of the following: at least 
24 years old, is married, is a graduate student, has a legal dependent 
other than a spouse, is a veteran or in active military service, or is 
an orphan or ward of the court (or was a ward of the court until age 
18). 

Expected Family Contribution Accounts for Certain Allowances and 
Expenses: 

To estimate the expected family contribution: 

* a family reports its income and assets; 

* certain allowances and expenses are then subtracted to account for 
income the family needs for other purposes, such as taxes, food, and 
housing. 

* a certain percentage of the remaining available income is the amount 
that the family is expected to contribute to college expenses. [The 
percentage varies based on income level] 

Income and Assets: 
* Salary; 
* Savings; 
* Investments; 
* Net worth of business/farm. 

Allowances and Expenses: 
* Federal income tax paid; 
* State and other tax allowances; 
* Employment expense allowance; 
* Income protection allowance (to protect the income needed to pay for 
a family’s basic living expenses). 

Background: Federal Aid Programs: 

Federal Formula Is Used to Determine Eligibility for Several Aid 
Programs: 

Pell Grants: For low-and middle-income undergraduates who have 
financial need. The maximum allowable Pell Grant is $5,350 for the 2009-
2010 school year. Students in certain post-baccalaureate teacher 
preparation programs may also qualify for a Pell Grant. 

Stafford Loans: For undergraduate and graduate students and subject to 
maximum loan limits. 

Subsidized: Students with financial need are eligible and the federal 
government pays the interest while student is in school. 

Unsubsidized: Students do not have to have financial need, but are 
responsible for paying all interest costs. 

PLUS Loans: For graduate students and parents of dependent 
undergraduates. 

Campus-Based Aid: Participating schools receive separate funds for 3 
programs for students with financial need: Perkins Loans, Supplemental 
Educational Opportunity Grants, and the Federal Work Study Program. 

Background: Other Financial Aid: 

Many Schools Use Federal Formula to Distribute Institutional Aid: 

Students can receive aid from nonfederal sources, including state 
grants and institutional aid from schools. 

Schools must use the federal aid formula to award federal aid, but many 
also use the federal formula to award institutional aid. 

Some schools use alternative formulas to distribute institutional aid. 

The College Board offers an alternative formula, which includes an 
optional geographic cost-of-living adjustment. 

Background: Student Aid Award Totals: 

Students Received Over $100 Billion in Federal and Other Aid in 2007-
2008: 

2007-2008 Selected Federal Aid Programs (Federal law also provides 
several postsecondary tax credits and tax deductions to help families 
pay for college): 
Pell Grants: $14.6 billion; 
Stafford and PLUS Loans: $74.7 billion; 
Campus-Based Programs: $3.3 billion. 

Source: 2008 Annual Report for Federal Student Aid, U.S. Department of 
Education. 

2007-2008 Nonfederal Aid Programs: 
Institutional Grants: $22.8 billion; 
State Grants: $7.8 billion; 
Other Grants: $7.5 billion. 

Source: Multiple data sources collected by the College Board, Trends in 
Student Aid, 2008. 

Figure: Estimated Percentage of Undergraduates Receiving Selected Types 
of Aid, 2007-2008 (Students included in the “any aid” and “any federal 
aid” columns may be receiving federal aid from more than one source): 

[Refer to PDF for image: vertical bar graph] 

Any aid: 65.6%; 
Any federal aid: 47%; 
Student loans: 34.5%; 
Pell Grants: 27.3%; 
Campus-based aid: 11.7%. 

Source: 2007-08 National Postsecondary Student Aid Study. 

[End of figure] 

Finding 1: Current Formula--Overview: 

It is Unclear How Geographic Cost-of-Living Differences That Are Not 
Accounted for in the Current Federal Aid Formula Affect Families’ 
Ability to Pay for College. 

* The federal financial aid formula accounts for a small degree of 
geographic cost-of-living differences. 

* Differences in cost-of-living could affect available financial 
resources. 

* Financial aid representatives had mixed views on the need for a cost-
of-living adjustment. 

The Federal Aid Formula Accounts for a Small Degree of Geographic 
Differences in Costs: 

* State and Other Tax Allowance in the formula accounts for geographic 
differences in state and other tax liabilities. 

- This allowance is set at a specific rate for each state and generally 
ranges from 1 to 9 percent of total income.[A] 

* Cost of Attendance is calculated by each institution using elements 
set forth in federal law and includes room and board; it can therefore 
reflect geographic differences in students’ living expenses. 

- Students attending schools with a high cost of attendance may be 
eligible for additional financial aid. 

* Federal aid formula does not adjust for general cost-of-living 
differences when estimating families’ available resources to pay for 
school. 

[A] GAO has identified limitations with how the tax allowance is 
calculated. See GAO, Student Financial Aid: Need Determination Could Be 
Enhanced through Improvements in Education's Estimate of Applicants' 
State Tax Payments, GAO-05-105, (Washington, D.C.: January 21, 2005). 

Geographic Cost-of-Living Differences May Exist, but It Is Unclear How 
Much They Vary: 

* It is generally accepted that there are variations in the cost of 
living in different geographic areas. Some locations are more expensive 
to live in than others. 

- However, it is difficult to separate cost-of-living from other 
factors like local income, housing quality, and local amenities that 
also drive up prices. 

* It is unclear how much the total cost of living varies across the 
country, but studies have found significant variations in housing 
costs. 

- For example, median rent for a standard two bedroom apartment in San 
Francisco, CA is 2.5 times as expensive as in Cheyenne, WY ($1,679 vs. 
$671 per month), according to data from the Department of Housing and 
Urban Development (HUD). 

Differences in Cost of Living Could Affect Available Financial 
Resources: 

* Cost-of-living differences could impact families’ available financial 
resources to pay for higher education. 

* Similarly situated students with permanent addresses in San 
Francisco, CA and Cheyenne, WY would receive the same Pell Grant award 
despite potential differences in the cost of living. 

Table: Example of the Impact of Cost-of-Living Differences on Available 
Resources: 

Total family income after taxes: 
San Francisco, CA: $35,000; 
Cheyenne, WY: $35,000. 

Annual rent cost (based on HUD’s median rent data for standard two 
bedroom apartment: 
San Francisco, CA: $20,148; 
Cheyenne, WY: $8,052. 

Available resources for other expenses including education: 
San Francisco, CA: $14,852; 
Cheyenne, WY: $26,948. 

Estimated Pell Grant (2007-2008 school year, family of four, one child 
in college): 
San Francisco, CA: $2,360; 
Cheyenne, WY: $2,360. 

[End of table] 

Traditional Criticisms of Cost-of-Living Differences Are Not Generally 
Applicable to the Financial Aid Population: 

Criticism: 
Differences in cost of living are offset by income differences. For 
example, salaries are generally higher in high-cost areas. 
Counterargument: 
The federal aid formula already accounts for income but not cost of 
living. 

Criticism: 
High-cost areas are more expensive because they may have more amenities 
than low-cost areas, such as: 
* proximity to recreational activities and entertainment; 
* larger houses. 
Counterargument: 
Job location and family ties can make it costly for some people, 
particularly low-income families, to move out of a high-cost area. 
(Citro, Constance F., and Robert T. Michael (eds.), Measuring Poverty: 
A New Approach. Washington, DC: National Academy Press, 1995). 

Financial Aid Officials and Higher Education Experts Had Mixed Views on 
Need for a COLA: 

* Several officials believe the current formula disadvantages families 
in high-cost areas because they have fewer available financial 
resources than the formula suggests. 

* Other officials and experts were concerned that adding a COLA might 
not improve the formula or might shift the focus of financial aid away 
from low-income families. 

* However, most other officials and experts did not have strong 
opinions, noting that a COLA might improve the formula depending on how 
it was implemented. 

[End of Finding 1] 

Finding 2: COLA Options-Overview: 

Several Options Exist for Adjusting for Cost-of-Living Differences, but 
They Vary in Scope, Impact, Strengths, and Limitations: 

* Measuring cost-of-living differences is difficult. 

* We identified three potential cost-of-living adjustments with 
different scopes and impacts on aid eligibility. 

* Different strategies for implementing a COLA have implications for 
students from low-cost areas and for Pell spending. 

Finding 2: COLA Options: 

Measuring Cost-of-Living Differences Is Difficult: 

* There are no official federal measures of overall geographic cost-of-
living differences (Federal programs that currently adjust for cost-of-
living differences use measures focusing on special populations (e.g., 
military personnel) or specific costs (e.g., medical practice costs): 

- Existing measures track changes in prices over time rather than 
differences in prices across the country. 

* A 1995 GAO report identified 12 methodologies that, in some part, 
could contribute to the development of a cost-of-living index, but 
identified problems with each methodology (GAO, Poverty Measurement: 
Adjusting for Geographic Cost-of-Living Difference, GAO/GGD-95-64, 
(Washington, D.C.: March 9, 1995). 

* Common problems associated with measuring cost-of-living differences 
are: 

- Challenges developing a common market basket of goods; 
- Difficulties accounting for area characteristics; 
- Data limitations; 
- Difficulties defining an appropriate geographic area; 
- Cost of living can vary among and within regions, cities, and 
counties. 

We Identified Three Potential Cost-of-Living Adjustment Options with 
Different Scopes and Impacts on Aid Eligibility: 

Table: Cost-of-Living Adjustment Options: 

Source: 
Home Rental Cost: Department of Housing and Urban Development data; 
Regional Price Parities: Multiple data sources including the Consumer 
Price Index and American Community Survey; 
Housing Expenditures: Consumer Expenditure Survey. 

Design: 
Home Rental Cost: Developed by GAO based on proposals by the National 
Academy of Sciences and the University of California; 
Regional Price Parities: Preliminary methodology developed by the 
Bureau of Economic Analysis; 
Housing Expenditures: Developed by the College Board and currently used 
by a number of colleges to calculate institutional aid. 

Unit of Measure: 
Home Rental Cost: Median rental costs for standard two-bedroom 
apartments; 
Regional Price Parities: Prices for a broad basket of 211 consumer 
goods ranging from housing (owned and rented) to haircuts; 
Housing Expenditures: Average annual expenditures on housing (owned and 
rented) and utilities. 

Scope: 
Home Rental Cost: Every county in the U.S. 
Regional Price Parities: All 363 metropolitan areas and aggregate 
amounts for each state’s non-metro areas; 
Housing Expenditures: 28 major metropolitan areas. 

Note: Additional information about the data sources for these COLAs can 
be found in appendix II. 

[End of table] 

Potential Cost-of-Living Adjustment Options Have Various Strengths and 
Limitations: 

Table: Cost-of-Living Adjustment Options: 

Strengths: 
Home Rental Cost: 
* Available for every county in the U.S. 
* Widely used to calculate housing expenses; 
Regional Price Parities: Accounts for more than just differences in 
housing costs; 
Housing Expenditures: Currently used by some colleges to adjust for 
cost-of-living differences in the College Board’s institutional aid 
formula. 

Limitations: 
Home Rental Cost: 
* Only captures recent movers rather than the entire rental housing 
stock; 
* Only measures rental housing costs; 
Regional Price Parities: 
* Experimental methodology has not been fully vetted; 
* Provides same values for all non-metro areas within a state; 
Housing Expenditures: 
* Only available for a small number of metropolitan areas; 
* Only measures housing costs; 
* Cannot be used to reduce aid in low-cost areas. 

COLA Could Be Based on Students’ Permanent Residence: 

Students’ ZIP codes could be matched to the COLA for their county of 
permanent residence: 

* Dependent students would use ZIP codes where their parents live; 

* Independent students would use the ZIP codes of their permanent 
address. 

Impact of COLA on Aid Eligibility Based on Students’ Permanent 
Residence: 

Permanent Residence: High cost-of-living county; 
Expected Family Contribution (EFC): Decreases or no change; 
Pell Grant Award: Increases or no change. 

Permanent Residence: Low cost-of-living county; 
Expected Family Contribution (EFC): Increases or no change; 
Pell Grant Award: Decreases or no change. 

[End of table] 

Implementing a COLA for Independent Students Would Likely Not Be a 
Significant Problem: 

According to aid officials, independent students generally change their 
permanent residence when moving to a new location; however, the aid 
formula would use the location reported on the federal aid application. 

* If an independent student moved from Wyoming to California, the COLA 
for the first year would be based on the Wyoming address. 

* The COLA for subsequent years, however, would be based on the new 
California address. 

Financial aid officials generally did not view this as a significant 
obstacle to implementing a COLA because: 

* Officials told us that relatively few independent students move to 
attend school (Data from the 2007-2008 National Postsecondary Student 
Aid Study suggest that few independent students move to attend school. 
For example, only 10.5 percent attended an out-of-state institution). 

* Aid officials can use professional judgment to adjust a student’s EFC 
based on special circumstances. 

* Some students will benefit from a COLA in their first year if they 
move from a high-cost area to a low-cost area. 

Different Strategies for Implementing a COLA Have Implications for 
Students From Low-Cost Areas and for Pell Spending: 

A COLA could be implemented using three different strategies: 

* Hold harmless: COLA is only used in high-cost areas where it will 
increase student aid. Students from low-cost areas are held harmless 
from adjustments. This option would increase Pell spending. 

* Across the board: COLA is used to increase aid for students in high-
cost areas and decrease aid for students in low-cost areas. For Pell 
spending, increases in aid are offset by reductions in aid. 

* Phased in: Current aid recipients are held harmless from any 
reductions while the COLA is applied across the board to new applicants 
(Education officials said it would be administratively challenging to 
operate different aid formulas for current recipients and new 
applicants). This approach would increase Pell spending in the short 
term, but the long-term costs would be lower. 

[End of Finding 2] 

Finding 3: COLA Impact--Overview: 

Each COLA Would Increase Pell Grants and Other Aid for a Small 
Percentage of Students from High-Cost Areas but Could Also Complicate 
Aid Process: 

* Each COLA would increase aid to applicants in a small number of 
counties in high-cost areas. 

* COLAs would not greatly increase overall Pell spending because many 
Pell recipients already receive the maximum Pell Grant or do not live 
in a high-cost area. 

* Pell recipients with relatively higher incomes could receive the 
greatest benefit from adding a COLA. 

* Adding a COLA could be inconsistent with other efforts to simplify 
the financial aid process. 

Finding 3: COLA Impact on Counties: 

Each COLA Would Increase Aid to Applicants in a Small Number of 
Counties in High-Cost Areas: 

* All three COLAs largely identify similar metropolitan counties as 
high-cost areas. 

* Each COLA would increase aid to some students who come from a small 
number of densely populated counties. 

Table: Number of Counties and Population in High-Cost Areas for Each 
COLA: 

COLA: Home Rental Cost; 
Number of High-Cost Counties: 263; 
Population in High-Cost Counties: 111 million; 
Number of Low-Cost Counties: 2,861; 
Population in Low-Cost Counties: 163 million. 

COLA: Regional Price Parities; 
Number of High-Cost Counties: 206; 
Population in High-Cost Counties: 109 million; 
Number of Low-Cost Counties: 2,905; 
Population in Low-Cost Counties: 164 million. 

COLA: Housing Expenditure; 
Number of High-Cost Counties: 208; 
Population in High-Cost Counties: 106 million; 
Number of Low-Cost Counties: N/A[A]; 
Population in Low-Cost Counties: N/A[A], 

[A] The Housing Expenditure COLA only identifies high-cost counties. 

Source: GAO analysis of Census, HUD 50thPercentile Rent Data, College 
Board Data, and Bureau of Economic Analysis data and Census estimates 
for county populations in 2000. 

[End of table] 

COLAs Could Increase Aid to Students from California, the Northeast, 
and a Few Other Areas Around the Country: 

Figure: Counties Where Students’ Aid Could Increase or Decrease with 
Home Rental Cost COLA[A]: 

[Refer to PDF for image: map of the United States] 

The map depicts cost of living in different U.S. counties, in the 
following classifications: 

Low-cost county (aid decreases); 
High-cost county (aid increases); 
Very high-cost[B] county (greatest aid increase). 

Source: GAO analysis of HUD 50th Percentile Rent data. 

[A] Blank counties are neither high cost nor low cost. Low-cost 
counties would not lose aid if COLA were implemented “hold harmless.” 
Other COLAs affect similar areas (see appendix III). 

[B] Very high-cost areas are more than 15 percent more expensive than 
the median. 

[End of figure] 

Finding 3: COLA Impact on Students: 

Many Students Have No Expected Family Contribution under the Current 
Formula and Would Not Benefit From a COLA: 

Figure: Estimated Percentages and Total Number of Students with No 
Expected Family Contribution for 2007-2008 School Year: 

Applicants for Federal Aid: 
Expected to contribute: 66%; 8.2 million students; (mean EFC is about 
$11,500); 
No expected contribution [A]: 34%; 4.2 million students. 

Pell Recipient: 
Expected to contribute: 43%; 2.4 million students; (mean EFC is about 
$1,700); 
No expected contribution [A]: 57%; 3.1 million students. 

Source: GAO analysis of Department of Education data. 

[A] Students in this group have low incomes and assets and an expected 
family contribution of zero, which means that a COLA cannot reduce the 
EFC any further. Graduate students are included and are generally not 
eligible for Pell Grants. 

[End of figure] 

Finding 3: COLA Impact on Aid: 

About 17 Percent of Federal Financial Aid Applicants Could Receive More 
Aid because They Are From High-Cost Areas: 

The COLAs would lower the expected family contribution for students who 
are from high-cost areas and for whom the federal aid formula indicates 
an expected contribution (For students with no expected family 
contribution, the COLA could not reduce the expected family 
contribution any further and the student would not be eligible for any 
additional aid). 

For these students, a lower expected family contribution might result 
in increased Pell Grants, Stafford Loans, or increased institutional 
aid if their college uses the federal formula. 

For example, a student with a reduced expected family contribution 
might be eligible for additional amounts of subsidized and/or 
unsubsidized Stafford loans, unless: 

* the student has already borrowed the maximum allowed; 

* the student is offered sufficient additional aid from other sources 
to reduce his/her eligibility for a Stafford loan. 

About 37 Percent of Federal Financial Aid Applicants Could Receive Less 
Aid because They Are from Low-Cost Areas: 

The Home Rental Cost or Regional Price Parities COLAs would increase 
the expected family contributions and potentially decrease aid for 
students who are from low-cost areas—if implemented “across the board.” 

For these students, a higher expected family contribution could 
possibly result in decreased Pell Grants, Stafford Loans, or decreased 
institutional aid if their college uses the federal formula. 

However, if the COLAs were implemented with a “hold harmless” 
provision, then these students would see no change in their aid. 

Finding 3: COLA Impact on Pell Spending: 

COLAs Would Not Greatly Increase Pell Spending because Many Pell 
Recipients Already Receive the Maximum Pell Grant or Do Not Live in a 
High-Cost Area: 

The Home Rental Cost and Regional Price Parities COLAs would reduce 
overall Pell expenditures (if implemented across the board) because 
more students would see a reduction in aid than an increase. 

Table: Estimated Pell Spending under Different COLA Scenarios, 2007-
2008 Grant Year (in millions of dollars): 

COLA Option: No COLA; 
Pell Spending (across the board): $14,685; 
Pell Spending (hold harmless): $14,685. 

COLA Option: Home Rental Cost; 
Pell Spending (across the board): $14,465; 
Pell Spending (hold harmless): $14,844. 

COLA Option: Regional Price Parities; 
Pell Spending (across the board): $14,289; 
Pell Spending (hold harmless): $14,928. 

COLA Option: Housing Expenditure; 
Pell Spending (across the board): N/A[A]; 
Pell Spending (hold harmless): $14,797. 

Source: GAO analysis of Department of Education data, Bureau of 
Economic Analysis data, HUD 50th Percentile Rent data and College Board 
data. 

[A] Housing Expenditure COLA is only calculated for a small percentage 
of U.S. counties and can not be implemented across the board. 

[End of table] 

Finding 3: COLA Impact on Pell Grants: 

The Proposed COLAs Would Increase Pell Grants for About 10 Percent of 
Pell Recipients: 

Figure: Estimated Percentages and Total Number of Pell Recipients with 
Changes in Their Pell Grants for Each COLAs[A]: 

Home Rental Costs: 
Increase[B]: 0.5 million (9%); 
Decrease: 1.2 million (22%); 
No Change: 3.8 million (69%). 

Regional Price Parities: 
Increase[B]: 0.5 million (9%); 
Decrease: 1.2 million (22%); 
No Change: 3.7 million (69%). 

Housing Expenditures: 
Increase[B]: 0.6 million (10%); 
Decrease: 0; 
No Change: 5 million (90%). 

[A] See appendix IV for additional information. 

[B] The percentage of students with increased grants in each figure 
includes about 1 to 2 percent of students newly eligible for a Pell 
Grant. 

Source: GAO analysis of Department of Education data, Bureau of 
Economic Analysis data, HUD 50th Percentile Rent data and College Board 
data. 

Notes: Figures reflect across-the-board COLA implementation. Students 
would see no decrease in aid if the COLA were implemented as hold 
harmless instead of across the board. Students with no change in Pell 
Grant already receive the maximum grant, do not live in a high-cost or 
low-cost area, or live in a United States territory. 

[End of table] 

Pell Recipients with Relatively Higher Incomes Could Receive the 
Largest Grant Increases: 

* Lower income students already receive the maximum—or nearly the 
maximum—Pell Grant and would receive either no grant increase or only a 
small increase. 

- A family in San Francisco earning $31,000 would see their Pell Grant 
increase slightly from $4,160 to $4,310 with any COLA. 

* Students from high-cost areas with relatively higher incomes would 
receive large Pell grant increases. 

- A family in San Francisco earning $51,000 could see their Pell grant 
increase from $860 to $3,060 with the Home Rental Cost COLA. 
- This $2,200 increase is more than 6 times the average increase of 
$318 (for those with an increase) with the Home Rental Cost COLA. 

Table: Estimated Change in Pell Grant for Family of Four with One Child 
and One Other Dependent in College with Home Rental Cost COLA 
(Implemented Across the Board): 

Family Income: $31,000; 
San Francisco, CA: +$150; 
Boston, MA: +$150; 
Cheyenne, WY: -$500; 

Family Income: $41,000; 
San Francisco, CA: $1850; 
Boston, MA: +$1500; 
Cheyenne, WY: -$600. 

Family Income: $51,000; 
San Francisco, CA: +$2200; 
Boston, MA: +$1500; 
Cheyenne, WY: $)[A]. 

[A] Student would be ineligible for Pell Grant with or without a COLA. 

Source: GAO analysis of Federal Needs Analysis formula, HUD 50th 
Percentile Rent data. 

[End of table] 

Other COLAs show similar trends, although on average for students with 
expected increases in grants: 

* Pell increases are greater with the Regional Price Parities COLA; 

* Pell increases are lower with the Housing Expenditure COLA (See 
appendix V for additional examples). 

Finding 3: COLA Impact on Aid System: 

COLA Could Be Inconsistent with Broader Federal Efforts to Simplify the 
Aid Process: 

Many financial aid professionals and economists recommend that the 
current aid formula and overall application process be simplified. 
Education has also published a proposal to simplify the aid formula and 
application (In addition, GAO recently convened a study group, as 
mandated by the Higher Education Opportunity Act, to examine options 
and implications in simplifying the financial aid process, with a 
report on the group’s results expected in October 2009). 

Several aid officials and experts were concerned that a COLA would 
complicate the aid formula and process. 

* Formula would be more difficult to explain to families. 

* Formula would be more complex for aid professionals to administer. 

* Guidance on how to deal with address changes and verification of 
addresses would be needed. 

Any COLA would also have to be updated on a regular basis. 

Finding 3: COLA Impact on Formula: 

Some Officials Thought Other Problems with Formula Should Be Addressed 
before Adding a COLA: 

Several financial aid officials and experts described the federal 
formula as imperfect and not an accurate measure of a family’s ability 
to pay for college expenses. 

Several aid officials commented either that: 

* a COLA should be considered as part of a more comprehensive review of 
the formula or; 

* improving other sections of the formula should be a higher priority. 

Some noted that increasing the income protection allowance in the 
expected family contribution formula for all families would improve the 
formula more than adding a COLA to this allowance. 

* Several officials and experts described the income protection 
allowance as unrealistic because it is based on old data that have been 
updated for inflation, but do not reflect changes in family spending 
patterns. 

[End of Finding 3] 

[End of Briefing slides] 

Appendix II: Scope and Methodology: 

To address our objectives, we reviewed relevant federal laws, 
regulations, and guidance; identified three potential cost-of-living 
adjustments (COLA); and analyzed Education's sample file of 2007-2008 
financial aid applicants to estimate the impact of potential COLAs. Our 
analyses focused mainly on the impact of COLAs on Pell Grants because 
they are Education's primary need-based grants. We also interviewed 
financial aid experts and economists. 

We conducted our work from December 2008 to August 2009 in accordance 
with all sections of GAO's Quality Assurance Framework that are 
relevant to our objectives. The framework requires that we plan and 
perform the engagement to obtain sufficient and appropriate evidence to 
meet our stated objectives and to discuss any limitations in our work. 
We believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings. 

COLA Options: 

To research possible COLAs that could be applied to the federal student 
aid formula, we reviewed relevant literature and interviewed several 
financial aid experts and economists.[Footnote 3] We found a limited 
number of available options that could be used in the student aid 
formula. For example, we considered the Basic Allowance for Housing 
that the Department of Defense uses, but we determined that this COLA 
was not appropriate for the financial aid formula because it adjusts 
for different income levels in addition to cost-of-living differences. 
We ultimately identified three possible COLA options--Home Rental Cost, 
Regional Price Parities, and Housing Expenditure COLAs--that could be 
used to adjust the federal aid formula for geographic cost-of-living 
differences. These three COLAs were the best options we identified 
during our research, although it is possible that other options could 
be developed. Below is a description of how we implemented these three 
COLAs, but we recognize that they could be implemented in alternative 
ways. 

We standardized our COLAs on a county level, which allowed us to 
compare the effects of different COLAs and to simulate the effect of 
adding a COLA. However, each of these COLAs was originally calculated 
based on geographic areas of varying sizes, most often Metropolitan 
Statistical Areas, which often encompass multiple counties. For each 
county, we assigned the COLA that applied to the area in which the 
county is located. We did not include U.S. territories in any COLA 
because they were only available for the Home Rental Cost COLA. 

Home Rental Cost COLA: 

The Home Rental Cost COLA was generated by GAO using data from the 
Department of Housing and Urban Development's (HUD) 50th Percentile 
Rent database. HUD estimates 50th Percentile Rents annually for 
different areas in the United States.[Footnote 4] These 50th Percentile 
Rents are the estimated median price of a two-bedroom apartment in 
different areas across the United States.[Footnote 5] HUD calculates 
the 50th Percentile Rent by using the decennial Census to provide base- 
year information on rents. It then updates this baseline number each 
year using random-digit-dialing telephone surveys, consumer price index 
information in areas where available, and the American Community 
Surveys. HUD publishes 50th percentile rent estimates for all U.S. 
counties or county subareas.[Footnote 6] HUD 50th Percentile Rent areas 
are often Metropolitan Statistical Areas. 

GAO used the following process to convert HUD 50th Percentile Rent data 
to a COLA. First, a housing cost index was created from the 50th 
Percentile Rent data using the median cost of a two-bedroom rental 
unit. A weighted national average rental amount was computed based on 
the county population estimates from the 2000 Census. Then, the local 
area's average rental amount was divided by the national average to 
create the housing cost index.[Footnote 7] We used a 3-year average of 
HUD 50th Percentile Rent data (2005 through 2007) to create the housing 
cost index. Using the 3-year average helps mitigate the fact that 50th 
Percentile Rent data reflect data only on people who have moved in the 
last 15 months, which can result in significant year-to-year 
fluctuations in some areas because such data only consider the rental 
market at that time. 

To account for the fact that the 50th Percentile Rent data only 
captured housing costs, we weighted the COLA so that it applied only to 
the housing portion of the income protection allowance. The Home Rental 
Cost COLA is calculated as a sum of 42 percent of our housing cost 
index and a constant of 58 percent. The 42 percent weight reflects 
housing as a component of overall consumption.[Footnote 8] The 58 
percent is the remaining weight that is applied for the other 
nonhousing components of consumption since this COLA only captures 
housing costs.[Footnote 9] 

Regional Price Parities COLA: 

The experimental Regional Price Parities COLA was developed by the 
Bureau of Economic Analysis (BEA) and provides estimated differences in 
the cost of living for a broad market basket of goods, including 
housing, transportation and food. BEA analyzed data from several data 
sources, including the Consumer Price Index, the Census, and the 
American Community Survey, to estimate a COLA for 363 Metropolitan 
Statistical Areas and another COLA for each state that is applied to 
all counties in the state that are not part of a Metropolitan 
Statistical Area.[Footnote 10] We used the Regional Price Parities 
COLAs for the counties in the Metropolitan Statistical Areas (which 
include over 1,000 counties of the 3,141 U.S. counties and county 
equivalents in the U.S.) and a state level COLA for all the 
nonmetropolitan counties in a state.[Footnote 11] Because the other two 
COLAs included multiyear averages, we averaged the Regional Price 
Parities from 2005 and 2006--the most recent 2 years for which the 
Regional Price Parities have been computed. Unlike the Home Rental Cost 
COLA, the Regional Price Parities can be applied directly to the income 
protection allowance because it represents a broad market basket of 
goods. 

Housing Expenditure COLA: 

The Housing Expenditure COLA was developed by the College Board for 
schools that use the College Board's Institutional Methodology to award 
institutional student aid. According to College Board officials, about 
270 schools use the Institutional Methodology and have the option to 
use the Housing Expenditure-based COLA to adjust aid levels for 
geographic differences in the cost of living. The COLA reflects a 3- 
year average of the differences in housing expenditures (for all 
renters and homeowners) collected by the Bureau of Labor Statistics for 
28 Metropolitan Statistical Areas using the Consumer Expenditure 
Survey. Similar to GAO's treatment of the Home Rental Cost COLA, the 
College Board weights the Housing Expenditure COLA to only reflect 
housing as one component of overall consumption. We used the COLAs 
provided directly by the College Board, which do not provide the option 
for downward adjustments to low-cost areas.[Footnote 12] 

Estimating the Impact of Potential Cost-of-Living Adjustments: 

To estimate the impact of potential cost-of-living adjustments, we 
multiplied the COLA value for each county by the families' income 
protection allowance (IPA) in the formula. We used the COLAs to adjust 
the parents' IPA for dependent students and the students' IPA for 
independent students. While the aid formula could be adjusted for 
regional variation in the cost of living in different ways, the law 
mandating this study specifically requested that GAO apply a COLA to 
the IPA.[Footnote 13] The IPA is an allowance, adjusted over time for 
inflation, that represents the income needed to pay for a family's 
basic living expenses. The IPA varies by family size and the number of 
family members pursuing a higher education. When the IPA is increased, 
a family is expected to contribute less of their income to higher 
education expenses and the family's expected family contribution could 
be reduced, which could result in an increase in federal student aid. 
The values of the COLAs we used range from 60 percent to 151 percent of 
the IPA's original size. A COLA below 100 percent would decrease the 
IPA and could lead to a higher expected family contribution and reduced 
aid. A COLA above 100 percent would increase the IPA and could lead to 
a lower expected family contribution and increased aid. 

To analyze the impact of the COLAs on students, we recalculated 
students' expected family contributions and Pell Grants for specific 
example students and also simulated the total effects on a large sample 
of students. To determine the change in Pell Grants for our example 
students, we created a profile for a full-time, independent student and 
a profile for a full-time, dependent student from a family with two 
working parents and one other dependent. We used three different income 
levels for the two types of student profiles but held all other 
characteristics constant.[Footnote 14] We then entered the students' 
characteristics in the federal aid formula, adjusting the families' IPA 
for COLAs in different areas, to determine the example students' 
adjusted expected family contributions and Pell Grants. 

To determine the impact of geographic cost-of-living differences on the 
total cost of all Pell Grants, we ran a simulation on an Education- 
provided sample of federal financial aid applicants from the 2007-2008 
school year. This sample file includes undergraduate and graduate 
students. Although most graduate students are not eligible for Pell 
Grants, they are eligible for other federal financial aid. Education 
collects the random sample of more than 500,000 student aid records to 
estimate the cost of Pell Grants. We modified Education's Pell Grant 
cost-estimation model by applying the three COLAs to the families' IPAs 
to estimate expected family contribution. We used students' ZIP codes 
in the sample file to determine which county-level COLA would apply to 
each student.[Footnote 15] We then used the adjusted expected family 
contribution to determine the total estimated change in Pell Grants, as 
well as to generate summary statistics on the estimated number of 
families with a change in expected family contributions. We applied the 
COLAs using two methods to estimate the impact on Pell Grant spending: 
(1) applying the COLAs while holding students in low-cost areas 
harmless by keeping the original, unadjusted IPA for low-cost areas and 
(2) applying the COLAs across the board, where we reduced students' 
IPAs in low-cost areas. 

We assessed the reliability of the datasets we used for our analyses 
and found them sufficiently reliable for our purposes. To assess the 
reliability of Education's dataset and HUD 50th Percentile Rents, we 
interviewed agency officials knowledgeable about the data and reviewed 
relevant documentation. For Education's dataset, we also conducted 
electronic testing to assess missing data and other potential problems. 
We determined that the data were sufficiently reliable for the purposes 
of this report. The BEA Regional Price Parities are an experimental 
methodology, but we interviewed relevant agency officials who provided 
a general overview of their methodology and concluded that the data 
used to generate the Regional Price Parities COLAs were sufficiently 
reliable for our purposes. Similarly, we spoke to College Board 
officials about the Housing Expenditure COLAs and determined that the 
data used to generate the COLAs were sufficiently reliable for our 
purposes. 

Our methodology and data have some limitations. In the simulation, we 
did not produce estimates for the impact of a COLA on the most recent 
federal aid formula, the 2008-2009 school year, because a sample file 
of those students is not yet available. Therefore, our analysis does 
not reflect changes in the federal formula or Pell Grant schedule, 
including increases in the IPA amounts for inflation and increases in 
the maximum Pell Grant, from $4,310 in 2007-2008 to $4,731 in 2008- 
2009. Additionally, Education officials have cautioned that the self- 
reported student ZIP codes may be unreliable if applicants report their 
school address instead of their permanent mailing address. However, we 
checked the reliability of the ZIP code data by comparing the state of 
the parents' residence with the state associated with the ZIP code for 
all dependent students and found they matched in 95 percent of cases. 

Interviews: 

We interviewed higher education experts and economists; representatives 
from seven higher education associations; and financial aid officials 
from 19 postsecondary institutions that represented a mix of 2-year and 
4-year public, not-for-profit, and proprietary schools in different 
geographic areas. 

We identified one expert mentioned in news articles on financial aid 
issues and we obtained recommendations from Education and other sources 
for additional individuals to contact. We then contacted those 
individuals and obtained further recommendations from them on 
additional individuals to contact. We also consulted with a panel of 
higher education experts and economists convened by GAO for a related 
study on simplifying the federal financial aid formula. 

We also interviewed officials from the following higher education 
associations: the American Association of Community Colleges, the 
American Association of State Colleges and Universities, the American 
Council on Education, the Career College Association, the National 
Association of Student Financial Aid Administrators, the National 
Association of Independent Colleges and Universities, and the 
Association of Public and Land-grant Universities (formerly the 
National Association of State Universities and Land-Grant Colleges). 

[End of section] 

Appendix III Counties Where Students Could See a Change in Financial 
Aid under Different COLA Options: 

Figure 1: Counties Where Students' Aid Could Increase or Decrease with 
Regional Price Parities COLA: 

[Refer to PDF for image: map of the United States] 

The map depicts cost of living in different U.S. counties, in the 
following classifications: 

Low-cost county (aid decreases); 
High-cost county (aid increases); 
Very high-cost[B] county (greatest aid increase). 

Source: GAO analysis of HUD 50th Percentile Rent data. 

Notes: Very high-cost counties are more than 15 percent more expensive 
than the median. Blank counties are neither high cost nor low cost. Low-
cost counties would not lose aid if COLA were implemented "hold 
harmless." 

[End of figure] 

Figure 2: Counties Where Students' Aid Could Increase with Housing 
Expenditure COLA: 

[Refer to PDF for image: map of the United States] 

The map depicts cost of living in different U.S. counties, in the 
following classifications: 

High-cost county (aid increases); 
Very high-cost[B] county (greatest aid increase). 

Source: GAO analysis of HUD 50th Percentile Rent data. 

Notes: Very high-cost counties are more than 15 percent more expensive 
than the median. Blank counties are unmeasured by the Housing 
Expenditure COLA. 

[End of figure] 

[End of section] 

Appendix IV: Summary of Effects of Adding a COLA to the Federal Needs 
Analysis Formula on Expected Family Contribution Levels and Pell Grant 
Awards: 

Figure 3: Estimated Percentages and Total Number of Financial Aid 
Applicants and Potential Changes in Their Expected Family Contributions 
for Each COLA: 

Refer to PDF for image: 3 pie-charts] 

Home Rental Costs: 
Increase: 4.4 million (36%); 
Decrease: 2.2 million (18%); 
No Change: 5.7 million (47%). 

Regional Price Parities: 
Increase: 4.6 million (38%); 
Decrease: 2.1 million (17%); 
No Change: 5.6 million (46%). 

Housing Expenditures: 
Increase: 0; 
Decrease: 2.3 million (18%); 
No Change: 10 million (82%). 

Sources: GAO analysis of 2007-2008 Department of Education data, Bureau 
of Economic Analysis data, HUD 50th Percentile Rent data, and College 
Board data. 

Notes: Figures reflect across-the-board COLA implementation. Students 
with a lower EFC could see an increase in aid and students with a 
higher EFC could see a decrease in aid. Students would see no decrease 
in aid if the COLA were implemented as hold harmless instead of across 
the board. Percents may not add to 100 due to rounding. 

[End of figure] 

Figure 4: Estimated Average Pell Grant Increase for Students Receiving 
a Pell Increase for Each COLA: 

[Refer to PDF for image: vertical bar graph] 

COLA Option: Home Rental Cost; 
Estimated Average Pell Grant Increase: $318. 

COLA Option: regional Price Parities: 
Estimated Average Pell Grant Increase: $486. 

COLA Option: Housing Expenditures; 
Estimated Average Pell Grant Increase: $202. 

Sources: GAO analysis of federal needs analysis formula, 2007-2008 
Department of Education data,Bureau of Economic Analysis data, HUD 50th 
Percentile Rent data, and College Board data. 

[End of figure] 

[End of section] 

Appendix V: Change in Pell Grant for Example Students in High-Cost and 
Low-Cost Areas for Each COLA: 

Change in Pell Grants for a Dependent Student: 

Table 1: Change in Pell Grants for Full-Time, Dependent Student from a 
Family of Four with Home Rental Cost COLA: 

Family income: $31,000; 
San Francisco, CA: +$150; 
Boston, MA: +$150; 
Cheyenne, WY: -$500. 

Family income: $41,000; 
San Francisco, CA: +$1,850; 
Boston, MA: +$1,500; 
Cheyenne, WY: -$600. 

Family income: $51,000; 
San Francisco, CA: +$2,200; 
Boston, MA: +$1,500; 
Cheyenne, WY: 0. 

Source: GAO analysis of federal needs analysis formula and HUD 50th 
Percentile Rent data. 

Notes: Table shows across-the-board implementation. In a hold-harmless 
implementation, students in low-cost areas, such as Cheyenne, would not 
see a reduction in their grant. City indicates student's permanent 
address. 

[End of table] 

Table 2: Change in Pell Grants for Full-Time, Dependent Student from a 
Family of Four with Regional Price Parities COLA: 

Family income: $31,000; 
San Francisco, CA: +$150; 
Boston, MA: +$150; 
Cheyenne, WY: -$200. 

Family income: $41,000; 
San Francisco, CA: +$1,850; 
Boston, MA: +$1,400; 
Cheyenne, WY: -$300. 

Family income: $51,000; 
San Francisco, CA: +$2,200; 
Boston, MA: +$1,400; 
Cheyenne, WY: 0. 

Source: GAO analysis of federal needs analysis formula and Bureau of 
Economic Analysis data. 

Notes: Table shows across-the-board implementation. In a hold-harmless 
implementation, students in low-cost areas, such as Cheyenne, would not 
see a reduction in their grant. City indicates student's permanent 
address. 

[End of table] 

Table 3: Change in Pell Grants for Full-Time, Dependent Student from a 
Family of Four with Housing Expenditure COLA: 

Family income: $31,000; 
San Francisco, CA: +$150; 
Boston, MA: +$150; 
Cheyenne, WY: $0. 

Family income: $41,000; 
San Francisco, CA: +$900; 
Boston, MA: +$300; 
Cheyenne, WY: 0. 

Family income: $51,000; 
San Francisco, CA: +$900; 
Boston, MA: +$300; 
Cheyenne, WY: 0. 

Source: GAO analysis of federal needs analysis formula and College 
Board data. 

Note: City indicates student's permanent address. 

[End of table] 

Change in Pell Grants for an Independent Student: 

Table 4: Change in Pell Grant for a Full-Time, Independent Student with 
No Dependents with Home Rental Cost COLA: 

Family income: $8,000; 
San Francisco, CA: +$550; 
Boston, MA: +$550; 
Cheyenne, WY: -$300. 

Family income: $12,000; 
San Francisco, CA: +$1,300; 
Boston, MA: +$800; 
Cheyenne, WY: -$300. 

Family income: $16,000; 
San Francisco, CA: +$1,300; 
Boston, MA: +$900; 
Cheyenne, WY: -$400. 

Source: GAO analysis of federal needs analysis formula and HUD 50th 
Percentile Rent data. 

Notes: Table shows across-the-board implementation. In a hold-harmless 
implementation, students in low-cost areas, such as Cheyenne, would not 
see a reduction in their grant. City indicates student's permanent 
address. 

[End of table] 

Table 5: Change in Pell Grant for a Full-Time, Independent Student with 
No Dependents with Regional Price Parities COLA: 

Family income: $8,000; 
San Francisco, CA: +$550; 
Boston, MA: +$550; 
Cheyenne, WY: -$200. 

Family income: $12,000; 
San Francisco, CA: +$1,200; 
Boston, MA: +$800; 
Cheyenne, WY: -$200. 

Family income: $16,000; 
San Francisco, CA: +$1,200; 
Boston, MA: +$800; 
Cheyenne, WY: -$400. 

Source: GAO analysis of federal needs analysis formula and Bureau of 
Economic Analysis data. 

Notes: Table shows across-the-board implementation. In a hold-harmless 
implementation, students in low-cost areas, such as a Cheyenne, would 
not see a reduction in their grant. City indicates student's permanent 
address. 

[End of table] 

Table 6: Change in Pell Grant for a Full-Time, Independent Student with 
No Dependents with Housing Expenditure COLA: 

Family income: $8,000; 
San Francisco, CA: +$550; 
Boston, MA: +$200; 
Cheyenne, WY: $0. 

Family income: $12,000; 
San Francisco, CA: +$500; 
Boston, MA: +$100; 
Cheyenne, WY: 0. 

Family income: $16,000; 
San Francisco, CA: +$500; 
Boston, MA: +$100; 
Cheyenne, WY: 0. 

Source: GAO analysis of federal needs analysis formula and College 
Board data. 

Note: City indicates student's permanent address. 

[End of table] 

[End of section] 

Appendix VI: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

George A. Scott, (202) 512-7215 or scottg@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, the following staff made key 
contributions to this report: Melissa Emrey-Arras, Assistant Director; 
Michelle St. Pierre, Analyst-in-Charge; William Colvin; Susannah 
Compton; Patrick Dudley; Jean McSween; Aron Szapiro; and Monique 
B.Williams. 

[End of section] 

Footnotes: 

[1] Pub. L. No. 110-315, § 1114. 

[2] For example, see GAO, Poverty Measurement: Adjusting for Geographic 
Cost-of-Living Difference, GAO/GGD-95-64 (Washington, D.C.: Mar. 9, 
1995), and Constance F. Citro and Robert T. Michaels, Measuring 
Poverty: A New Approach (Washington, D.C.: National Academy Press, 
1995). 

[3] For example, see GAO, Poverty Measurement: Adjusting for Geographic 
Cost-of-Living Difference, GAO/GGD-95-64 (Washington, D.C.: Mar. 9, 
1995); Constance F. Citro and Robert T. Michaels, Measuring Poverty: A 
New Approach (Washington, D.C.: National Academy Press, 1995); and Dean 
Jolliffe, How Sensitive Is the Geographic Distribution of Poverty to 
Cost of Living Differences? An Analysis of the Fair Market Rents Index, 
a report for the Economic Research Service, U.S. Department of 
Agriculture (Washington, D.C.: June 8, 2004). 

[4] HUD estimates the 50th Percentile Rent from the same dataset they 
use to develop Fair Market Rents. Fair Market Rents are primarily used 
to determine standard payment amounts for the Housing Choice Voucher 
program. The Fair Market Rent covers the same 530 metropolitan areas 
and 2,045 nonmetropolitan county areas as the 50th Percentile Rent. 

[5] We used the two-bedroom rent because HUD generates the two-bedroom 
rent first and then adjusts it to apply to housing units of other 
sizes. Therefore, if other apartment sizes such as three bedrooms were 
used, the end result would be a very similar index. 

[6] We used 2006 Census definitions of counties and county equivalents 
as the unit of analysis for the Home Rental Cost COLA, as well as the 
other two COLAs. However, a few situations where HUD 50th Percentile 
Rent Areas did not match the Census file were treated as follows: (1) 
HUD provides a 50th Percentile Rent for Columbia City, Md., and 
Sullivan City, Mo. Neither of these areas is a Census county or county 
equivalent, so we dropped them from the dataset and used the 50th 
Percentile Rent for the county in which these areas are located; and 
(2) HUD provides a 50th Percentile Rent for Clifton Forge City, Va., 
which is not a Census county or county equivalent. However, its 50th 
Percentile Rent is the same as Alleghany County, Va., in which the city 
is located, so dropping Clifton Forge City did not change the Home 
Rental Cost COLA. 

[7] All GAO analysis is at the county level. However, HUD divides some 
counties, mostly in New England, into component areas. In these cases, 
each county's rent was first computed by generating a population- 
weighted average rent for each county, based on its components, by each 
year. 

[8] Research done by the Bureau of Labor Statistics researchers and 
others estimates that housing costs are about 42 percent of the cost of 
living within the "market basket of goods." See Bettina H. Aten, Report 
on Interarea Price Levels, WP2005-11 (Washington, D.C.: U.S. Bureau of 
Economic Analysis, Nov. 30, 2005). 

[9] For example, if the housing index were 2.00, the Home Rental Cost 
COLA would be calculated as 2.00 times .42 (the housing weight) added 
to .58 (the remaining, unadjusted part of the COLA), which would give a 
COLA of 1.42. 

[10] Bettina H. Aten and Roger J. D'Souza, "Regional Price Parities: 
Comparing Price Level Differences Across Geographic Areas," Survey of 
Current Business (Washington, D.C.: U.S. Bureau of Economic Analysis, 
November 2008). 

[11] BEA continues to explore additional methods to estimate regional 
price parities for individual nonmetropolitan areas but has not 
published any specific measures. GAO used only Regional Price Parities 
that BEA has published. 

[12] Some of the counties in the 28 Metropolitan Statistical Areas may 
have a cost of living below the national average. However, over 2,000 
counties have no assigned cost of living. Therefore, if the COLA were 
designed to be implemented across the board, it would only reduce aid 
for students in a few lower-cost cities, while holding students from 
the rest of the country harmless. 

[13] Pub. L. No. 110-315, § 1114. 

[14] We made the following assumptions: (1) The cost of attendance is 
higher than the maximum Pell Grant, which in turn maximizes a student's 
potential Pell Grant; (2) the student or both the student and parents 
do not have sufficient assets to make a contribution from assets; and 
(3) because the federal aid formula has an allowance for federal taxes 
paid, we generated a tax estimate assuming the standard deduction (and 
a $1,000 child-tax credit for the dependent student's family) but did 
not assume any contributions to retirement accounts or other tax 
deductions. 

[15] In the small percentage of cases where the ZIP code spanned more 
than one county, we assigned students a county. 

[End of section] 

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