Welfare for college students? Why we need to rethink student aid indirect costs

Most Americans would be shocked to realize that two-thirds of the federal student aid money allocated to students at public colleges and universities goes for things other than tuition and fees. These so-called indirect costs of attendance include food, lodging, books and supplies, transportation, health care and miscellaneous other expenses such as the purchase of a computer, clothing and even study abroad program charges.

Each college or university that participates in federal student aid programs develops a “cost of attendance” budget for each academic year. Separate budgets are designed for dependent and independent students, undergraduate and graduate students, and on-campus and off-campus residents. The National Association of Student Financial Aid Administrators has provided guidelines for institutions to use in developing their unique cost of attendance budgets.  

The College Board lays out the rationale for including indirect costs of attendance in the student financial aid programs. They note that “people pay for housing, food and other living expenses whether or not they are in college. However, a significant cost of going to college is forgone earnings from the time devoted to school instead of the labor market.” Department of Education regulations attempt to control these expenses by prohibiting postsecondary institutions from awarding student aid in excess of costs of attendance. This all sounds well and good, but as is the case with all government programs, the devil is in the details. 

Let us start with on-campus housing. A quick check on the websites of five major universities in Washington, D.C., reveals a wide disparity in the least and most expensive per-semester prices of a two-person dormitory room. The lowest price at Georgetown University ($5,390) is 62 percent higher than the $3,312 that Howard University charges. The remaining three institutions (American University, George Washington University and the University of the District of Columbia) cluster between $4,765 per semester and $5,002 per semester. Since the total amount of eligibility for federal student aid equals the cost of attendance minus expected family contribution, students at universities charging more for dormitory beds typically will trigger higher student grant and loan awards than those at institutions with comparable tuition costs that charge less for housing.  

There is no limit to the total amount of grant and loan aid a student can receive to pay these charges. Even if a student reaches the full limit for Pell Grants and subsidized direct loans, there are other loans available to fill in any gaps, especially for graduate students. 

An important factor in on-campus housing charges is the built-in profit margin for colleges and universities. Housing charges take into account building supplies, maintenance, utilities, depreciation, administration and occupancy rates, adding in a targeted margin of profit. In many instances, there is a double profit incurred because the university has contracted out its residency program to private corporations. As noted in a 2017 article in Forbes magazine, there are many benefits to having experienced housing developers build and efficiently manage modern campus housing facilities. 

In 2015, the University of Georgia system entered into a $538 million contract with Corvias to run the state university system’s campus system. Nonetheless, from a federal taxpayer’s point of view, the federal budget for student aid is incurring double overhead for the profits earned by Corvias and other housing companies, and the university’s own profit margin. Students who borrow money to pay for such charges are incurring more debt. 

A loophole exists for some undergraduates and all graduate students living with their parents.  Normally, undergraduate students under age 24 are considered to be “dependent,” meaning that their parents’ income is factored into the financial aid eligibility formula. Exceptions are made for younger students who are veterans, married or legally emancipated. Undergraduates who are 24 or older, and all graduate students regardless of age, are considered to be “independent,” meaning that their aid eligibility is calculated without regard to parental income and resources.  

Accordingly, an undergraduate over 24 who is living at home rent-free, and all graduate students in similar situations, can borrow the full cost of attendance for off-campus residents. The lack of controls to contain these costs produces greater student debt and lower benefits to taxpayers.  Granted, such examples may be relatively few, but they illustrate the lacunae in the programs’ constructs.

Other indirect cost allowances also tend to drive up the bill for students and taxpayers alike. The cost of textbooks grew to the point where Congress attempted in 2008 to control prices. As reported by CBS News, the textbook costs rose 186 percent between 1998-2006, and the problem has continued ever since. Part of the problem is attributed to publishers bundling course materials into higher-priced packages. Another is that text selection is up to professors, who focus more on relevant content than price. But as any economist will confirm, prices of subsidized goods will rise to take full advantage of the value of the subsidy. Indirect cost allowances do not have limits on how costly required texts and course materials may be. They also have no limits on whether a student purchases a $500 computer or a $2,000 computer to aid in their studies.

Finally, there seems to be no integration of federal student aid programs and various federal welfare programs. A low-income student may qualify for SNAP food assistance and federally subsidized housing and still simultaneously qualify for food and housing allowances for purposes of obtaining student aid. Many students may be borrowing money because they are not aware of their eligibility for these other welfare programs. Others may actually receive such benefits and also take out student loans. I am not trying to resurrect the welfare queen stereotype of the past, but rather note that both taxpayers and students may be incurring excessive long-term costs.

With outstanding student loan debt having reached crisis proportions at $1.5 trillion and counting, the time has come for a thorough examination of indirect costs of attendance. With possible Higher Education Act reauthorization legislation coming before Congress in the next year or two, a broader discussion is needed. Even radical alternatives should be on the table, such as separation of programs offering direct tuition credits and those subsidizing costs of living, two very different things.

C. Ronald Kimberling, Ph.D., is a research fellow with the Independent Institute. He was the U.S. assistant secretary for postsecondary education during the Reagan administration. He holds a doctorate in English from the University of Southern California.