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Background

For most of the last 50 years, Texas offered its residents low tuition rates at its public colleges and universities. These rates were kept well below national averages. As late as the 1995-96 academic year, the California Higher Education Policy Center reported that Texas' resident tuition rates ranked in the bottom 10 among the states.[1] The state also invested heavily in new campuses across the state, so that nearly all Texans lived within driving distance of an affordable higher education institution.

Because rates were relatively low, fewer students needed financial aid. Texas was one of many states, primarily in the South and West, that maintained a "low tuition, low aid" model for higher education; that is, the state used low tuition rates to keep higher education accessible without the need for substantial student financial assistance from the state. The federal government provided the bulk of such assistance in Texas, primarily for students with financial need.

Many state tuition and fee exemption and waiver programs developed over the years for various purposes to meet public needs. Examples of these include exemptions granted to the highest-ranking high school graduates, the children of Texas servicemen and women killed in the line of duty and firemen attending classes in firefighting; and waivers of nonresident tuition for students from Mexico attending a Border-area college or students from border counties in neighboring states attending colleges in border counties in Texas. Over time, such programs have grown in number and now represent a major share of state financial aid.

In 1965, both Texas and the federal government created college student loan programs. The 59th Legislature in 1965 created the Hinson-Hazlewood Student Loan Program, and Texas voters subsequently approved the first of many constitutional amendments authorizing the sale of bonds to finance these loans. In the same year, Congress passed the Higher Education Act, which authorized the Guaranteed Student Loan Program and Federal Insured Student Loan Program.

In 1973, the federal government created what is now the largest need-based grant program, the Basic Educational Opportunity Grant, known today as the Pell Grant. This program provides more need-based grant aid to students in Texas than any other federal or state program.

The 1970s also saw the creation of Texas' first major state grant program, the Tuition Equalization Grant (TEG) program. Created in 1971, the TEG program provides financially needy students at private and independent institutions with grants to help cover the higher costs of attendance at these institutions. The program was established at a time when rising college enrollments had placed a strain on public higher education facilities. By supporting students at private institutions, the state could educate more students while easing the need for new public facilities. Since tuition rates at public institutions continued to be low, the state's role in providing grant aid to students at public institutions remained small.

New increases in tuition rates led the 69th Legislature in 1985 to create a second major need-based grant, the Texas Public Educational Grant (TPEG) program, funded by set-asides from the higher tuition revenues. The set-aside for resident undergraduate tuition revenues is currently 15 percent, although the statute allows up to 20 percent; for nonresident undergraduates, the set-aside is 3 percent of tuition revenues. For community and technical colleges, the set-aside is from 6 percent to 20 percent of in-district tuitions; most colleges' set-aside is 6 percent. The program is campus-based, with each campus distributing TPEG funds through its student financial aid office. The only state criterion for its use is financial need, giving individual institutions significant flexibility to use TPEG aid as they deem best. For example, it can be used to help college students who are ineligible for other state programs because they delayed their entry into college after high school.

Rising Tuition

The oil-patch crisis of the 1980s hit Texas state government hard, causing declines in state tax revenues that forced policymakers to reexamine the state's role in higher education. In 1985, resident tuition tripled, from $4 to $12 per semester credit hour (SCH). This action initiated a pattern of regular annual increases in statutory tuition rates that became the norm for the rest of the century.

While state finances improved somewhat after the oil shock, other demands on the state treasury for public school finance, new prison construction and health and human service programs curbed growth in higher education appropriations. Colleges and universities, however, have nontax revenue sources, the largest of which are student tuition and fees. Over the years, the Legislature has authorized colleges and universities to establish and increase student fees to fund activities such as student services, health centers, student unions and bus transportation.

Prior to 1997, the Legislature alone set tuition rates at public universities. Although institutions were authorized to charge various student fees in addition to tuition, these fees were limited to amounts set in state law or to the actual amounts needed to cover the costs of providing specific services to students.

In 1997, the 75th Legislature took the first step toward deregulating tuition and fees -- authorizing higher education institutions to establish their own rates -- by raising the statutory cap on the building use fee. This fee, authorized by statute, previously could be charged in an amount up to $12 per SCH to cover costs associated with operating buildings on campus. The 1997 law allowed the governing boards of higher education institutions to set the fee in an amount not to exceed the tuition rate specified by the Texas Education Code.

The 75th Legislature also renamed the building use fee as "designated tuition." Tuition at Texas public universities now consists of two parts: statutory tuition, as specified by state law, and designated tuition, which is set by the institutions.

Since 1997, tuition in Texas has risen at a substantially higher rate than the national average, although the Texas 2004-05 academic year statewide average of $4,843 is still lower than the national average of $5,487 (Exhibit 1). At the same time, however, the impact on financially needy students was mitigated by the tuition percentage set-aside requirement that automatically increases the total amount of aid available to financially needy students.

Texas tuitions have increased faster than U.S. since 1996

TEXAS Grants

TEXAS Grants provide students with grants based on the average tuition and fee rates at Texas public universities and community and technical colleges. A student who receives the grant at a public institution may not be charged for the difference between the grant amount and the actual tuition and fee rate, although institutions may cover the difference using other student financial aid available to students. Students who attend private colleges and universities may receive TEXAS grants equal to those given to students at public universities, to apply toward the (generally higher) cost of their tuition and fees.

To receive a TEXAS Grant (but not a TEXAS Grant II), students must demonstrate financial need and must have graduated from high school under the state's recommended high school program or its equivalent. Students must also maintain a minimum grade-point average set in law (2.5 on a 4.0 scale) and may not receive the grant for more than four years, unless they are enrolled in degree programs that require an additional year of study. Only students who graduated from high school in the 1998-99 school year or later are eligible.

TEXAS Grant II targets students at public community and technical colleges. Unlike the TEXAS Grants program available at four-year institutions, students do not need to graduate with the recommended high school program to receive a TEXAS Grant II.

In 1999, the 76th Legislature created the Towards Excellence Access and Success (TEXAS) Grant program, and two years later followed it with a smaller program for students at community and technical colleges called TEXAS Grant II. Although initial appropriations for both programs were modest, their creation marked the beginning of a major expansion of state-funded student financial assistance.

The Texas Higher Education Coordinating Board (THECB) initially instructed colleges and universities to provide the grants to students whose families could not be expected to contribute to their child's college education. The family contribution is based upon an assessment of family income and assets (see Aid Amounts and "Unmet Need"). Beginning in 2001, this funding was expanded to cover those students whose families can contribute some but not all of the amount needed and who meet the other program requirements.

Spending for TEXAS Grants increased markedly after the program's first two years. During the 2000-2001 biennium, Texas spent about $55.7 million on the original TEXAS Grant program. As more students became eligible, this amount rose to $278.2 million for the 2002-2003 biennium (Exhibit 2).

EXHIBIT 2
TEXAS Grant Program
Students Served and Grants Awarded
Fiscal 2000 to 2005

Fiscal Year Number
of Students
Cost
per Student
Amount
2000 10,912 $1,817 $19,827,683
2001 18,162 $1,996 $35,884,777
2002 53,318 $1,943 $103,577,720
2003 68,327 $2,402 $164,154,187
2004 63,834 $2,467 $157,127,599
2005 56,109 $2,959 $166,030,001
Note: Fiscal 2004 and 2005 numbers and amounts are estimated.
Source: Texas Higher Education Coordinating Board, Student Services Division.

Tuition Deregulation

Until 2003, designated tuition remained capped at the statutory tuition rate. In 2003, however, the 78th Legislature faced an historic budget shortfall. In response, the Legislature removed the cap, effectively allowing higher education institutions to establish their own tuition rates. This deregulation of tuition shifted Texas from the "low-tuition, low-aid" model to a market-based model that allows tuition to fluctuate with demand, while building in financial aid through the percentage set aside for TPEG grants.

This model has brought Texas more in line with tuition rates in other states. In a recent survey of 2003-04 rates at major public research universities in all 50 states, Texas ranked 19th in tuition and fee rates charged to resident undergraduates. In Texas, tuition and fee rates were nearly 10 percent above the national average.

Tuition rate increases from Fall 2003 to Fall 2004 at Texas institutions has averaged 17.5 percent statewide and ranged from a low of 2.1 percent at Texas A&M at Texarkana to a high of 36.9 percent at the University of Texas at Austin (Exhibit 3).

EXHIBIT 3
Resident Undergraduate Tuition and Mandatory Fees

Selected Institutions Fall 2003 Fall 2004 Fall 2003-
Fall 2004
Angelo State University $1,753 $1,889 7.8%
Sam Houston State University $1,826 $2,130 16.6%
Stephen F. Austin State University $1,717 $2,149 25.2%
Tarleton State University $1,742 $1,907 9.5%
Texas A&M University $2,450 $2,974 21.4%
Texas A&M University - Kingsville $1,923 $2,043 6.2%
Texas A&M University - Texarkana $1,431 $1,461 2.1%
Texas Southern University $1,981 $2,208 11.5%
Texas State University $2,008 $2,340 16.5%
Texas Tech University $2,373 $2,924 23.2%
The University of Texas at Austin $2,094 $2,867 36.9%
The University of Texas at Brownsville $1,472 $1,727 17.3%
The University of Texas at El Paso $1,797 $2,324 29.3%
The University of Texas of the Permian Basin $1,729 $1,939 12.2%
University of Houston $1,974 $2,487 26.0%
University of North Texas $2,207 $2,781 26.0%
STATE AVERAGE
(All four-year institutions)
$1,862 $2,188 17.5%
Source: Texas Higher Education Coordinating Board, Student Services Division.

Additional Financial Aid

To help offset the impact of tuition increases on financially needy students, the Legislature maintained the tuition 15 percent set-aside requirement and added a new 20 percent set-aside for designated tuition revenues above the old cap of $46 per semester credit hour with 5 percent allocated for the B-On-time Loan and 15 percent for other aid. Although universities have raised tuition to varying levels under deregulation, the percentage set-aside has also increased the amount of funds available for financially needy students attending these institutions; the higher the tuition level, the more funds become available for financial aid.

In addition, the Legislature continued its commitment to TEXAS Grants by increasing its funding despite the shortfall and other budget demands. For the 2004-2005 biennium, the THECB allocated $323.2 million to colleges and universities for TEXAS Grants, an increase of 20.7 percent from the 2002-2003 biennium -- and 62 percent of the estimated cost needed to offer grants to all eligible candidates.[2]

Due to budget limitations from the shortfall and an increase in eligible students, the THECB determined that students already receiving TEXAS Grants would continue to be served until graduation. The 82,153 students that were denied the grants during the 2004-2005 biennium represent entering freshmen who were eligible for the award. From 2000 through 2005, an estimated 270,700 students received assistance through the program at an average cost of $2,389 per student (Exhibit 2).[3]

The Texas Grant II program also received $4.8 million for each year of the 2004-2005 biennium, despite the shortfall. Although a small program in comparison to TEXAS Grants, it further underscores the state's growing commitment to increasing state financial aid for students.

The 78th Legislature also created another new financial aid program, the B-On-time Loan Program (BOT). The BOT program provides eligible students with zero-interest loans that are forgiven if they graduate on time and with a minimum grade point average set in state law (as with the TEXAS Grant, 2.5 on a four-point scale). Initial funding for the program came from the refinancing of bonds sold to support the THECB's Hinson-Hazlewood Student Loan Program and from the provision in H. B. 3015 (78th R) that dedicates 5 percent of any designated tuition at public universities above $46 per SCH to BOT.

The original intent of the BOT program was to assist middle-income families who do not qualify for need-based grants. Because funding for both the BOT program and the TEXAS Grants was limited, however, the THECB instructed colleges and universities to give preference for BOT awards to students who are eligible for TEXAS Grants but did not receive them due to the shortfall.

Exhibits 4 and 5 show projected demand for the BOT and TEXAS Grants awards, as estimated by the THECB for fiscal 2006 through 2011.

EXHIBIT 4
B-On-Time Student Loan Program
Projected Costs for Serving All Eligible Students
Fiscal 2006 to 2011

Fiscal Year Number of Students Cost per Student Amount
2006 70,878 $3,137 $222,355,629
2007 81,578 $3,414 $278,492,807
2008 88,501 $3,707 $328,077,431
2009 97,056 $3,824 $371,182,025
2010 102,193 $3,971 $405,858,973
2011 108,993 $4,160 $453,454,720
Source: Texas Higher Education Coordinating Board, Student Services Division.

EXHIBIT 5
TEXAS Grant Program
Projected Cost for Serving All Eligible Students
Fiscal 2006 to 2011

Fiscal Year Number of Students Cost per Student Amount
2006 77,748 $3,030 $235,596,135
2007 91,202 $3,167 $288,798,401
2008 102,564 $3,266 $335,002,002
2009 116,682 $3,458 $403,467,884
2010 132,142 $3,650 $482,258,919
2011 141,520 $3,830 $542,055,430
Source: Texas Higher Education Coordinating Board, Student Services Division.

Aid Amounts and "Unmet Need"

According to the THECB's annual report, Financial Aid for College Students in Texas Fiscal Year 2003, nearly 500,000 students in Texas higher education institutions received almost $3.5 billion in need-based assistance during the 2002-03 academic year (Exhibit 6 and Appendix 1). These students, however, represented only two-thirds of those who applied for assistance.

pie chart shows half of need-based aid comes from exemptions

Although the federal government is still the largest source of financial aid in Texas, most commonly in the form of student loans, Texas provides a greater-than-average percentage of state-funded financial aid. In 2003, federal assistance accounted for 76.8 percent or nearly $2.7 billion of aid awarded in Texas; state programs accounted for 11.3 percent or $392 million; and other sources accounted for 11.8 percent or $410 million. By contrast, federal aid programs accounted for an average of 68.1 percent of all need-based aid awarded to students nationally; state aid accounted for 6 percent; and other sources accounted for 25.9 percent.[4] "Other sources" include sources such as institutional grants and private loans.

The contrast between Texas and the national average in the "Other Sources" category may mean that higher education institutions in other states offer more financial aid of their own (such as endowment-funded grants and scholarships) or simply that students in other states rely more heavily on private loans than those in Texas.

Of Texas students who received aid, community college students received an average of $2,956 in loans while public university students accounted for an average of $6,439 in loans in fiscal year 2003. Only 43 percent of the aid awarded to students came in the form of exemptions, grants and scholarships, while about 56 percent represented loans (and the remainder other aid such as work-study programs).[5] The shortage of financial aid and the heavy dependence on loans inevitably discourages enrollment in and completion of college.

Most state and federal need-based financial aid is distributed using a formula prescribed by the federal government. This formula is based on an analysis of family financial status that determines the amount of assistance, if any, students and their families must contribute to the cost of a college education. This amount is called the expected family contribution.

The family's expected contribution is then subtracted from the cost of attending college as estimated by the U.S. Department of Education. This cost estimate includes tuition and fees, books and supplies, room and board, transportation and other expenses. The remaining amount, if any, represents the student's need. If aid is insufficient to meet the student's need -- as is almost always the case -- the portion of the expense that cannot be covered is called "unmet need."

Despite the availability of nearly $3.5 billion in student aid in Texas, the state's students still face substantial unmet needs. In fiscal 2003, students attending Texas' public universities had an average of $3,913 in unmet need; public community college students averaged $4,972; students at public state colleges had $4,007; and public technical college students had $6,592.[6] Students must earn additional funds while in school or their parents must dig deeper into their wallets to cover this remaining share.

The type of aid students receive varies by institution, with loans contributing a greater share of aid at public universities and grants a larger share at community colleges. Students at community colleges tend to be reluctant to borrow for their education; according to financial aid professionals, they are more likely to be first-generation college students and uncomfortable with taking on debt to finance their education. This reluctance to borrow, along with lower amounts of financial aid available to community college students, has contributed to an average unmet need of 56.6 percent of the cost of attendance at community colleges.[7] Often this forces community college students to attend fewer classes at a time, lengthening the time needed to earn a degree.

Aid Program Characteristics

As noted above, Texas financial aid programs have developed over time into a myriad of exemptions, waivers, grants, scholarships and tuition rebate, savings, loan and loan forgiveness and repayment assistance programs (programs that forgive loans or assist in repaying them if certain conditions are met, such as the recipient's entry into a profession in demand like nursing or teaching). The state offers 29 exemptions, 30 waivers, 14 grants or scholarships, nine loan forgiveness or loan repayment programs, three traditional loan programs, one work-study program, one rebate and one savings plan. Four other programs are being phased out and are not open to new students. (See Appendix 2 for a detailed description of state financial aid programs, legal basis, eligibility requirements, coverage and awards.)

Texas' 59 exemption and waiver programs focus primarily on specific groups of individuals the state would like to assist, such as the children of deceased officers and former foster children, or focus on achieving various work force or economic goals, such as assisting teacher aides to become teachers.

Texas' 14 grant and scholarship programs generally reward scholarship or provide need-based aid to eligible students. The state's programs for savings, loan forgiveness or repayment assistance, work-study and tuition rebates generally reward efficient behavior, such as saving for college, working or graduating from college on time, or further state goals, such as maintaining the state's teaching or nursing work force.

When created, the projected costs of state financial aid programs are based on fundamental assumptions about available resources. Over time, however, the resource picture inevitably changes, and with the advent of college control over tuition rates, predicting future costs has become more difficult. In addition, tuition exemptions that once cost the state little represent a substantially greater burden when used at universities that now depend heavily on student tuition revenues.

Eligibility and Coverage

Varying eligibility and maintenance requirements also add to the confusion for students and administrators. Some programs require the applicant to demonstrate financial need or file for federal financial aid, while others do not. Some have age or residency requirements, while others do not. Some require a minimum grade-point average to maintain eligibility, while others do not.

The specific costs covered by aid programs also vary significantly, and such differences can make it difficult for parents and students to weigh financial aid possibilities and assemble a cohesive plan.

Some programs require individuals to use their federal financial aid first for tuition and other expenses, while others do not. Some benefits have time or credit limits, but others do not. Some cover tuition, but not fees. Some cover one fee but not another. Few cover textbook costs, which sometimes exceed fee costs. Some provide funds that can be used to cover any educational expense, while others provide amounts that can only be used for tuition, and fees or various other combinations.

Financial aid offices must attempt to deal with many questions about the state's programs and weigh their features to ensure fairness in financial aid award packages. When funds become scarce, maintaining fairness becomes more difficult; if 50 individuals are eligible by state law, but funds are only available for 15, the institution must find some way to distribute limited funds as equitably as possible. This task is a burden on institutions and leaves many students and families wondering why some students are "more eligible" than others.

The unfulfilled promises that underfunded aid programs represent may discourage students from pursuing higher education. Combined with regular media reports about rapidly rising college costs, such disappointments make it more difficult to recruit college students from lower- and middle-income groups.

Vision Needed

Texas lacks a clear vision and measurable goals or objectives to guide policymakers in the development, review and adjustment of financial aid programs. In the absence of clear objectives, separate programs with a bewildering variety of eligibility requirements and coverage have proliferated. These differences have contributed to the administrative burden placed on financial aid offices, as well as the frustration of parents and students.

In choosing how to assist students, Texas policymakers are making decisions that will affect the state for the next fifty years; yet these decisions are being made in the absence of a clearly stated vision, goals and strategies for achieving the best financial aid outcomes for the state and its citizens.

THECB outlined a vision, goals and strategies for increasing enrollment, participation, research and centers of excellence in higher education in a 2000 report entitled Closing the Gaps; yet the state has not made a similar effort in financial aid. Although other recent reports identify ways to improve some current programs, the reports do not provide the kind of strategic vision developed in Closing the Gaps.

Closing the Gaps establishes a state goal of enrolling an additional 500,000 students in Texas colleges and universities from 2000 to 2015, while greatly increasing minority enrollment. This effort is necessary because the percentage of college-aged Texans enrolled in higher education is declining, and because minorities are expected to comprise the majority of Texans by 2008. Texas must have an educated population and work force to ensure its economic future.[8] Achieving the goals established in Closing the Gaps will depend upon an efficient and effective financial aid structure; the current structure simply cannot achieve these goals.

Support for Students at Two-Year Institutions

Students at two-year institutions are more likely to be ineligible for TEXAS Grants and BOT loans because those who do not enter a four-year institution within 16 months of high school graduation lose their eligibility or funding priority. TEXAS Grant II is too limited to serve many students; in 2004, the program received $4.8 million and served about 4,500 financially needy students at an average cost per student of about $1,068.[9]

A recent THECB report, Preparing for the Emerging Texas, proposed that the TEXAS Grant and BOT Loan programs be linked, providing a TEXAS Grant to students for the first two years of study and a BOT Loan for the last two years.[10] Given limited funding, this would allow the state to stretch its aid dollars while ensuring that deserving students receive financial assistance.

Incentives for students to enter and complete a two-year degree program can assist the state as it works to meet its Closing the Gaps goals. Of the 500,000 new students the plan aims to enroll from 2000 through 2015, for instance, 60 percent will attend community colleges.[11] Enrollment of minority students, furthermore, is higher at two-year institutions than at four-year universities. This could provide a pool of new university students if the state provides programs that facilitate transfers from two-year to four-year institutions.

In a 2004 Closing the Gaps progress report, however, THECB noted that the percentage of high school graduates entering college had not increased by 2003, and that while a total enrollment goal for 2005 had already been exceeded, Hispanic enrollment continued to lag behind. And these disappointments came despite the additional financial aid provided by the TEXAS Grant program and other aid efforts.[12]

Access to public two-year institutions for recent Texas high school graduates is the goal of the Comptroller's TexasNextStep proposal. By guaranteeing tuition, required fees and books, TexasNextStep would encourage minority students to enter college as first-generation college-goers and would help economically disadvantaged students who must work part- or full-time while attending college.

By providing greater opportunity to attend college, TexasNextStep would increase the number of high school graduates who enroll, an outcome that other financial aid programs have been unable to achieve. Tuition, fees and books at two-year institutions are estimated to cost about $2,650 in fiscal 2007. TexasNextStep could help tens of thousands of Texas graduates prepare for high-paying occupations through the community and technical college system.

Because TexasNextStep is used only after federal grant aid is exhausted, it is a more efficient use of state funds than other programs that do not have this requirement. And, because TexasNextStep is limited to two-year institutions, which have lower costs than four-year institutions, it represents the most efficient and effective financial aid program for Texas' recent high school graduates.[13]

Endnotes

[1]California Higher Education Policy Center, "Characteristics of the Texas Higher Education System," http://www.capolicycenter.org/texas/texas3.html#tuition. (Last visited December 1, 2004.)

[2]Texas Higher Education Coordinating Board, Student Services Division, "TEXAS Grant Program: "Students Served and Grants Awarded, Fiscal 2000 to 2005."

[3]Texas Higher Education Coordinating Board, Student Services Division, "TEXAS Grant Program and B-On-time Projections as of January 2004."

[4]Texas Higher Education Coordinating Board, Financial Aid for College Students in Texas Fiscal Year 2003 (Austin, Texas, July 2004), pp. 7-8.

[5]Texas Higher Education Coordinating Board, Financial Aid for College Students in Texas Fiscal Year 2003, pp. v and 8.

[6]Texas Higher Education Coordinating Board, Financial Aid for College Students in Texas Fiscal Year 2003, p. 13.

[7]Texas Higher Education Coordinating Board, Financial Aid for College Students in Texas Fiscal Year 2003, p. 17.

[8]Texas Higher Education Coordinating Board, Closing the Gaps: The Texas Higher Education Plan (Austin, Texas, 2000), pp. 1-2.

[9]Texas Higher Education Coordinating Board, "2004 Bentson Report" (Excel spreadsheet).

[10]Texas Higher Education Coordinating Board, Preparing for the Emerging Texas: Report on the Effectiveness and Efficiency of State Financial Aid Programs to Help Close the Gaps in Participation and Success (Austin, Texas, August 2004), p. 23.

[11]Texas Higher Education Coordinating Board, Closing the Gaps: The Texas Higher Education Plan, p. 8.

[12]Texas Higher Education Coordinating Board, Closing the Gaps by 2015: 2004 Progress Report (Austin, Texas, July 2004), pp. 4-5.

[13]Texas Comptroller of Public Accounts, "TexasNextStep: The Comptroller's Proposal for the 2003 Legislature," Austin, Texas, May 7, 2002, http://www.window.state.tx.us/comptrol/texasnextstep/. (Last visited December 6, 2004.)