The federal government funds higher education primarily through student-based financial aid (i.e. vouchers), in contrast to K-12 education funding, which is mostly institution-based (i.e. much like aid to local school districts).
Title IV of the Higher Education Act of 1965 (HEA) established the first federal grant and loan programs. When the HEA was first passed, its emphasis was on expanding college access by providing grant aid to low-income students who otherwise would not pursue post-secondary education. As college costs have increased over time, the federal government’s investment in higher education has shifted to also support heightened college affordability by providing relatively low-interest student loans. Today, approximately 62 percent of federal student aid funding is in the form of government guaranteed and subsidized student loans and about 15 percent is in the form of grants. Tax benefits make up about 23 percent of total federal aid.Federal student aid consists of loans, grants, and tax benefits. Loans include Direct and Perkins Loan programs. Grants include Pell Grants, Supplemental Educational Opportunity Grants (SEOG), Iraq and Afghanistan Service Grants, and TEACH Grants. Tax benefits include the exclusion of scholarship income; Lifetime Learning and American Opportunity tax credits; deductions for student loan interest and higher education expenses, 529 plans, parental personal exemption for students aged 19 and over, and exclusion of employer-provided educational assistance.