The impact of federal student financial aid policy on states and state responses to federal programs are assessed. After reviewing federal and state student aid during the past decade, the State Student Incentive Grant program (SSIG), is discussed, along with the effect of federal policy on SSIG. Perspectives of the state legislatures, governors, and state higher education executive officers concerning the impact of federal student financial aid programs are considered, based on survey results. Factors that affect state responses are examined, including the following: inflation, demographic trends, tuition, and reduced federal funding. In addition, a state budget policy perspective on financing higher education is discussed. The following state programs of student financial assistance are covered: scholarship programs, work study programs, loan programs, and tax incentive programs. In addition, state innovations, including interstate cooperation and loan collection efforts, are described. Lastly, federal-state interactions in student aid financing are outlined, and policy and program options from a state perspective are summarized. Appendices include a bibliography and data on student aid by state and on state demographic trends. (SW)