The federal government sets aside a proportion of its annual budget for direct transfer to community colleges across the country. The money is used for various purposes such as paying teachers' salaries, building maintenance, and construction of new buildings. In 2002, the Federal budget for community colleges was $4.5 billion and in 2009 it was $12 billion.
States are also responsible for providing funding to community colleges. Some of the state's budget is generated internally from tax collection and the rest comes from allocation by the federal budget. States have full discretion on how to distribute federal funding and so they determine the amount to give to each college in that state. The state considers a lot of factors such as location, student population and previous performance in determining the amount. In most cases, the budget from the state is the biggest source of funding for community colleges with the federal budget acting as a secondary source of funding.
The federal government indirectly funds community colleges by granting scholarships to qualified students. To qualify for the scholarships, a student must pass an aptitude test. Grants and scholarships also have "return service" clauses where the student is barred from, say, working abroad for a certain duration after graduating so that the student can give back to the government through taxes or working for the government.
The most common form of federal support for community colleges is given through student loans. The Higher Education Opportunity Act which governs the releasing of loans was first enacted in 1965. The latest version of the Act, which was passed in 2008, specifies the grant of loans to minorities, physically challenged students, and many other underrepresented groups. These federally subsidized loans or guaranteed loan programs totaled $3 billion in 2007. These loans are paid back when the student starts working.