Expert Calls For Income-Only Financial Aid Decisions

By Staff

Mark Kantrowitz, publisher of several higher ed websites and renowned expert on financial aid, is calling for a drastic simplification of the formulas that the federal government uses to determine aid eligibility. In a New York Times piece, Kantrowitz said the current formula is far too complex, and even with such complexities, fails to account for the nuances of individual student and family situations. According to Kantrowitz, financial aid eligibility should be based, essentially on income.

Currently, the information — and the calculations behind it — that a school uses to determine your eligibility for financial aid depends largely on you, your parents and what type of institution the school is. Most schools rely, completely or in some part, on a federal model known as “expected family contribution” (EFC). The EFC is the criteria used by schools, whose students rely on federal financial aid to help pay for their educations, to determine aid eligibility. Such schools include practically all public institutions and many (if not most) private colleges. Regardless of the school, Yuma Community College or Yale, if you are receiving financial aid under a federal government program, the award will be based on your EFC.

The information used to calculate EFC comes from the Free Application for Federal Student Aid (FAFSA; yes, we’re wading into the realm of FGAAS: federal government acronym alphabet soup) which you will fill out every year you attend college and hope to get federal aid to do so.

Using the information from your FAFSA, your school’s financial aid officials (and their handy computers) will apply a formula known as the federal methodology (no acronym) to your individual situation. They look at your income and assets, as well as those of your parents to arrive at your EFC. As a general rule, the closer your EFC is to the estimated cost of attending the school you’ve chosen, the less eligible you are for federal financial aid — because the federal government and your college expect you to contribute an amount equal to your EFC to your education (thus, “expected family contribution”).

In his opinion piece, Kantrowitz notes that financial aid enables students to pursue a college education despite their limited financial resources. It can also serve other public policy goals like keeping the United States strong in science, math, engineering and other fields of strategic and economic importance. It’s not just an investment in the future of the individual student, but in the future of the nation.

We should simplify the need analysis formulas and stop including assets when determining eligibility.
The formulas for financial aid measure ability to pay by assessing a portion of the family’s discretionary income and assets. Discretionary income is the amount of taxable and untaxable income that remains after subtracting mandatory expenses like basic living costs. Unfortunately, student aid forms and formulas are so complicated that they practically serve as obstacles to success, and for some of the truly daunted, even barriers to access.

We should simplify these formulas. Most other means-tested government benefit programs like the Supplemental Nutrition Assistance Program (S.N.A.P.) and Temporary Assistance for Needy Families (T.A.N.F.) base eligibility on a comparison of income with a percentage of the poverty line. Even the income-based repayment plan measures ability to repay student loan debt after graduation by measuring current discretionary income, which is defined as the amount by which income exceeds 150 percent of the poverty line. Why not use a similar formula for determining tuition owed?

Switching to an exclusive income-based formula would allow financial aid application forms to fit on the back of a postcard. It might even allow families to apply for financial aid before they apply to colleges by checking a box on federal income tax returns two years before enrollment, allowing college affordability to influence college choice.

When assets are considered in these formulas, families can get discouraged about saving and making plans for the future. Assets currently do not contribute much information when evaluating ability to pay. Most wealthy families would still be denied the federal Pell grant based on income alone if their assets were disregarded. The family home, retirement plans and small family businesses are not reported as assets on many financial aid application forms. We could go further in this direction. Assets should be omitted entirely.