Question

. Both the federal government and individual colleges typically use needs analysis, which considers available income and assets, to determine eligibility for financial aid. Consider a simplified version of needs analysis in which grant aid is awarded in the following manner: - Line A: Total adjusted gross income as reported on income tax form - Line B: Supplement from assets, equal to 0.2 × assets per year - Expected Family Contribution (EFC):0.35 × [Line A + Line B] - Aid Rule: Grant = max(0,$15,000 − EFC) a. What are the maximum levels of income (assuming zero assets) and assets (assuming zero income) at which an individual could be expected to receive financial aid?

b. Under what circumstances does this aid formula create a disincentive for parents to save?

c. Is this aid policy horizontally equitable? How about vertically equitable? What are the potential efficiency consequences of this policy?

Answer 1

a) There is no explicit income cutoff on eligibility for the Federal Pell Grant. Eligibility for the Federal Pell Grant is based on the expected family contribution (EFC), not income.

Based on data from the National Postsecondary Student Aid Study (NPSAS), more than 94% of Federal Pell Grant recipients in 2015-16 had an adjusted gross income (AGI) under $60,000 and 99.9% had an AGI under $100,000.

The odds of receiving a Federal Pell Grant decrease with increasing income, as shown in this chart.

b)From a pure logic standpoint, this makes sense: if a family has savings with which it can pay for college tuition and related expenses, then it should. But this logic has a clear flaw -- saving doesn't get there by accident; it is a behavior that you generally have some control over. Unless a family has very high income, it can always spend its income on something else instead of saving if it chooses. And those very high-income families wouldn't qualify for aid anyway.

So by considering savings, the government and universities discriminate against families who make the choice to save. They provide greater aid to a student whose parents have not accumulated as much money over the years.

c) Need based of Financial aid is often defended both on grounds of Equity amd Efficiency: Equity because it provides equality of opportunity, and efficiency because it encourages the formation of Productive human capital.

While the Financial aid system may contribute to vertical equity, Since the poor get more aid than the rich, its horizontal equities are substantial.

The potential implications for college affordability raised by this issue have led numerous researchers to try to identify whether postsecondary institutions respond to government financial aid policies in their pricing. Of the many studies that have tried to identify whether colleges react to federal financial aid, most find little to no response. While several studies do find a college price response, their overall results are mixed and often contradictory.

None of the numerous studies on the subject have found a “smoking gun” in terms of college pricing behavior.