Reforming Federal Student Aid, Part 3

In continuing my blog series on reforms needed in our federal student-aid program, I want to now focus on the dreaded EFC — Estimated Family Contribution. In financial-aid terms, the EFC is the amount of money that the U.S. Department of Education determines, based on data collected through the Free Application for Federal Student Aid (FAFSA), that a family can contribute toward the student’s education. The formula utilized to calculate the EFC is developed by Congress (not student-aid experts) and is generally included each time the Higher Education Act is reauthorized. I have been on both the sending and receiving ends of this number, and I can tell you that the current formula for determining EFC has everything to do with political realities and nothing to do with the financial realities under which students and families live.

The EFC formula is not based on data collected about household income or expenditures, but, instead, on the amount of money that Congress has available for the Pell Grant program (and for those of you who like to say that we should fund student aid rather than war, while you might be right, please understand that the federal appropriations process pits the Pell grant program not against the Department of Defense, but instead against the National Institutes of Health, in the annual battle for funding). In practical terms, each time Congress reauthorizes the Higher Education Act, staff from the Department of Education, congressional committees, and the Office of Management and Budget suggest a series of tweaks to the formula, which are then evaluated by economists who determine how much each tweak will cost once applied to the millions of students who participate in the student aid programs. Only those tweaks that fit within the larger budget plan can move forward. It is a maddening game of manipulating the formula to get the answer you want, rather than correcting the formula and getting the answer that is correct.

There are significant problems with the EFC. For one thing, it does not take into account regional differences in cost of living. We all know that the living standard for an $80,000 per year, two-income family in California is very different than that for a family living in Kansas, yet for purposes of financial aid, no distinction is made between the two families (local tax rates are considered, but local cost of living is not). Beyond that, the way that student savings and parent savings are treated in the calculation are quite different. Even the way that parent assets are treated is quite different if the parent is near or in retirement versus if the parent is younger. Also, the formula treats assets in the bank differently than it does assets held in a home. In other words, parents who buy McMansions are advantaged over those who live in more modest homes so that they can save for college. Of course, the formula was written this way in order to protect farming families who frequently hold tremendous assets in land and equipment despite modest annual incomes, but there is probably a way to help agricultural families without advantaging those who think that life begins with 3,000 square feet.

Although there have been efforts to improve this, the treatment of 529 savings plans can be quite different depending upon what kind of plan you have, and in whose name it is held. And students who are hard working, perhaps working full time in the summer or more than 10 hours a week during the school year, might find that they lose their eligibility for the Pell Grant, just by doing the right thing. It is impossible, however, for a student to know in advance how many hours he or she can work before forfeiting Pell eligibility. Despite the mythology made popular by some, many of these students are not working to pay for fancy Spring Break trips or designer clothes or mocha-skim-lattes, but instead to pay the rent, and cover the costs of such luxuries as food, health insurance, and transportation. Some students really do help support their parents and siblings while they are in college.

The EFC calculation penalizes families who space children apart by four or more years because it advantages those whose children are enrolled in college concurrently rather than sequentially. Let’s say that a family has one child in college, and the EFC for that family is determined to be $20,000. Unless that child attends an expensive private school, he or she is unlikely to demonstrate financial need, which is determined by subtracting the EFC from the COA or Cost of Attendance (which is determined by the college or university attended and includes such things as tuition, fees, books and supplies, transportation, estimated living expenses, the cost of a computer, and even day care).

However, once that same family sends two kids to college, the EFC is divided between the two children, and each student now has a relative EFC of $10,000. At that level, each student is more likely to exhibit some degree of “need” when comparing the EFC with the COA, which could mean the difference between whether the student qualifies for a subsidized rather than an unsubsidized Stafford loan. For the most part, families with EFC’s above zero are unlikely to qualify for the full Pell grant, but the difference between subsidized and unsubsidized loans is quite substantial in terms of interest rates, repayment terms, and total cost of the loan. A student could pay many tens of thousands of dollars more over the life of a student loan if he qualifies only for unsubsidized loans. Why should one student pay more than another just because she is four years older than her sibling rather than two?

Once upon a time, when it was reasonable for families to contemplate the pay-as-you-go model for higher education, it may have been reasonable to determine the EFC based on the number of students currently enrolled in college. But today’s families are told by the government that they need to be saving for college practically from the moment of conception. Beyond that, most student financial-aid packages include a significant parent PLUS loan. This means that even if a family has only one child enrolled in college, they are likely to be contributing money to a savings plan for a younger sibling while making payments on a parent PLUS loan for an older child, none of which is taken into account when the EFC is calculated. I believe that the EFC should recognize that paying for college takes a lifetime — not four years — and that EFC should be divided by the number of siblings in a family, regardless of how many are currently enrolled in college. At a minimum, parent contributions to college savings accounts and payments being made on federal PLUS loans should be considered in the formula by which EFC is determined.

The formula does not account for K-12 education expenses a family might be facing while also putting another child through college. I know, I know — many of you don’t support school choice at the K-12 level and will say that since parents have the option to use free public schools, we shouldn’t give them a break if they elect to use a private school. Those of you who say that probably don’t live in Baltimore, D.C., or Detroit. But regardless, why do we look so unfavorably upon school choice at the K-12 level, yet advance policies that favor choice at the college level? If we use the K-12 model in higher ed, then need would be based on the cost of attendance at a local public college, not the institution of the student’s choice. I’m not advocating for that model, but fair is fair, and in reality, choice at the K-12 level may actually be more important than at the college level. We all know that learning foundations are built during the K-12 years, not during college, and most data show that variability in educational quality among K-12 schools is far greater than it is among public versus private colleges. Either you are for school choice or you are not, but to have a policy that disadvantages choice at the K-12 level but advantages it at the higher education level makes no sense to me.

One of the biggest problems with the EFC is that it includes a built-in marriage penalty. In the case of divorce, only the custodial parent’s income is considered in determining the EFC. So, if a student has a wealthy non-custodial father, but the custodial-parent mother works only part time, the student is likely to qualify for significant student aid, including a Pell grant, since the EFC will be based upon the mother’s income only (especially if child-support ends when the child turns 18 years of age). However, if the mother and father are married, the EFC would consider both parents’ incomes (married parents don’t get to stop paying child support), and the student is unlikely to qualify for student aid.

At many private institutions, it is not uncommon to see students who qualify for a Pell Grant based on the so-called “federal methodology” (the FAFSA and EFC), but do not qualify for institutional aid based on a secondary formula that many private schools utilize, which does consider both parents’ incomes (as well as K-12 tuition payments and other household assets). I know more than one couple who “divorced” in order for the student to qualify for aid, only to remarry once the student finished college. The formula was written this way to protect students who have deadbeat noncustodial parents, but wouldn’t it be better to go after the deadbeat parent than to simply excuse them from their parental responsibilities? Financial-aid officers are allowed to exercise professional judgment and manipulate the formula for students who are in unusual circumstances or who have particular hardships, so why should we have federal policies that provide incentives for divorce and that allow noncustodial parents to ignore their responsibilities in a way that married parents cannot?

It is true that if Congress changes the formula to reflect reality for students and families, there might be more students who qualify for Pell Grants than there is money to fund them. Also, there will be many more students who qualify for subsidized versus unsubsidized loans (which would be a problem since Congress tends to focus benefits on subsidized programs since a substantially smaller number of students qualify for that program, thus making the added benefit less costly for the federal government). However, I believe we owe it to families to provide them with an honest and accurate determination of how much they realistically can contribute each year toward college tuition.

Even if the government can’t meet a student’s full need, once the student demonstrates need, he or she may be eligible for all kinds of other grants and scholarships, many of which are available only to students who show need or are Pell-eligible. Of course, this change would hurt all of those “no loan” schools because the no-loan promise is generally made only with regard to the gap between EFC and COA. It is surprising how many families at no-loan institutions still take loans just to meet the EFC, so if EFC was appropriately lowered, those institutions would now be required by their own policies to provide increased institutional aid.

I think American students and families understand that the government can’t fully meet their need when it comes to paying for college, but it is time that we start being honest with them about how much they realistically can contribute to their child’s education, and how much they can’t.

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