Should Wealthy Parents Cut Family Income Tenfold to Help their Children Qualify for Need-Based Student Financial Aid?
April 09, 2012
One can play what-if games with a college’s net price calculator to explore the impact of an income reduction on the net price. The net price calculator provides a ballpark estimate of the remaining costs after subtracting grants. All colleges have been required to provide a net price calculator on their web sites since October 29, 2011.
One could also use the College Navigator tool created by the National Center for Education Statistics (NCES) at the US Department of Education. This tool includes tables that show the average estimated net price for various income thresholds at each college.
In-state public colleges and the six dozen colleges with generous no loans financial aid policies tend to have the lowest net price for low-income students.
To affect eligibility for need-based financial aid during the freshman year of college, an income reduction would have to occur at least one calendar year prior to enrollment. For example, the FAFSA is based on the prior tax year’s income, so income would have to decrease the year before the FAFSA is filed to have an impact on that year’s expected family contribution. Since each FAFSA controls only one year of eligibility for financial aid, the income reduction would have to continue through the end of the tax year prior to the start of the student’s senior year in college.
The FAFSA and most financial aid application forms look only at the prior year’s income when evaluating eligibility for need-based financial aid during the subsequent award year. The main exception is when a family seeks a professional judgment review to appeal for more financial aid because of volatile income (i.e., the income during the prior tax year was unusually high, not reflective of ability to pay during the award year). If the family’s income varies considerably from one year to the next due to the nature of the wage-earner’s employment, some colleges will use an average of the last 3-5 year’s income to smooth out the volatility.
The EFC is also based on the family’s assets, not just income. The FAFSA will ignore all assets for a family that qualifies for the simplified needs test. (Likewise for a family that qualifies for auto-zero EFC.) Typically a family must have less than $50,000 in annual income and be eligible to file an IRS Form 1040A or 1040EZ to qualify for the simplified needs test. There are other criteria that can substitute for the income tax return requirement. Even if the family doesn’t qualify for the simplified needs test, money in qualified retirement plans and the net worth of the family’s principal place of residence are ignored, as is about $40,000 to $50,000 in other parent assets.
The CSS Financial Aid PROFILE form, however, is used by about 250 colleges to award their own financial aid funds. This form does not have a simplified needs test and may consider the net worth of the family home and excessive retirement assets. A family with low income but significant assets might not qualify for institutional grants at some of the more expensive colleges.