Is there an Income Cutoff on Eligibility for Financial Aid?

Mark KantrowitzBy Mark KantrowitzBy Savingforcollege.com

Parents sometimes wonder whether it is worthwhile to file the Free Application for Federal Student Aid (FAFSA), especially if they think their income is too high to qualify for need-based financial aid. But, there are no simple income cutoffs on financial aid eligibility, in part due to the complexity of financial aid formulas.

Unless the parents earn more than $350,000 a year, have only one child and that child will enroll at an in-state public college, they should still file the FAFSA, as there is a good chance they may qualify for federal, state or institutional grants. They may also qualify for low-cost federal loans and federal work-study.


Intuition is Inaccurate

Parents have a tendency to underestimate eligibility for need-based aid and overestimate eligibility for merit-based aid.

Eligibility for need-based aid depends on more than just income. Important factors include the cost of the college, the number of children enrolled in college at the same time, family size and special circumstances that affect the family’s ability to pay for college. Student income and assets are assessed more heavily than parent income and assets. Financial aid formulas are also more focused on cash flow than on income.

Academic performance is not enough to distinguish a student from his or her peers, especially at the most selective colleges. There are more than 80,000 valedictorians and salutatorians each year. Grade inflation and weighted GPAs contribute to more high school students having a 4.0 (or better!) GPA on a 4.0 scale. Thousands of students get a perfect score on the SAT and ACT each year. Tens of thousands of students get at least a 1500 on the SAT and a 33 or better on the ACT.


Apply for Financial Aid Every Year

It is important to apply for financial aid every year, even if you did not get anything other than loans last year. There are subtle factors that can affect eligibility for need-based financial aid. These factors can change from one year to the next. Congress tinkers with the financial aid formulas periodically. If you don’t file the FAFSA every year, you might miss out on financial aid.

Financial aid is based on financial need, which is the difference between the cost of attendance (COA) and the expected family contribution (EFC). Financial need increases when the COA increases and when the EFC decreases.

Thus, a student who enrolls at a higher-cost college might qualify for some financial aid, while the same student might qualify for no financial aid at a low-cost college, such as an in-state public college.

The parent contribution part of the EFC is divided by the number of children enrolled in college at the same time. When the number of children in college increases from one to two, it is almost like dividing the parent income in half, which can qualify both children for much more financial aid than either could qualify for on their own.

For example, when the oldest child enrolls in college for the first time, that child might not qualify for much financial aid. However, when the oldest and second oldest children both enroll in college at the same time, the number of children in college increases from one to two, potentially qualifying them for more financial aid.

Thus, eligibility for need-based financial aid depends on more than just income.


Eligibility for Grants

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.

As noted above, a family with two or more children in college may qualify for a Federal Pell Grant because the parent contribution is divided by the number of children in college. Also, the family may have special circumstances that affect their ability to pay for college.

They may also qualify for other forms of financial aid, such as institutional grants. For example, some students whose parents earn $100,000 or more will qualify for grants from their college. For example, almost a third (32.9%) of students whose parents earn six-figure salaries received institutional grants. A fifth (21.4%) received merit-only grants and a tenth (11.6%) received need-based grants.

Some colleges require students who are applying only for merit aid to file the FAFSA, just to make sure they get any need-based aid for which they are eligible. Colleges often use need-based aid to offset part of a merit-based grant.

If there is any question as to whether a student might qualify for financial aid, use the college’s net price calculator to get an estimate as to how much gift aid the student might get.


How Many Students Pay Full Sticker Price?

Based on 4-year college data from the Integrated Postsecondary Education Data System (IPEDS), a quarter of freshmen and a third of all undergraduate students pay full sticker price. Slightly less than half got no institutional grants.

At Ivy League colleges, half of freshmen and all undergraduate students pay full sticker price, and slightly more than half get no institutional grants. Generally, the percentage of undergraduate students paying full sticker price increases with greater selectivity. But, among the most selective colleges, fewer undergraduate students pay full sticker price at MIT, Stanford and Princeton.

Counter-intuitively, undergraduate students at 4-year public colleges and lower-cost colleges are more likely to pay full price than students at private colleges. Two-fifths of undergraduate students at public colleges pay full sticker price, compared with a quarter of students at private colleges.

Overall, a third of students at 4-year colleges pay full price, compared with almost half of students at community colleges.

The lower cost at public colleges causes fewer students to qualify for financial aid, especially among high-income students.

Family income affects where the students enroll.

  • Students from high-income families enroll in colleges where three-fifths of undergraduate students pay full price
  • Students from low-income families enroll in colleges where a third of undergraduate students pay full price

The same is true even when the data is limited to Bachelor’s degree programs, where the proportions are half and a quarter, respectively.


The FAFSA is a Prerequisite for Federal Loans

Even if a student will not qualify for grants, filing the FAFSA makes them eligible for low-cost federal loans, which are usually less expensive than private student loans. Even wealthy students will qualify for the unsubsidized Federal Direct Stafford Loan and the Federal Parent PLUS Loan. The Federal Stafford Loan is a good way for the student to have skin in the game, since they are unlikely to over-borrow with just the Federal Stafford Loan.

When Is It OK to Not File the FAFSA?

There are a handful of situations in which the family probably does not qualify for need-based financial aid:

  • Families who can afford to pay for college with pocket change
  • Families who are in the top one percent by income or wealth
  • Families who have donated a building or two to the college


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