The new federal student aid formula punishes families with more than one child in college at a time.
As with the old law, the Education Department determines a family’s ability to pay, declares the expected parental contribution for the coming school year, and then tries to meet the family’s financial need. Under the new law, though, that expected contribution is multiplied by the number of kids you have in college that year.
If Uncle Sam thinks you can afford $20,000 in tuition while you have two kids in college, you are left on the hook for $40,000 per year — twice what you can afford.
How does anyone justify this change? Here’s the argument from the National Association of Student Financial Aid Administrators:
“From an equitability standpoint, we must consider that paying for college is not an annual expense. Families finance a postsecondary education by drawing on past earnings (savings), current earnings, and future earnings (loans).”
This sounds plausible on the surface, but it falls apart amid further inspection. I wrote my recent column on the matter and made this point:
“It’s a bit perverse to tell families to borrow to cover the added costs of this new formula because this very formula determines whether the student is eligible for subsidized student loans. Parents can instead take out PLUS loans, whose interest rate is currently set by the Education Department at 9.07%.
“It’s also a bit odd to tell parents they should have saved for college, considering the ability-to-pay formula also counts their savings against them.”
In my column, I compared the fictional Thompson family with twins to the Spaceys, who have two children spaced four years apart. They have identical incomes. I pointed out that the Thompsons would end up paying 25% more for college than the Spaceys because they would have to borrow (at high interest rates) to fund college, while the Spaceys wouldn’t.
In that example, I imagined the Thompson twins were the same age as the Spaceys’ oldest child. What about the opposite? What if the Thompson twins were the same age as the Spaceys’ younger child?
The Education Department’s argument goes like this: In Years 1-4, both families have $20,000 each year that they could spend for tuition, but only the Spaceys are spending it on tuition, which means the Thompsons can be saving that money. Come Year 5, the Thompsons should have $80,000 in savings, from which they can pay one twin’s four years of tuition, while their income each year will allow them to pay the other twin’s tuition.
This sounds sensible until you realize the Education Department is going to hold that savings against the Thompsons, and thus reduce their financial aid.
The FAFSA form expects parents to pay 5.64% of their cash savings each year into tuition. The Spaceys have no cash savings, while the Thompsons start off with $80,000 in savings.
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Consider Year 5, the first year the Thompson twins are in college: FAFSA expects the Thompsons to pay $20,000 from their income, plus $4,512 from their savings — for each kid. So in that freshman year for the Thompson twins and the Spaceys’ younger child, the Thompsons pay $49,024, while the Spaceys pay $20,000.
That’s not equity.
If the Thompsons somehow scrimp enough to stretch their $80,000 in savings over four years, they will have paid $182,560 by the end of Year 8, while the Spaceys will have paid $160,000. That 14% penalty for having twins is somehow called “equity.”