For years, middle-income families have been finding it increasingly difficult to afford the tuition, fees, and other expenses associated with a college education. That challenge has surely escalated as a result of the financial crisis, which has caused 529 savings plans —along with many other investments —to post sharp declines.
At Grinnell College, a quarter of our students come from middle-income families. To better understand their financial circumstances, we recently performed a simple analysis. The results confirmed what we have long believed: The Free Application for Federal Student Aid, the instrument that guides virtually all financial-aid decisions in America, has a fundamental problem.
In a nutshell, the formula that the Fafsa uses unrealistically overstates what many middle-income families can be expected to pay toward a child's college education. Colleges and universities universally employ that formula to determine financial need. It is, in fact, required for students to get access to federal grants, loans, and work-study programs. As a result, its flawed calculations cascade through the entire higher-education system and severely distort virtually all financial-aid determinations.
There is no universal definition of middle-income families, as one's geographic location greatly affects the cost of living and compensation norms. For our analysis, however, we defined middle income as a range from $60,000 to $120,000 in total income for a family of four. Within that range, we created hypothetical families of four at income levels of $60,000, $90,000, and $120,000. We assumed that each of those families had one college-age student, $3,000 in untaxed income, and $21,000 in combined savings and assets.
We then entered that information into the Fafsa formulas for 1999-2000 and 2009-10. Based on a family's characteristics, the Fafsa formula determined an "income-protection allowance" to cover the family's housing, food, transportation, medical, and other expenses. It then produced the "expected family contribution," the amount the family is expected to contribute toward college tuition and fees.
Next, we looked at the change in the Consumer Price Index that occurred between 1999 and 2009. We found that the index, a measure of inflation calculated by the U.S. Department of Labor, rose 27 percent over the past decade. In the final stage of our analysis, we compared the rise in the index with the expected family contributions for our three families to determine how well the Fafsa formula is aligned with increases in the cost of living.
Our findings indicate that for families at the bottom of the middle-income spectrum, the expected family contribution dictated by the Fafsa formula decreased substantially over the 10-year period, dropping 34.3 percent, from $8,461 to $5,557.
However, the expected family contributions at the midpoint and upper end of the middle-income range were far out of alignment with the 27-percent rise in the Consumer Price Index over the past decade. For families with incomes of $90,000, the estimated contribution dropped only 16.7 percent, from $18,145 to $15,116; for families with incomes of $120,000, it fell just 9.9 percent, from $29,041 to $26,163.
Considering that the U.S. Department of Education, through federal mandate, updates the Fafsa formula annually, one might even wonder if government officials are consciously adjusting the formula in a manner that limits eligibility for federal aid to a level that can be met by available government funds. In effect, the amount of government support may be determining need, rather than need determining the amount of government support.
Several elite universities, including Harvard, Princeton and Stanford, have done an end-run around the Fafsa by creating their own formulas —typically limiting tuition for middle-income families to a fixed percentage of their adjusted gross income. While laudable, that go-it-alone approach risks injecting more confusion and anxiety into a process that already needs to be simpler and clearer. Furthermore, the vast majority of higher-education institutions rely on the Fafsa as the starting point for establishing demonstrated need and then assist students in getting access to federal Pell Grants, work-study programs and Stafford Loans. Rather than devolving into thousands of different approaches to need assessment, the Fafsa must be fixed.
The results of our analysis point to an obvious solution: The Fafsa formula should be adjusted annually at a rate that directly reflects the cost of living. Equally important, that adjustment should be applied in a manner that reflects the needs and realities of families across the entire middle-income spectrum.
How would bringing the formula in line with the economy each year influence the complex issues that surround college affordability? Doing so would, for the first time, bring openness and realism to the process of determining need. It would put new pressure on policy makers, private foundations, and academic institutions to provide more aid and to moderate tuition increases.
Some colleges and universities would have to increase their financial-aid budgets, while others might have to stop claiming that they meet full need. Most important, a more-accurate reflection of need through a revised formula would build broader confidence in the fairness of our financial-aid system.
America is a nation committed to providing opportunities for higher education to all qualified young people. Yet we are at risk of thwarting the educational aspirations of a huge portion of them: the daughters and sons of middle-income families, whose parents are letter carriers, teachers, factory workers, and government employees. At present, the Fafsa is not only doing them a disservice; it is failing them.
We should fix the Fafsa formula, and following that, rethink our financial-aid system so that it provides some long-overdue relief for all families eligible to receive need-based financial aid. Fixing the Fafsa won't solve all the financial obstacles that stand in the way of educational aspirations. But it is a start