U.S. Markets closed

Changes to a crucial financial aid formula may hurt middle-income families

One of the formulas the government uses to determine how much financial aid families can get for college has changed drastically over the last few years, cutting middle-income families’ eligibility for financial aid.

The changes impact the Asset Protection Allowance (APA), the part of the federal financial aid formula that is meant to shield certain assets, like savings and investments not held in a retirement fund. The higher the APA, the more money families can subtract from their total net worth. The lower their net worth is, the less families are expected to contribute to college costs, and the greater their chances of qualifying for need-based federal financial aid.

The APA depends on a parent or parents’ age and whether they’re applying for aid jointly or as an individual. Since the 2009-10 school year, the APA — again, the amount of money protected from the financial aid formula — for 50-year-old married parents has fallen 63%, from $55,300 to $20,200 for 2016-17, and 46% since the 2014-15 academic year.  

Source: Mark Kantrowitz/Edvisors.com

How does the APA impact aid eligibility? 

Once the government subtracts the relevant APA from a family’s assets, it can count up to 5.64% of whatever remains as part of the family’s total assets in its financial aid formula. That means that for every $10,000 the APA is lowered, it can reduce a family’s financial aid eligibility by up to $564.

[Get the Latest Market Data and News with the Yahoo Finance App]

In the case of two 50-year-old parents, their APA has dropped by $35,100 since the 2009-10 school year, meaning their  aid eligibility may have fallen by $1,980. We say “may have fallen” because the APA is only one part of a larger formula used to determine a how much a family will have to pay toward college costs, also known as the Expected Family Contribution (EFC). The EFC also takes into account a family’s income. Ultimately, the government will subtract the family’s EFC from the cost of attendance for the student’s school of choice in order to determine how much federal financial aid his or her family qualifies for.

The lower a student’s EFC is, the better chance he or she has to qualify for federal grants like the Pell Grant and Federal Supplemental Educational Opportunity Grant (FSEOG), which don’t have to be repaid, or Perkins Loans, which have no fees and are available only to families with exceptional financial need. And it goes beyond federal aid, too. Some states, colleges and universities use the EFC to determine whether to award students institutional grants.

The changes to the APA stand to hurt middle-income families the most, because assets held by low-income families (defined here as a two-parent household with adjusted gross income below $50,000) can generally be excluded. And the lower the APA falls, the more it penalizes parents who have set aside savings. Most financial experts recommend families have at least three months worth of living expenses banked for emergencies, so a household earning $100,000 annually could easily have $25,000 set aside, well above the APA limit for two parents under the age of 59.

Why does the APA keep falling?

The nitty gritty of how the APA is calculated is mind-bendingly confusing, so the fact that the changes haven’t been widely registered isn’t surprising. “These are the minute details the average public doesn’t know, but this is how the sausage is being made,” says Joseph Orsolini, a certified financial planner and founder of College Aid Planners.

The Department of Education recalculates the APA annually for the coming academic year, which requires some guesswork. The APA is derived by calculating how much money it would take to fill the gap between the estimated average Social Security benefit and the “moderate family income” level (defined as 120% of the median family income in the U.S.) for the year ahead. When average Social Security benefits increase faster than moderate family income does, that gap shrinks and so does the value of the APA. Because Social Security benefit amounts can vary widely from year to year, it can make for a pretty unstable APA, notes Mark Kantrowitz, publisher of Edvisors.com. His suggestion would be for the government to tie the APA to the rate of inflation alone, which would make the APA more easily predictable, or excluded family assets from financial aid calculations altogether. 

"If you and I have trouble making heads or tales of it, families have an even harder time," Kantrowitz says. "Families just see this as being completely arbitrary and they’re not far off."

To change the way the APA is calculated, lawmakers would have to amend the Higher Education Act of 1965, which is currently up for reauthorization. Sens. Lamar Alexander (R-Tenn.), Barbara Mikulski (D-Md.), Richard Burr (R-N.C.), and Michael Bennet (D-Colo.) are part of a task force that is working on a plan to amend the HEA, but there is no mention of the APA calculation in their plan so far. We reached out to this task force for comment but have not heard back yet.

In the meantime, if your family’s aid eligibility falls next year, at least now you’ll have a good idea why.