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April 7, 2016

Pell grant formula simplification: How the details matter

April 7, 2016

A simplified Pell grant formula can make financial aid more predictable and effective for low-income students, even beyond students currently supported by the program. Many stakeholders have offered simplification proposals but grapple with how to balance simplicity with the guarantee that the right students receive the aid they need.

Estimates in our new brief show that a simplified Pell formula can effectively target the right students, but the details of the formula matter for students. Policymakers will need to determine what their goals are when writing specific legislation. For example, is it a strength or a drawback for more recipients to get the maximum grant amount? Or should single parents be treated like other students in similarly sized households? The answers to value judgments like these will affect how formulas should be set up.

Currently, Pell grants are determined from the Free Application for Federal Student Aid (FAFSA) using the less-than-transparent expected family contribution (EFC) calculation. With maximum awards of $5,815 for the 2016-17 school year, they represent no small sum for students. The long and often confusing FAFSA application can create a roadblock for students applying for aid (the form even includes a section titled “Why all the questions?”). Students who need aid may not be applying for it, and potential students may not know they are eligible for the aid that would make college possible for them.

Last year, we examined how eight different simplification proposals would affect different students. We concluded that separating Pell grants from other forms of aid (e.g., student loans or money from universities) and using an application with only a few questions would make it much easier for potential students to apply for aid and, more importantly, to know in advance that aid is available and college is affordable. We suggested a two-factor model based only on family size and income that could drastically simplify the Pell award calculation and remove the blinders from the mysterious EFC calculation.

Because Pell awards start with what a family is expected to pay (from the EFC calculation), legislators who want Pell grants to cost less would need to either lower the maximum amount of the grant or increase how much families are expected to pay. This will affect Pell grant recipients, but if there is only one formula for all aid, it could also increase family contributions for other students.

While our previous research included several proposals that separated awarding Pell grants from other types of aid, our current brief looks at how details can affect grant aid when only using family size and income as inputs. The Financial Aid Simplification and Transparency (FAST) Act, legislation reintroduced in 2015 by Senators Lamar Alexander (R-TN) and Michael Bennet (D-CO), also considers basing awards on only family size and income but makes different choices on how much aid is awarded across these factors.

Threshold for maximum Pell

While both our two-factor model and the model we adapt from the FAST Act base awards on how family income compares with the federal poverty level (FPL)—a measure that varies with family size—our model awards maximum Pell grants to more families. Under our two-factor model, maximum Pell goes to those with incomes up to 150 percent of FPL, while the FAST Act limits maximum Pell to those at 100 percent of FPL. Both proposals award Pell grants to individuals with incomes up to 250 percent of FPL. Because more people receive maximum Pell grant amounts, our two-factor model is more generous to these lower-income students (but not the lowest-income students).

Family size cap

The models also vary in their caps on family size used for the FPL of large families in their Pell calculations: we cap family size at six people for the two-factor model while the FAST Act caps it at eight. Compared with our two-factor model, the higher family size cap under the FAST Act means that awards go further up the income ladder for some students in families of seven or more.

Support for small families with children

One problem with basing Pell only on family size and income is that a single parent with a child going to college and a college student with a child would be treated the same as a married student with no children. This raises an equity concern because with no dependents to support and with two potential earners, the latter student may have more financial means to pay for college. Indeed, many small families (of two or three people) with a dependent received larger Pell awards under the existing formula—which accounts for family composition and family size—than under any of the two-factor plans.                                                                                                                                                                                  

An alternative option to ensure that these families are less likely to lose funds would be to apply the FPL for a family of four in the Pell calculation to a family of two or three with dependent(s). This method would cover small families where the student has a dependent child or where the student is a dependent. While there would still be inequities across the income distribution—the FPL is so low for families of two ($16,020 in 2016 versus $24,300 for a family of four)—this method would help mitigate the number of students made worse off.

Pell grant formula simplification: How the details matter

All these options trade off more generous Pell grants with cost to the federal budget. Under these proposals, in general, students receiving smaller awards or losing their awards altogether are from families further up the income distribution. This is even more true if we switch from the original two-factor or FAST Act model to the small-family alternative formula.

Even after providing more support to small families with children, the FAST Act plan would remain less expensive than the current Pell program (saving 3 percent), while the increased cost under our two-factor model would be about 6 percent. If all students were enrolled full-time, a larger share of recipients under the two-factor model would receive maximum awards (74 percent) than under the existing formula (62 percent). After taking their actual enrollment into account, about one-quarter of recipients receive maximum Pell grants.

We’re excited by the attention that simplification of the financial aid process is receiving. By considering details like those discussed above, policymakers can pursue Pell formula simplification while addressing concerns like targeting and program costs. Understanding how the details affect students and the different trade-offs when considering reform can help lead to a better-designed formula that is equitable and effective.

This photo taken June 10, 2014, shows intern Daisha Tanking working at the St. Louis High School to College Center in St. Louis. A drop-in counseling center akin to a pop-up retail store, the center helps low-income students make the transition to college by negotiating financial aid agreements, housing contracts, and the other myriad details of college enrollment. Photo by Jeff Roberson/AP

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