Mike Kueber's Blog

October 25, 2013

Pell grants and means testing revisited

Filed under: Education,Issues,Politics — Mike Kueber @ 6:49 pm
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I have previously written about government means testing in general and Pell grants in specific.

The essence of my post on college-related Pell grants was as follows:

  • According to an article provided by U.S. News – “Those with EFCs (expected family contributions) above $4,041 will be disqualified for Pell grants. Almost all Pell grants go to students whose families have incomes of less than $50,000 a year.”
  • Presumptive GOP presidential nominee Mitt Romney has suggested that the federal government seems to be concerned only about the rich (cared for by the GOP) and the poor (cared for by the Dems), whereas the middle class is neglected.
  • Although I think Romney is right, I am also willing to make an exception in this case because there are few things as important in this country as encouraging motivated poor kids to go to college.  And because the federal government doesn’t have unlimited amounts of money (in fact, it has no money), a cut-off for Pell Grants has to be somewhere, and perhaps $50k is the appropriate cut-off.  Personally, I think the cut-off is a bit low, and if I were in Congress, I would push for Pell Grants to kids with parents making up to $100k a year.

The essence of my post on means testing was as follows:

  • When digging deeper into the federal government’s calculation of expected family contribution (EFC), I learned that (1) the government considers “resources” to be not just income, but also assets; and (2) assets do not include home equity or retirement accounts.
  • Calculations that consider assets in addition to income unfairly penalize someone (like me) for being thrifty.
  • Calculations that exclude home equity from assets unfairly penalize someone (like me) who chooses to live in a rental.

Obtaining access to the precise formula used by the federal government in calculating financial aid is extremely difficult.  In fact, for several months the government website has been saying that the 2013-14 formula is “coming soon.  Based on the ObamaCare roll-out, I am not holding my breath.  But I have been able to find the formula that was used last year, and although it is extremely difficult to understand, I believe it provides the following:

  • Each year, parents are expected to contribute a percentage of their income over $17k.  The sliding-scale contribution amounts to an $8k contribution on the next $30k of income, and 47% of any income over that.  It’s easy to see why this government formula results in people with incomes over $50k “being on your own.”
  • Each year, parents are expected to contribute 12% of their non-home assets toward their child’s college education.  That means that almost half of your lifetime savings will be depleted even if your kid is able to graduate in four years.  The government allows you to not count your first $20k of assets.

Looks like I’m on my own unless I park my savings into some sort of home equity or retirement account.

July 29, 2013


Filed under: Economics,Education,Issues,Politics — Mike Kueber @ 8:54 pm
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As America continues to struggle with its deficit and debt, one of the most frequently suggested solutions is to means-test America’s two most expensive programs – Social Security and Medicare.  Although this populist approach might hold out some superficial appeal to many, if not most people, it also is subject to that old aphorism – i.e., the devil is in the details.  Most people probably have a general understanding of what means-testing is (Wikipedia says it is a determination of whether someone is eligible for help from the government, based upon whether that person possesses the resources to do without that help), but the detail is how do you determine whether a person has adequate resources.

I recently encountered means-testing with my son’s federal application for college financial aid.  Jimmy previously received aid based on my ex-wife’s finances, and this year when he shifted to become my dependent he was denied any aid.  The denial was based on a federal calculation that I was expected to contribute more than twice as much to Jimmy’s college education as my ex-wife was expected.  This calculation didn’t make sense to me because my ex-wife’s assets were comparable to mine.  Furthermore, she is working while I am retired.

So I dug deeper and this is what I found:

  • For purposes of financial aid, the federal government considers “resources” to be not just income, but also assets.
  • Assets do not include home equity or retirement accounts.

Home equity is what distinguishes me from my ex-wife.  When we got divorced, she took the house without a mortgage and I took an apartment and put my assets into a brokerage account.  Although the equity in her house and the assets in my brokerage account are virtually identical, the federal government has taken the position that a parent won’t be expected to use any of that home equity to pay for your child’s college education.  With my brokerage account, however, the federal government expects me to liquidate a portion of that every year to pay for college.

How is that fair?  Why should I be expected to contribute more to my child’s college education than someone with $1 million equity in a house?

And fairness is just one aspect of means-testing.  Another is the incentive or disincentive that it produces.  The internet is replete with articles analyzing how means-testing, whether income or assets, tends to discourage people from earning or saving money.  Although you may not think that people would decline to earn more money if it cost them government benefits, this has already been found to occur when applied to welfare and it is reasonable to expect seniors might do the same thing if earnings cut into their Social Security and Medicare benefits.

Unfortunately for me, I can’t figure out a way to avoid the harsh effects of the federal calculation for financial aid.  I can significantly reduce my income by avoiding any capital gains, but unless I take the money out of my brokerage and buy a house or condo, the federal government has decided that I can do without any of their help.  That is true, but so can a lot of other people who will get government assistance.

Incidentally, in discussions of means-testing for Social Security and Medicare, there are suggestions that an alternative that will produce fewer distorted incentives is to means-test lifetime earning instead of annual income or assets.  That sounds promising.