Schools and the government should focus on income, not savings, when awarding financial aid assistance
Throughout the U.S., millions of parents struggle to save for their children's college education. It isn't easy: in a consumer culture like ours, there's always something new to buy. Driving an older car, using an out-of-date computer, and ignoring cool new gadgets like the iPad aren't easy -- particularly when you've got some income that you could be spending on such luxuries. No wonder seeing the U.S. savings rate as high as 6% is unusual. But those parents who do the responsible thing and save are discriminated against: students whose parents save less often qualify for more financial aid.
If you or one of your children has gone to college over the past 15 years, then you're probably familiar with the Free Application for Federal Student Aid ("FAFSA"). This is a form that must be filled out by anyone hoping to get financial assistance for college. It requires a heap personal and financial information about a student's family, such as income, savings, and investments. Using this data, the government calculates how much financial aid the it will provide the student through grants and loans.
FAFSA's influence doesn't begin and end with the government. Many colleges also use the form as a way to streamline the information needed for their financial aid process. Like the government, many colleges also take savings into consideration.
From a pure logic standpoint, this makes sense: if a family has savings with which it can pay for college tuition and related expenses, then it should. But this logic has a clear flaw -- saving doesn't get there by accident; it is a behavior that you generally have some control over. Unless a family has very high income, it can always spend its income on something else instead of saving if it chooses. And those very high-income families wouldn't qualify for aid anyway.
By awarding more aid to families who save less, are colleges punishing responsible parents?
So by considering savings, the government and universities discriminate against families who make the choice to save. They provide greater aid to a student whose parents have not accumulated as much money over the years.
Let's make this example concrete. The FAFSA website has an aid estimator that I played around with a little. If you have two students applying for aid whose family has precisely the same characteristics, then saving impacts how big of a Federal Pell Grant they will qualify for. In the scenario I created,* the student in a family with zero savings would be awarded a $4,000 annual grant. If that family had $50,000 in the bank the student would only qualify for $3,800. If that savings is $100,000, then the grant drops to $2,400.