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Most financial aid formulas base the amount of financial aid on the student’s demonstrated financial need. Demonstrated financial need is defined as the difference between total college costs and the family’s ability to pay. It is the amount of money the family needs for the student to be able to enroll at the college. Thus, financial aid eligibility is based on the following formulas:
Demonstrated Financial Need = Cost of Attendance (COA) – Expected Family Contribution (EFC)
Financial Aid = Demonstrated Financial Need – Unmet Need (Gap)
While these equations are fairly simple, it gets tricky when one calculates each component of the equation. Total college costs are specified in the college’s full cost of attendance (COA), and include tuition, fees, room, board, books, supplies, equipment (including a computer), transportation, miscellaneous/personal expenses and dependent care. The family’s ability to pay is measured by the expected family contribution (EFC), an assessment of the family’s financial strength.
Consequences of the Definition of Demonstrated Financial Need
Since demonstrated financial need is defined as the difference between Cost of Attendance (COA) and Expected Family Contribution (EFC), financial need increases with increases in the COA and/or decreases in the EFC.
Since a low-income student will tend to have a lower EFC, the low-income student will have greater demonstrated financial need and qualify for more financial aid. But middle- and high-income students might also qualify for need-based financial aid if they enroll at a higher-cost college. For example, consider the three students in this table:
So, even though the low-income student has a lower EFC, the middle- and high-income students have greater demonstrated financial need and receive more financial aid because they choose to enroll at higher-cost colleges.
Data from the 2011-2012 National Postsecondary Student Aid Study (NPSAS) demonstrates that high-income students receive higher average total grants than low-income students. The average total grants for students with family adjusted gross income (AGI) of $100,000 or more (average $157,500) was almost $9,000, compared with $5,700 for students with family AGI less than $50,000 (average $19,500). This is partly due to the higher COA at more-elite colleges and universities, and partly due to colleges leveraging financial aid to attract wealthier students. The average COA for the high-income students who received grants was $30,000, compared with $17,000 for the low-income students who received grants.
The Federal Pell Grant is intended to enable low-income students to pursue a college education. Accordingly, eligibility for the Federal Pell Grant is based on just the EFC and not on demonstrated financial need.