While designing a webtool that provides potential college students with an estimate of their financial aid, I learned a few crazy things.
#4: The aid formula is biased toward states like New York and California, and against states like Texas and Florida.
The aid formulas allow applicants to subtract allowances for state and other taxes from their income, similar to deductions on your taxes. Since a higher income will generally reduce aid eligibility, the higher the allowance, the more of your income is shielded from the aid formula. But the allowance varies by state. For example, independent students with dependents other than a spouse in New York generally get to shield 8% of income from the aid formula, and 7% in California. But similar students in Texas and Florida can generally only shield 2% of their income with these allowances.
While unfair to all residents in states like Texas and Florida, this unfair treatment is especially problematic when it interacts with the minimum Pell grant discontinuity highlighted in part 1.
To see this, starting from the default settings of the webtool, select this year, increase age to 30, select married with spouse not attending college, with 2 children, then increase income to 70,300. This student (who lives in California) would receive a $600 Pell grant and have an EFC (EFC stands for Expected Family Contribution, and it is what the government thinks your family can afford to pay for college) of $5,200. This same family in Texas would have an EFC of $6,200 and a Pell grant of $0.
The only difference between these two families is that one lives in California, and one lives in Texas. Yet the California student gets a $600 Pell grant while the Texas student gets $0 in Pell grant aid.
Right now, the federal aid formulas are effectively discriminating against students in Florida and Texas, and giving more aid to students in New York and California. The easiest solution to this problem would be to apply a universal state tax allowance regardless of state of residence.