Income-Tested College Financial Aid and Student Working Decisions

• In Event: 14.045 - Roundtable Session 3
  In Roundtable Session: 14.045-5 - Division J Section 5 Roundtable

Abstract

Though increasingly common, working can have unexpected adverse consequences for postsecondary students. This is because increased earnings result in reduced calculated financial need in federal formulas, and therefore potentially less aid receipt. The implicit tax creates a disincentive for students to work, and can be particularly problematic for the students most in need of financial assistance. Using nationally representative student data, I estimate the marginal rate of the financial aid income tax faced by financially independent students and investigate students’ response to the assessment. I estimate realized marginal tax rates that are lower than those in scheduled assessments and little evidence that the implicit college financial aid income tax substantially influences students’ working behavior.

Author

• Rajeev Darolia, University of Missouri - Columbia