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Students face aid eligibility woes
For some families, changes to state income tax allowances mean they'll lose federal grants.
June 22, 2005: 5:18 PM EDT
By Grace Wong, CNN/Money staff writer
State tax allowance
In many states, parents earning more than $15,000 a year saw the amount they can deduct from their income for financial aid eligibility cut by 2 to 3 percentage points. Below are some of the states impacted most.
State% 2004-2005% 2005-2006Percentage point change
Connecticut5%6%+1
Delaware7%3%-4
Michigan8%4%-4
North Dakota5%1%-4
Source: Department of Education's EFC Formula, 2004-2005; 2005-2006.

NEW YORK (CNN/Money) - New federal guidelines that raise the bar for financial aid eligibility means some families will see their aid packages for this academic school year reduced.

When determining financial aid eligibility, the federal government allows families to deduct some of what they pay in state taxes from their income. Income is the most heavily weighted factor the government uses to determine financial need.

Rules that reduce that allowance go into effect this coming school year.

According to Mark Kantrowitz, founder of FinAid.org, most states saw the amount of state tax allowance reduced by 2 percent to 4 percentage points, which has a "pretty big impact" on aid eligibility for some students this year.

Marya Dennis, management and program analyst at the Department of Education, said the state tax tables were based on IRS information that was more than 15 years old and were adjusted to reflect more current tax information.

Each year, millions of students submit a Free Application for Federal Student Aid to the Department of Education to determine the expected family contribution, or EFC.

That helps determine federal and state aid, such as need-based Pell Grants and subsidized Stafford loans. Private schools also rely on the EFC as a barometer for determining a student's financial aid package.

Middle-class squeeze

The families most likely to be impacted by the change in the EFC formula are middle-class families, according to Kevin Knotts of Thomson Peterson's data licensing department.

At the University of Michigan, it's still a little early to tell what impact the EFC change has made because the university hasn't calculated its packages for returning students yet, according to Pamela Fowler, Director of the Office of Financial Aid.

Michigan's state tax allowance for families with an income of more than $15,000 was slashed to 4 percent for the 2005 to 2006 school year, from 8 percent the previous year, according to the tax table published by the Department of Education.

Fowler said middle-class students at her campus will probably be most impacted by the change.

Ravi Poorsina, spokeswoman for the Office of the President at the University of California, said looking at the impact on Pell grants shows the real-life effect the change makes.

The Department of Education's Dennis said the impact would probably be greatest for students right on the edge of eligibility for those grants, but that huge amounts of money were not at stake.

Pell grants are need-based federal awards that don't have to be repaid and which generally make up the bulk of low-income students' aid package.

Poorsina said about 400 to 500 UC students would lose their minimum award amounts of about $500 and that the total value of Pell grants for UC students would likely fall by about $4 million in the upcoming school year.

That's about a 3 percent decline from the $150 million in total Pell grants UC students were awarded in the 2003/2004 school year.

Fowler said while it looks like the EFC figures for incoming freshman are greater than anticipated this year, enrollment at Michigan is "way up."

Seeking stability

Finaid.org's Kantrowitz said students generally do not need to worry about major fluctuations in their aid eligibility throughout their college years. Notwithstanding the changes that went into effect this year, the EFC formula tends to be fairly steady from one year to the next

But, for those seeking to stabilize their tuition payments, Kantrowitz said some families may want to seek schools which offer level tuition rates.

Schools such as Berkeley College in New Jersey and Illinois public schools offer level tuition rates which "lock-in" the cost of tuition, generally for all four years of attendance.

That makes it easier to plan for college costs, especially for those students attending public colleges and universities, where tuition rates tend to be more volatile depending on the economic environment, Kantrowitz said.

Thomson Peterson's Knotts said students also should consider the wide range of financial aid available, such as merit-based scholarships and other school-specific funding which can be based on anything from academic performance to athletic ability to ethnic background.

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