Income-tested College Financial Aid and Labor Disincentives
Early Career Research Award
Working can have unexpected adverse consequences for postsecondary students who rely on financial aid. This is because increased earnings result in reduced calculated financial need, and therefore potentially less financial aid, in federal formulas. The implicit tax creates a disincentive for students to increase earnings beyond a protected amount, even though working while in school can improve future labor market outcomes and students may need the income to meet expenses. The tax can be particularly harmful for the students most in need of financial assistance, including independent, adult, and non-traditional students that comprise an increasingly large segment of postsecondary education. The objectives of this study are to: 1) estimate the marginal rate of the financial aid income tax and relatedly, to identify the incidence of the tax and distributional considerations; and 2) investigate student response to the implicit financial aid income tax.