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Professional Judgment

Income Insufficient to Support Family

Financial aid administrators occasionally encounter families whose income seems insufficient to support the family, such as families with low, zero or negative AGI. For example, a student might be independent by age or marriage, yet not earn enough money to provide for basic living expenses such as food and shelter. Although self-sufficiency is not required for independent student status, low income can suggest the presence of unreported sources of direct and indirect support. Alternately, if the student is living off of assets, it can suggest the presence of unreported assets. Financial aid administrators should try to elicit information about the other sources of income and support, and then use professional judgment to make appropriate adjustments or corrections to income and assets and the worksheets.

This issue should be approached with sensitivity, since the family may have accurately and fully reported their income. It is best if the institution establish a written policy requiring verification of such applications. This allows the financial aid administrator to indicate that such verification is routinely required of applications that meet the specified criteria, instead of having to say that the family is suspected of underreporting income. Some schools verify all applications with reported income below particular thresholds. Others verify all Pell-eligible applications.

To identify families with unreasonably low income, one could note that the Income Protection Allowance (IPA) is a kind of minimum non-discretionary expense for modest living expenses. It is based on allowances for food, clothing, personal care, medical care, shelter and transportation. If the family's total income (AGI + Worksheet A + Worksheet B - Worksheet C) is not at least the IPA, it is difficult to understand how the family was able to meet its basic needs.

There are two possible sets of IPA figures, the parent IPA figures and the student IPA figures. For 2007-2008, these figures are:

Student IPA Dependent: $3,000

Student IPA Independent Single: $6,050

Student IPA Independent Married (1 in college): $9,700

Parent IPA (2 in household and 1 in college): $15,000

Per additional family member: + $3,590
Per additional college student: - $2,550

Another possible source of baseline income is the HHS Poverty Guidelines. For 2006, the base figure for a family size of 1 is $9,800 for the continental US, plus an increment of $3,400 for each additional family member. The HHS Poverty Guidelines are a simplification of the Census Bureau's Poverty Thresholds, commonly referred to as the "Poverty Line". The 2006 poverty line figures are basically $10,488 for a single individual plus approximately $3,000 to $5,000 per additional individual. (See also the College Board's Living Expense Budgets.)

Clearly, someone can still survive below the poverty line, especially if they are young and in good health. So although one should be suspicious if someone reports income below the poverty line, it isn't unreasonable for them to be able to survive below the poverty line.

The poverty thresholds aren't actually intended to be a precise description of what people need to live. The original poverty thresholds were developed in 1963-64 using US Department of Agriculture food budgets for families under economic stress, plus statistics on the portion of income families spend on food. The original poverty line was calculated as three times the economy food plan. It has been adjusted for inflation ever since.

It is probably best to use the IPA figures as a threshold, instead of the poverty line, as they are more closely connected with the need analysis formula. Note that Section 402B(g)(2) of the Higher Education Act defines "low income" at 150% of the poverty line.

This suggests checking for alternate sources of support when an independent student reports less than $9,000 in income (+ $3,000 per additional family member). Extra scrutiny should be applied to any independent student reporting less than $5,500 in income (+ $3,000 per additional family member). (These figures have been rounded to simplify the heuristic.)

Students with unusually low income will be flagged on the ISIR.

In such cases, the student should be asked to complete a form that asks for the information specified on FinAid's support test form. This covers basic food, clothing, shelter, and medical expenses. If any figure seems low as compared with the financial aid administrator's expectations or the IPA-related percentages (e.g., food should be at least 30% of $5,500 = $1,650 for a single student), probe for more information. Often you'll find that the student was living with a friend and didn't mention that friend as a source of support. But in about 5% of cases you'll encounter students wearing $400 Coogi sweaters and carrying $500 Coach handbags who report income insufficient to support their apparent lifestyle, and you'll discover that this independent student lives rent-free in an apartment owned by their parents.