Assessing the College Financial Aid Work Penalty

Working has become commonplace among college students in the United States; however, this activity can have unexpected financial consequences. Federal formulas implicitly tax the amount of financial aid some students are eligible to receive by as much as 50 cents for each marginal dollar of income. In this article, I document this college financial aid “work penalty” and discuss the related incentives for some college students to reduce their income. Using data from a national sample of financially independent college students in the United States, I did not find evidence to suggest that students meaningfully reduce earnings because of implicit taxes. Lack of knowledge, abstruse formulas, and the timing of aid receipt likely limit responses. The reduction in aid has the potential to burden low-income students who need to both work and receive financial aid to afford college expenses.