Continuing the Conversation: Assessing Ability to Pay Under a Simplified System

As part of our continuing National Conversation Initiative, NASFAA has released the third in a series of issue papers about selected policy areas. The paper, Assessing Ability to Pay Under a Simplified System, is now available in the NCI Resource Center.

The NCI proposal would compute an Income-to-Poverty ratio for each student (instead of an Expected Family Contribution) which is then used to determine maximum Pell award and as a relative measure of ability to pay as compared to other students. This paper explains the concept in detail and explores questions such as:

• How can we continue to measure family contribution without the kind of data we are used to collecting?
• How will we make decisions about distribution of funds?
• If we no longer have an Estimated Family Contribution (EFC) to subtract from cost of attendance, what we will do instead?

Please contribute your thoughts on assessing ability to pay.

Q.  Many families claim exemptions for people who are not family members, so using number of exemptions instead of household size would not be a fair way to determine eligibility.

A. True. But likewise, there are families for whom the number of exemptions claimed do not represent all family members (such as when divorced parents agree to claim children in alternate years). The basic IRS guidelines for claiming dependents other than children are that the person lived with and received more than half their support from the taxpayer, which parallels Title IV requirements for including an individual in household size. Exemptions, like AGI, are verifiable by an IRS match. For circumstances in which the number of exemptions does not reflect the family’s situation, FAAs would still have professional judgment authority to modify that data element in either direction.

Q. In divorce situations, using the tax return to apply for federal aid will cause the assessment to come from a different parent, as many non-custodial parents claim the student. Do you intend to move away from using custodial parent income?

A. No change is intended here; we do not advocate performing the eligibility determination on the non-custodial parent. The same rule that currently determine which parent’s finances are used would continue to apply. Use of a check-off on the tax return would be one option for triggering a student aid application, but not the only one.

Q. Actual need does not always equate to reported Adjusted Gross Income, so why use AGI as the primary basis? Is it very surprising that the research has shown that AGI is a good indicator of ability to pay. It takes me back to the days of maximum income limits for Guaranteed Student Loans.

A. AGI is currently the main source of income assessment for most families, but the treatment of the family’s income in the current formula does not usually result in a figure that is a true reflection of the family’s ability to pay. We propose using AGI in a very different way than the current formula, in that we would make a direct comparison to the poverty line for that family’s size and relate that to need for grant aid, rather than trying to derive a dollar amount of support from the family and then using that expected contribution to determine the amount of grant aid.

Q.  What will you do with a negative AGI of several thousand dollars? Having a negative AGI does not necessarily mean that there is no income, only that they are lowering their AGI with some type of loss or losses. They are now eligible for Pell and are being treated the same as families with very low income. This is not an equitable use of need-based funds. Is there any thought to looking at this further?

A. Yes. We advocate looking at the type of tax return filed and whether the filer used any schedules (other than the typical schedules A and B) to reduce income. If the AGI was reduced by losses that do not truly impact the amount of income available to the family, the eligibility determination would be based on a revised AGI that disallows the losses. That would be done systematically; it would not rely on use of PJ adjustments by the FAA.

Q. If a student does not file taxes (for example, when SSI benefits are the only income) how would eligibility be calculated?

A. Under our proposal, an individual who receives federal means-tested benefits such as SSI is automatically considered eligible for the maximum amount of grant aid. We would not require such individuals to go through additional need assessment. Similarly, we would consider an individual eligible for maximum aid if his or her income is too low to require filing an income tax return.

Q. Assuming that simplification of need analysis is adopted, there would no longer be an EFC calculation. To what extent will NASFAA assist schools and states in the development of a method to award their need-based funds?

A. NASFAA will undertake professional development and training as it always has. We believe that the income-to-poverty ratio method can be used to determine eligibility for most, if not all, forms of need-based aid. Watch for an NCI issue paper on this topic soon for more details.

Q. Would linking the tax return and the FAFSA eliminate the need for verification at the institution? Currently, we verify all federally selected students, plus 15 to 20 % of additional filers. My understanding is that the IRS only audits about 1% percent of filers. How do we insure accurate data without the verification process as we understand it today?

A. The current verification process in fact utilizes the tax return. Under the proposed system, if data is taken directly from the tax return, there is no reason to verify that data again. We would rely on the IRS system of internal checks for inconsistencies on the tax return, rather than an application-based system of edit checks.

Q. Are there any thoughts about how schools and states might deal with fewer data elements on the FAFSA when awarding institutional aid or state grants (and how the CSS/Financial Aid PROFILE might become more prominent)?

A. States or schools that need alternate or additional information might need to use a separate form. However, it is our hope that many could adopt a convergent simplified process as the federal system develops. In an electronic process, ED could use links to direct a FAFSA applicant to the appropriate state’s application site upon completion of the FAFSA.

What do you think about this proposal? How would you improve it?

The NCI proposal would eliminate the Perkins Loan program and consolidate FSEOG and FWS into one fund that could be used as grant or work (or both) at the discretion of the institution. This approach would better allow schools to use the funds to address the needs of their students and further institutional recruitment, diversity, and retention goals. Details about this proposal are given in the NCI Issue Paper, Restoring Responsiveness to Campus-Based Funds.

How would you use a consolidated fund like this at your institution? What student needs do you think you could meet, that you can’t today?

The complexity of the student aid programs and the application process make it difficult for students and parents to predict how financial aid they should expect and discourages students from applying for aid. In addition, the complexity creates large administrative burdens for campuses that must direct scarce resources to administer financial aid, when these resources could be more effectively used to benefit students.

“I’ve spent most of my career making poor kids prove they are poor,” a financial aid administrator recently commented to NASFAA, highlighting how the current complexity of the system is causes inefficiency and frustration.

NASFAA’s National Conversation Initiative (NCI) Preliminary Recommendations Report makes eight recommendations to simplify the application process to eliminate the problems caused by the current complexity. The system envisioned by NASFAA would reduce the number of questions on the FAFSA by 70 percent - from 106 questions to roughly 30 questions -  and 10 of these questions would be simple demographic questions such as: name, address, date of birth, etc. The nation’s neediest students would auto-qualify for maximum aid – so their application process would be even simpler. NASFAA also recommends that financial data be gathered through data matches from other sources, such as the Internal Revenue Service (IRS).

The result would be a dramatically simplified student aid application process that makes it easy to determine and understand eligibility and more families to apply for the assistance they may qualify to receive. At the same time NASFAA’s model would effectively differentiate truly needy students from those who merely appear needy on paper to ensure integrity in the student aid system.

The following are NASFAA’s simplification recommendations:

1.     Streamline the FAFSA application so that it collects only demographic, student eligibility, and dependency status data

2.    Students and their families who are not required to file taxes due to low income, or who receive means-tested federal benefits, should automatically qualify for the maximum Federal Pell Grant

3.    Give schools the option to waive reapplication every other year for individual students or for groups of students whose circumstances have not changed significantly, as identified by the institution

4.    Allow families to initiate the financial aid application process through the federal tax system

5.    Provide look-up tables for students and families to show them how much they would qualify for in Federal Pell Grants and loans

6.    Eliminate “needs analysis” and use an “eligibility analysis” that relies on Adjusted Gross Income and tax exemptions to determine the amount that financial aid applicants can expect to receive in a Federal Pell Grant

7.    Use relevant tax schedules for independent students or parents of dependent students to gain a more accurate picture of their financial aid eligibility

8.    Eliminate all non-financial aid related questions from the application process,( e.g., Selective Service Registration, drug convictions)

One aspect of NASFAA’s NCI preliminary recommendations is a new approach to student loans that would replace the Federal Family Education Loan Program, the Direct Loan Program, and the Federal Perkins Loan Program with a program that integrates the best aspects of all three. This new loan program would incorporate current FFELP participants to ensure a high level of customer service and maintain valuable borrower services like financial education and default prevention.

This new, integrated loan program would be simpler and more equitable for students while expanding the amount of capital available to make loans through the capital markets. The proposed loan model also encourages all beneficiaries of postsecondary education (i.e., borrowers, state governments, private employers, friends and families, and all Americans) to help pay down borrowers’ debt levels and raise capital for a self-sustaining loan fund.

NASFAA has been receiving questions from members about the proposed loan model and has posted some common questions and answers. We will continue to post answers to common questions as we receive them.

The proposed loan program would:

• Subsidize student loan borrowers during repayment - instead of while they are in school
• Decrease student loan burden by strengthening the Income-Based Repayment program so students never pay more than 10 percent of their discretionary income and loans are forgiven after 20 years of repayment.
• Provide consistent and equal terms, conditions, and benefits to all borrowers
• Offer a seamless loan origination, disbursement and repayment experience for students
• Ensure a predictable and continuous source of capital for student loan funding that isn’t dependent on any single entity
• Reduce federal expenditures by creating a self-sustaining funding source that relies on new, safe investment vehicles
• Leverage technological and business innovations in the private sector by creating a common servicing platform that relies on a centralized database of all borrowers and can be used by multiple servicing agents
• Creates new incentives for businesses, individuals, and states to help students repay student loan debt
• Capitalizes on the expertise and best practices developed by all entities currently participating in the existing loan programs
• Is not the FFEL, Direct Loan, or Perkins Loan program, but rather an entirely new loan program created from the most positive aspects of all three

We are curious about what you think of NASFAA’s proposed loan model, so please post any comments, questions or concerns you have about the proposal.

A topic being debated during the NCI Listening Sessions is personal and family contribution to the student’s education. Many aid administrators feel there has been a shift in the way families perceive saving for college. Wealthier families do not save because they feel entitled to student aid; poorer families do not save because they do not have the resources. Some financial aid administrators feel that one or more of the following approaches might encourage saving for college:

• Increasing expectations of personal/family responsibility as the student progresses through school
• Restructuring current 529 plans or other tax incentives
• Requiring community or military service and offering a college savings component
• Providing matching funds tied to saving and pursuing a college preparatory curriculum

What do you think of these ideas? How do you feel we can encourage families and individuals to save to support their education? Is it realistic to expect college savings in the 21st century?

Congress has been increasingly interested in the rapid increases in college costs in recent years. Through the HEOA, Congress will be highlighting institutions that increase college costs the most to draw public scrutiny. Some believe that financial aid actually contributes to rising college costs.

These college cost issue raises important questions about the role of financial aid. Should the financial aid system enable every qualified student to attend any college, no matter the cost? What are your thoughts?

We know the societal and personal benefits of postsecondary education, but private businesses and corporations also benefit from higher education training. Based on your experience, what are the best ways that the private business sector contribute to college affordability?

• As a stakeholder in higher education, what role do you think private companies can have in financial aid?
• Should they be taking a larger role in helping students pay for college? In what ways?
• Should they help subsidize or repay student loans?

Some aid administrators view borrowing as a good thing for students, regardless of their background, because it teaches fiscal management and makes a student feel invested in his or her education. Others argue that borrowing creates inequity by placing a heavier burden on lower income students and say loans should be replaced with grants for students with financial need. Still others think borrowing to pay for college is inappropriate regardless of income and should be phased out.

Now it’s your turn:

• What role should loans play in helping students pay for college?
• Should all undergraduate students be expected to borrow? None?
• What about graduate students?

During recent NCI Listening Sessions, some have suggested a reform and reconfiguration of the existing Title IV programs. Several of these ideas appear below. Please review these ideas, and then express your thoughts on the current structure of the Title IV programs, whether it should be changed, and if so, how it should be changed?

• Some feel that the Title IV programs should be reformed to provide one grant, one loan, and one work assistance program. This would mean the elimination of the FSEOG and Perkins Loan programs, and possibly redirecting the funding to a larger Federal Pell Grant program. How do you feel about this idea?
• Alternatively, some suggest the campus-based programs be modified to combine the monies and provide those funds to schools in a “block grant” to be used any way the school desires for student aid or student retention and/or graduation enhancement programs. Do you agree?
• Those who argue against these consolidations of aid programs into single types or provision of block grants suggest it would result in a total loss of these federal appropriations or make them a juicer target in times of budget crises. What do you think of these arguments?