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 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)

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?

During NCI listening sessions all aid administrators who addressed the topic agree we need to simplify the aid process for applicants. Some suggestions have referred to using IRS data in lieu of the FAFSA. This raises a number of questions. Please consider the questions below, and then express your views on potential methods for simplifying the student aid application process.

• Should we eliminate the FAFSA and determine need-based aid eligibility using existing data, such as IRS data? What parameters or other considerations would need to be taken into account if this was done?
• If we use an IRS data match to simplify the application process, would this still address the needs of states/institutions for packaging their student aid monies?
• Would students benefit from a simplified needs analysis approach that would allow them to know in advance the amount of need-based aid for which they qualify?
• Can you suggest alternative FAFSA simplification ideas in lieu of its elimination in favor of an IRS data match?
• Are there other simplification ideas or topic you can recommend that would help students or schools?