The Simpler FAFSA: Who Wins? Who Loses?

2. The Simpler FAFSA:Who Wins? Who Loses? OASFAA/OCAN Conference December 2011

3. Early Awareness and Simplicity • The current student aid system is complex (process and programs) • Low- and moderate-income students are more likely to prepare academically if they understand financial aid • A simple, predictable, well-targeted student aid system will lead to more efficient use of taxpayer dollars • College Board’s Rethinking Student Aid (RSA) recommendations are based on this premise

4. Simplification: Progress to Date • HR 3221 passed but never considered by Senate • Only data available from IRS used to determine federal aid eligibility; families with assets above legislated cap ineligible for federal aid • Similar proposal in President Obama’s FY 2012 budget • Administration committed to further FAFSA simplification • Significant interest in eliminating assets; difficult to verify information; complex instructions

5. State Need-Based Aid Study • Goals of study • Help states understand impact of a simplified federal aid process on federal and state grant programs • Build state support for a simplified process to ensure that students will benefit • Evidence about benefits of simplifying the application and increasing predictability of grant aid is compelling • Help states and institutions advocate for a streamlined system that will enable them to distribute need-based aid equitably and efficiently • May require changes to underlying Federal Methodology

6. Our Approach • Selected a representative group of pilot states based on criteria for eligibility & aid determination • Kentucky • Minnesota • Ohio • Texas • Vermont • Met with pilot state representatives to discuss goals and issues, define data requirements

7. Our Approach • Using state’s FAFSA and award data, simulated impact of potential federal data and formula changes on state grant awards • In Ohio used 2008-09 data, last year of OIG • OCOG eligibility estimated for OIG recipients • Included only state grant recipients in private nonprofit and proprietary sectors • Included all FAFSA applicants in public sectors • Provided fiscal and distributional impacts of fewer federal data elements • By income • By dependency status • By sector

8. Characteristics of 2008-09 OCOG Recipients • Enrollment Status • Full-time: 44% • Part-time: 56% • Dependency Status • 22% dependent • 42% reported household income below $15,000 • 24% independent without dependents • 98% reported household income below $15,000 • 55% independent with dependents • 58% reported household income below $15,000

9. Distribution of 2008-09 OCOG Recipients and Total Dollars

10. Our Methodology: Multiple Simulations • Remove Worksheet A items (new baseline for comparison) — previously eliminated in 2009-10 FM • Earned income credit and additional child tax credit • Welfare benefits • Untaxed Social Security benefits • Eliminate all assets • Use only IRS data (similar to HR 3221 language) • No employment allowance • FICA based on AGI/total earnings • IRS data included AGI, taxes paid, number of exemptions • Used FAFSA number in college

11. Impact on EFC of Removing Assets: Dependent Filers in Public Sectors • Largest impact on EFC at highest income levels • Pell and OCOG targeted at low- and moderate-income filers, but institutions that award need-based aid to higher income filers would face challenges

12. Impact on EFC of Removing Assets: Independent Filers in Public Sectors • Independent filers without dependents would benefit more than those with dependents • FM treatment of assets differs • Independent filers would benefit less than dependent filers • Independent filers have few assets

13. Impact of Removing Assets on Grant Eligibility: Public Sector Filers • Average increases larger for dependent filers • More likely to have significant family assets • Less impact on OCOG eligibility: EFC cutoff $2,190

14. Impact on Dependent Pell Grant and OCOG Recipients of Removing Assets • Largest average increases among private nonprofit recipients

15. Removing Assets: Considerations • Removing assets has greater impact on dependent than on independent filers • Most independent students have few assets • Higher income families are more likely to have significant assets, so reductions in EFC increase as incomes increase • Pell and OCOG are targeted at students from low- and moderate income backgrounds • Removing assets does not have great impact, particularly on filers in public sectors • Many institutions, especially in private nonprofit sector, award need-based aid to higher income students; removing assets could be challenging

16. Impact on EFC of Using Only IRS Data: Dependent Filers in Public Sectors • All filers impacted by elimination of employment expense allowance; smaller EFC decreases than if assets dropped • Higher income parents see greatest impact

17. Impact on EFC of Using Only IRS Data: Independent Filers in Public Sectors • All filers impacted by elimination of employment expense allowance • More than 80% of independent filers at community colleges and about 60% at public four-year institutions attend part-time; probably employed

18. Impact of Using Only IRS Data on Grant Eligibility: Public Sector Filers • Average Pell and OCOG eligibility decreases for dependent and independent filers with dependents • But lowest-income filers would see average increases in eligibility

19. Impact on Dependent Pell Grant and OCOG Recipients of Using IRS Data Only • Many recipients would see modest decreases in grant awards • Lowest-income filers would see small increases

20. Using Only IRS Data: Considerations • Dependent filers benefit more than independent filers • Most independent students have few assets and removing employment allowance has greater effect • Ohio filers benefit more from removing assets than from using only IRS data • Average EFCs increase for highest income dependent filers and independent filers with dependents • Pell and OCOG targeted at students from low- and moderate-income backgrounds • Using only IRS data does not have great impact • Many students see decreases in grant eligibility

21. Minimizing the Impact of Fewer Data Elements • Make modest changes to the underlying need analysis formula • Achieve EFC results closer to current level while simplifying the application for students • Modeled impact of changing the available income assessment rates • Parameters in current system are arbitrary and not based on economic research • Marginal tax rates • Currently 22% to 47% for parents of dependent students and independent students with dependents (50% for others) • Modify Adjusted Available Income (AAI) bands

22. 2008-09 FM AAI Assessment Rates

23. Modifying FM AAI Assessment Rates • Example of simple options for adjusting EFC computation • Increase marginal tax rates by 3 percentage points (25% to 50%) • If assets eliminated, average EFC for students in public 4-year sector would rise to $3,164 — very close to current level of $3,219 • Similar pattern if system relied only on IRS data • Other options possible • Understand goals (EFC levels, Pell Grant expenditures) • Test options and outcomes

24. Minimizing the Impact of Fewer Data Elements • If only IRS data were used to determine federal aid eligibility, why couldn’t more detailed IRS data be provided to institutions and perhaps to states? • Identify tax filers with negative AGI • Impute assets based on interest and dividend income • Create more effective need analysis system than exists today • Model still under review, that opens up possibilities • Would require support from Administration and perhaps legislation

25. We Welcome Further Contact Sandy Baum sbaum@skidmore.edu Kathleen Little klittle@collegeboard.org Jennifer Ma jma@collegeboard.org Anne Sturtevant asturtevant@collegeboard.org