Simplifying Student Aid:What It Would Mean

for States

May 2012

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Why Simplicity MattersAn effective federal and state student aid

system is key to meeting college completion goals

Low- and moderate-income students are more likely to prepare academically if they understand financial aidMore likely to believe college is in their future

Simple, predictable, well-targeted student aid system will lead to more efficient use of taxpayer dollarsCurrent system is complex

Simplification: Progress to DateHR 3221 passed but never considered by

SenateOnly data available from IRS used to determine

federal aid eligibility; families with assets above legislated cap ineligible for federal aid

Administration committed to further FAFSA simplification IRS data retrieval process is a big step in the

direction of process simplification

National Evidence on Simplifying the FAFSA

2009 report from the Executive Office of the President: Relying on IRS data would have minimal impact

on Pell eligibility for independent students but generate increases for about 1/3 of dependent students.

Simplifying would remove some questions included for states.States needed information about budgetary and

distributional impact.College Board proposed state simplification

study to Lumina Foundation

State Simplification Study: GoalsHelp states understand impact of a simplified federal

aid process on state grant programsSupport institutions’ ability to plan for a simpler FAFSA

Build state support for a simplified process to ensure that students will benefitEvidence about benefits of simplifying the application

and increasing predictability of grant aid is compellingHelp states advocate for streamlined system that will

enable them to distribute need-based aid equitably and efficientlyMay require changes to underlying Federal Methodology

Our ApproachSelected a representative group of pilot states

based on criteria for eligibility & aid determinationKentuckyMinnesotaOhioTexasVermont

Using state’s 2007-08 or 2008-09 FAFSA and award data, simulated impact of potential federal data and formula changes on Pell and state grant eligibility

Mean Income and Assets of 2007-08 FAFSA Filers

State

Average Parents’ Income

(Dependent)

Average Parents’ Assets

(Dependent)

Average Income

(Independent Without

Dependents)

Average Income

(Independent Students

with Dependents)

Kentucky $59,278 $29,558 $18,405 $23,732

Minnesota $69,329 $45,563 $21,315 $27,682

Ohio $37,279 $17,793 $15,267 $21,451

Texas $41,236 $21,647 $10,771 $15,634

Vermont $63,638 $58,847 $18,629 $28,113

State Grant Program Characteristics 2007-08Kentucky College Access Program

First-come first-served; centralized awardingFM EFC cutoff $4,110

Minnesota State GrantDesigned for shared responsibility; centralized awarding• Award = cost less student and family share, less Pell Grant

Ohio College Opportunity GrantFirst-come first-served; decentralized awardingFM EFC cutoff $2,190 (2008-09)

TEXAS Grant (for students enrolled in public institutions)First-come first-served; decentralized awardingFM EFC cutoff $4,000 Students must enroll within 16 months of h.s. graduationMust be enrolled at least ¾-time

Vermont Grant Remaining need based on VSAC methodology; centralized awardingSupplemental information required; information verifiedFull-time enrollment required; may enroll out-of-state

Our Methodology: Multiple Simulations1. Remove Worksheet A items (new baseline for comparison) —

previously eliminated in 2009-10 FM• Earned Income & Additional Child Tax Credits• Welfare benefits• Untaxed Social Security benefits

2. Eliminate all assets (assets not considered today for many filers)

3. 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• Number in college from FAFSA

What if FAFSA Worksheet A Had Been Eliminated in 2007-08?

EFCs would have declined and grant eligibility would have increasedIncreased % of filers eligible for Pell Grants by about 1% in

each stateAverage state grant eligibility increase per filer ranged from $2

(MN) to $50 (OH public 4-year)Total state grant eligibility increases ranged $300K in MN to

$5.4M in Ohio 4-yearLittle discussion nationally because impact

confounded by economic downturnWorksheet A simulation results served as

baseline for comparison in study

Impact on EFC of Removing Assets: Dependent ApplicantsAverage EFCs decline for all applicantsLargest declines among dependent applicants from

highest income households (more likely to have significant assets)State

Average EFC Decline per

Filer (Recipient)

Lowest Income <$15K

Middle Income $45-60K

HighestIncome $>75K

Kentucky -$914 (-$2) -$119 -$636 -$2,080

Minnesota -$1,350 (-$167) -$242 -$814 -$2,540

Ohio -$509 (-$11) -$200 -$769 N/ATexas -$660 (+$2) -$73 -$414 -$1,946

Vermont -$1,878 (-$199) -$468 -$1,164 -$3,181

Impact on EFC of Removing Assets: Independent ApplicantsAverage EFCs decline more for independent

applicants without dependents than for independent applicants with dependents

State Without Dependents With Dependents

Kentucky -$146 -$20

Minnesota -$309 -$39Ohio (public 4-year) -$125 -$16

Texas (publics) -$71 -$5

Vermont -$358 -$71

Impact of Removing Assets on State Grant Eligibility per FAFSA Filer$ (in Millions) and % Change in Eligibility

DependentApplicants

Independent Without

Dependents

IndependentWith

Dependents

Kentucky$1.1 (+1.2%) +$19 +$5 +$1

Minnesota$1.1 (+0.7%)

+$8 +$9 +$1

Ohio (public 4-yr)

$2.9 (+2.7%)+$45 +$8 +$0

Texas (publics)$1.3 (+1.4%)

+$29 +$5 +$0

Vermont$1.1 (+4.5%)

+$64 +$9 +$2

Impact of Removing Assets on % of Students Eligible for State Grant

StateBase % of Filers

Eligible (Current FM, No Worksheet A)

% Eligible if Assets Eliminated

Kentucky58.6% 59.2% (+0.6%)

Minnesota59.2% 60.1% (+0.9%)

Ohio (public 4-yr) 55.2% 56.4% (+1.2%)

Texas (publics) 61.8% 62.4% (+0.6%)

Vermont 46.8% 48.3% (+1.5%)

Removing Assets: Considerations Removing assets has greater impact on dependent than on

independent studentsMost independent students have few assets

Higher income families are more likely to have significant assets, so reductions in EFC increase as incomes increase

Pell Grants and most state grants are targeted at students from low- and moderate income backgroundsRemoving assets does not have great impactShare of filers eligible for Pell Grant would increase by between

1 and 3%Share of filers eligible for a state grant would increase by 1 to

2%

Impact on EFC of Using Only IRS Data: Dependent Applicants

Average EFCs would decline for most applicants Largest impact among those from higher income families; more

likely to have complex financial situations

StateAverage EFC Decline per

Filer (Recipient)

Lowest Income <$15K

Middle Income $45-60K

Highest Income $>75K

Kentucky -$993 (+$52) -$150 -$532 -$2,515

Minnesota

-$1,650 (-$95) -$304 -$840 -$3,323

Ohio -$289 ($0) -$236 -$555 N/A

Texas -$891 (+$70) -$99 -$515 -$2,756

Vermont -$2,379 (+$5) -$604 -$1,269 -$4,294

Impact on EFC of Using Only IRS Data: Independent Filers Independent students without dependents would benefit more

than independent students with dependents Greater incidence of increased EFCs as a result of elimination

of employment allowance

State Without Dependents With Dependents

Kentucky -$46 +$81

Minnesota -$323 +$70Ohio (public 4-yr) -$48 +$126

Texas (publics) -$190 +$36

Vermont -$418 -$4

Impact of Using Only IRS Data on State Grant Eligibility per FAFSA Filer Many students would see decreases in grant eligibility

$ (in Millions) and % Change in Eligibility

Dependent

Applicants

Independent Without

Dependents

Independent With

DependentsKentucky

-$400,000 (-0.4%)

$0 -$7 -$10

Minnesota-$800,000 (-0.5%)

-$6 +$2 -$11

Ohio (public 4-yr)-$800,000 (-0.7%)

-$5 +$15 -$49

Texas (publics)$800,000 (+0.9%)

+$17 +$28 -$2

Vermont$800,000 (+3.3%)

+$51 +$2 -$4

Impact of Using Only IRS Data on % of Students Eligible for State Grant

StateBase % of Filers

Eligible (Current FM, No Worksheet A)

% Eligible if Assets Eliminated

Kentucky58.6% 58.3% (-0.3%)

Minnesota59.2% 59.4% (+0.2%)

Ohio (public 4-yr) 55.2% 54.7% (-0.5%)

Texas (publics) 61.8% 62.0% (+0.2%)

Vermont 46.8% 48.8% (+2.0%)

Using Only IRS Data: ConsiderationsDependent students benefit more than independent

Most independent students have few assets and removing employment allowance has greater effect

Higher income families more likely to have complex financial circumstances; reductions in EFC grow as incomes increase

Pell Grants and most state grants are targeted at students from low- and moderate-income backgroundsUsing only IRS data does not have great impactMany independent students with dependents would see

decreases in grant eligibility

Minimizing the Impact of Fewer Data ElementsMake modest changes to underlying federal need

analysis Achieve EFC results closer to current level while

simplifying application process for studentsModeled impact of changing Adjusted Available

Income (AAI) assessment ratesParameters in current formula are arbitrary and not

based on economic research• Increased marginal tax rates• Modified Adjusted Available Income (AAI) bands

Achieved EFC levels similar to those in effect in 2007-08

Minimizing the Impact of Fewer Data ElementsIf only IRS data were used to determine federal aid

eligibility, why couldn’t more detailed IRS data be provided to institutions and states?Identify tax filers with negative AGIImpute assets based on interest and dividend income

Create more effective federal need analysis system than exists todayWould require move to “prior prior year” incomeWould require support from Administration and most

likely legislation

Implications for Other StatesImpact of simpler FAFSA on level and distribution

of state grant aid would be relatively small overall.

Impact would vary from state to state.Differences in eligibility rules for state grant programsLevel of funding for state grant programsVariations in incomes and assets of state residents• States with more affluent residents would see greatest changes

States selected to permit other states to find closest comparison

ConclusionSimplifying the FAFSA would lead to small changes

in the distribution of federal and state grant awards.Could lead to an eligibility system that is simpler

and more predictable for filersReductions in EFCs could be counteracted through

minor changes to the assessment rates in the Federal Methodology.

Similar results could be achieved by creating a more robust formula that includes more data elements from the IRS without increasing the application burden for filers.

Read the Complete Report

http://advocacy.collegeboard.org/simplifying-student-aid