Nuts and Bolts of Need Analysis

1. Nuts and Bolts of Need Analysis A webinar sponsored by the North Carolina Association of Student Financial Aid Administrators and the NC State Education Assistance Authority Presented by Steve Brooks, Executive Director, North Carolina State Education Assistance Authority, October 2009

2. Need Analysis and Professional Judgment • First in a series of webinars on need analysis nuts and bolts • Focus today is on principles of need analysis and why they are vital to making good professional judgment decisions • We will discuss federal methodology and its rules yet also consider the broader context of meeting needs fairly, both complying with FM rules and ALSO appropriately allocating discretionary campus dollars

3. Need Analysis and Professional Judgment • Some significant themes of this series: • Decision of whether to do a professional judgment is dependent on understanding both need analysis and federal eligibility determination • How you make a professional judgment matters • FM limitations – change data elements only • “Ripple effects” by changing the “wrong” data element • Understand origin and derivation of methodology tables to ensure equitable results

4. College CostsWho Benefits? Who Pays? • No one pays full costs of education • State and private donors subsidize heavily • Of the costs that are left, who should pay? • Society benefits – so it subsidizes for all AND provides aid for those who cannot pay net costs • Student benefits – so student and family must have an obligation to pay if they can

5. Need Analysis Principles • First principle of need based financial aid: • Parents and students have primary responsibility for financing and • To the extent that they are able to pay, they should pay the costs of college education • So we have to have a system to measure the extent to which they are able to pay We allNeed Analysis! -- Sigmund Freud

6. A system of “need analysis” • Three ways to pay for college • Saving in advance • Using current income • Borrowing and paying with future income • Our system looks one year at a time - a snapshot – and uses that to imagine a video over time • That is, we look at current data and extrapolate the family’s ability to pay college costs • An art as well as a science

7. The artist’s tools • Income and assets used to measure financial strength • Families with assets have financing options • Families with assets experience less pressure on current-year income • Some argue this penalizes families for saving • But in fact assets play only a small part, and those who did not save almost always have to do more borrowing in the end

8. EFC as Measure of Family’s Responsibility (Share) • The result of our analysis is the “expected family contribution,” or EFC • We use that, along with reasonable costs of attendance, to calculate the student’s demonstrated need for aid • Concepts that must be a part of any measure • Relative sacrifice • Face validity

9. How did all of this begin? As the competition for enrollment and talent gets tighter, as it will, we may undercut the old-fashioned idea that [financial aid] is intended to help the needy and deserving scholar, and that well-off families should help themselves. We will do ourselves and the country no good if we diminish the force of this fine old idea. May 1953 John H. Monro

10. A brief history lesson • 1954- CSS founded to support awarding of need-based aid • 1965- Higher Education Act • Federal legislative umbrella; Title IV Programs • Federal aid was distributed according to the formula developed by financial aid professionals • 1972- HEA started “federalization” • Basic Educational Opportunity Grant (now Pell Grant) • Introduced separate federal application and eligibility formula (for BEOG only; other aid still up to aid community)

11. Where We’ve Been . . . • 1974- Keppel Task Force • The situation • Federal, state & institutional forms • Need analysis & Federal eligibility • No community standards • The recommendations • Common application - “multiple data entry” • Uniform Methodology (UM) same result despite which form might be used • BEOG still had a separate eligibility formula to ration funds • Community standards - National Coalition of aid community to develop and maintain the UM

12. Where We’ve Been . . . • 1978- Multiple data entry began • 1986- HEA “federalization” • Congressional Methodology (CM) • CM replaced UM in 1988-99 • No longer a community standard; now took Act of Congress to change methodology • Continued Pell Grant formula as a separate eligibility calculation (BEOG renamed Pell Grant in 1980)

13. To The Present… • 1992- HEA consolidated CM and Pell • Federal Methodology (FM) • Federal application only • Merger of formulas for Pell Grant and CM into FM presented some interesting political (not philosophical) outcomes • Professional judgment authority explicitly given to aid administrators

14. What is “Financial Need?” This is the one aspect that has remained constant since 1954 Total College Costs • Family Contribution • Need/Aid Eligibility

15. Need Analysis Principles • Some principles remain… … but they are often lost in the rush to comply with ever-changing federal rules • Question is how to make the system FAIR

16. Need Analysis Principles • Horizontal equity – lining them up in order of discretionary income

17. Need Analysis Principles • Vertical equity – assessing ability to pay in a progressive manner

18. So, What ISProfessional Judgment? I exercise professional judgment, therefore I am! -- Descartes

19. Professional Judgment • Need analysis is a guide for judgment, not a substitute • Step Back – “is this the right answer?” • Easy to “hide behind the rules” • Aid Administrator is final authority • Effective PJ impossible without understanding the “why’s” of need analysis • Good professional judgment includes understanding FM rules AND understanding need analysis principles and practices

20. Federal Methodology (FM) • Established by the Higher Education Amendments of 1992 (1993-94) • Hybrid of CM and Pell formulas • Official U.S.E.D. calculation required • Student must complete FAFSA • CSS estimates FM results on PROFILE • INAS FM results match ED results

21. Federal Methodology • Distribution formula--nottraditional need analysis • Developed by U.S. Congress • the result of merging UM and Pell Grant • subject to politics/budgetary limits • no commitment to keeping formula economically-sound – politics, not economics • Good professional judgment includes understanding FM rules AND understanding need analysis principles and practices

22. Federal Methodology Used to determine eligibility for: • All Title IV student aid programs • Some state grant programs * • Some private scholarships • Some institutional aid *All our North Carolina programs use FAFSA data but not all use the federal methodology – a crucial distinction to understand in doing professional judgment

24. Whose income & asset information is required in FMand whose is excluded but may deserve consideration when doing professional judgment ? • Custodial parent(s) – always used in FM unless professional judgment to make student independent • Stepparents – normally used in FM but might be excluded in professional judgment under some circumstances • Non-custodial parent(s) – never used in FM, but might be factor in deciding if a professional judgment is appropriate

25. What is income? • Income subject to taxation • Wages, salaries and tips • Net income from business/rental/farm • Interest and dividends • Capital gains/losses???? • Income not subject to taxation • Interest on tax free bonds • Tax deferred payments (401K, for example) • Other

26. What income counts in FM? Some Taxable income • Adjusted gross income (exclude combat pay) • Income earned from work + Some Untaxed income • Excluded Income =========================== = Total income used in FM Should be aware of other income as well before professional judgment

27. FM untaxed income includes • Payments to tax-deferred pension & savings plans • IRA deductions & payments to a SEP/KEOGH/similar plans • Child support received • Tax exempt interest • Untaxed portion of IRA distributions (not rollovers) • Untaxed portions of pensions • Housing, food and other living allowances paid to military, clergy, and others • Veterans non-education benefits • VA Work Study Allowances • Other untaxed income not reported elsewhere • Money received or paid on your behalf

28. No Longer Untaxed Income for FM • Earned Income Credit • Welfare benefits including TANF • Credit for federal tax on special fuels • Foreign income exclusion • Untaxed Social Security benefits (SSI) • Additional Child Tax Credits (IRS 1040 Line 66) • Combat Pay not included in AGI • Earnings from work under a cooperative education program not counted in AGI Should any of these be considered before professional judgment decision is made?

29. Discretionary Income • The goal of need analysis is to count all legitimate income, and to exclude income that is not representative of real situation (using snapshot to see a video) • Horizontal equity – get them all to the right place in line and know that each is in order of discretionary income

30. Discretionary income is total income minus certain allowances Idea is that there is some income that is not available for any discretionary use • Taxes Paid: • Federal Income Tax; State and Local estimated taxes; FICA taxes • Employment Expense Allowance • Income Protection Allowance • NOT a “living expense allowance” (“how can we live on that?”) • Represents an amount below which a family has absolutely no discretion as to how to spend a dollar and above which SOME discretion begins

31. Horizontal and Vertical Equity • Now we have all families lined up in order of amount of discretionary income (horizontal equity) • We next have to determine what portion of that discretionary income should go to college education • Vertical equity (progressive assessment) versus flat tax – the more discretionary dollars a family has, the greater portion of those dollars it can afford to use for a given purpose • So system assesses from 22% up to 47% depending on amount of discretionary income

32. The role of assets in measuring ability to pay

33. What assets count and don’t count in FM? Do count: Cash, Savings & Checking Net Worth of Investments Net Worth of Some Business/Farm 529 college savings assets Don’t count: Home equity Some business and farm assets Retirement and life insurance Should be aware of actual total net worth before doing professional judgment! You can - but do not have to - do a PJ!

34. (Education Savings and) Asset Protection Allowance • Derivation – for retirement Money required to purchase an annuity today that, at retirement age, would provide a moderate standard of living when combined with social security • Unclear purpose today We don’t assess retirement assets – a disconnected table with no real economic rationale (but a political rationale for sure!) • Be aware before doing professional judgment Generous protection is built into the FM formula and must be taken into consideration

35. Contribution from Assets Total Net Worth (of countable assets) • Education Savings & Asset Protection Allowance = Discretionary Net Worth

36. Contribution from Assets • Discretionary Net Worth • Multiplied by Asset Conversion Rate – 12%, and added to available income • Assessed at 22% to 47% • Thus 5.6% net is maximum from parental assets (that is, 47% * 12% = 5.64%) • Putative Income from assets is one way to look at it – a tie breaker in the formula • Two families, identical incomes, different assets – which has more long term capacity to pay?

37. In conclusion • Hope this has been a good introductory discussion of need analysis principles and theory and how they interact with FM • Next steps – future webinars this fall: • Income items and professional judgment • Asset items and professional judgment • Extraordinary expenses and professional judgment • Case studies and discussion, even hand calculations!

38. Questions and Comments