FM: Broken and/or Too Political? H eather McDonnell - Sarah Lawrence College

1. FM: Broken and/or Too Political?Heather McDonnell - Sarah Lawrence College

2. The Premise • Federal Methodology is subject to - attempts to control Federal Pell Grant Expenditures – entitlement program - political expediency – pork barrel legislation • Federal Methodology lacks collaboration of practitioners and economists

3. Does Federal Methodology Work as a Needs Analysis Tool? • Based on its historical foundation • Based on its philosophical roots • In its practical application

4. Creation of Needs Analysis A fictional dramatization

5. Chronology of Needs Analysis • Early 1950’s work by John Munro of Harvard • Mid-1950’s: College Scholarship Service (CSS) founded by small group of private colleges. Established criteria to measure college students and their families' ability to contribute to their education based on family income and assets. • Mid-1970’s: National Task Force on Student Aid Problems – Keppel Task Force – developed Uniform Methodology Partnership – Collaboration

6. Congress Controls Needs Analysis for Federal Student Financial Aid • 1986 – Congressional Methodology – with Professional Judgment • 1992 - Higher Education Amendments - Mandated sole use of a single, free application for Title IV funds (Free Application for Federal Student Aid, or FAFSA); - Mandated a single need analysis methodology, called the Federal Need Analysis (FM);

7. Underlying Philosophy of Needs Analysis • An objective and uniformly applied formula designed to establish the relative financial strength of families to meet education expenses over time. • Equity Principle – Allowing full access to educational opportunity and leveling the playing field for access to financial resources for higher education • vertical equity – varying contributions according to available resources – income and assets – people with more pay more • horizontal equity – families with relatively equal resources will be assessed at the same level

8. Equity – Uniformity - Objective u·ni·form adj. 1. Always the same, as in character or degree; unvarying. 2. Conforming to one principle, standard, or rule; consistent. 3. Being the same as or consonant with another or others. 4. Unvaried in texture, color, or design. ob·jec·tive adj.1. Of or having to do with a material object. 2. Having actual existence or reality. 3. Uninfluenced by emotions or personal prejudices:an objective critic. See Synonyms at fair1. • eq·ui·ta·ble • adj. 1. Marked by or having equity; just and impartial.. Just to all parties:equal, even, evenhanded, • 2. Free from bias in judgment: fair, fair-minded, impartial, just, nonpartisan, objective, unbiased, unprejudiced. Idiom: fair and square. See fair • noun • The quality or state of being just and unbiased: Source: Webster-Merriam Dictionary

9. Reasonable and Realistic • rea·son·able • adjective • 1 a:being in accordance with reason<a reasonable theory> • b: not extreme or excessive <reasonable requests> • c:moderate, fair<a reasonable chance><a reasonable price> • d:inexpensive • 2 a: having the faculty of reason b:possessing sound judgment<a reasonable man> - re·al·ism • noun • 1:concern for fact or reality and rejection of the impractical and visionary • 2 a: a doctrine that universals exist outside the mind; specifically : the conception that an abstract term names an independent and unitary reality • b: a theory that objects of sense perception or cognition exist independently of the mind Source: Webster-Merriam Dictionary

10. The Disconnect • The foundation of needs analysis is the ability to pay • Do we know enough about the family’s economic situation to make a reasonable and realistic determination? • AGI is not always a true reflection of a family’s income and resources

11. The Tax Return as a Need Analysis Tool • The only verifiable document available that provides a picture of family income. • Limitations: • Designed to determine what portion of income is taxable. • Some changes in the tax law designed to spur the economy – protecting income from being taxed. • Changes in the tax laws do not necessarily lead to change in the treatment of income and expenses within Needs Analysis.

12. The Tale of the $40,000 AGI’s • Family Two • Self-employed • Schedule C shows $125,000 gross receipts with $85,000 of business expenses (possible inclusion of expenses for office in the home, business travel expenses, etc.) • AGI - $40,000 • Family One • Both parents earn $20,000 • AGI = $40,000

13. Example of Tax Law Change Affecting Needs Analysis Un-reimbursed Business Expenses - $5,000 Expenses used in calculating AGI – $45,000 Dad $40,000 Mom $10,000 $100,000 assets Parent Contribution $1,816 Expenses not used in calculating AGI – 50,000 Dad $40,000 Mom $10,000 $100,000 assets Parent Contribution $4,211 Does anyone allow Business Expenses under Professional Judgment?

14. Tale of Business Assets $150,000 in Liquid Assets AGI – $80,000 Dad – 48 - $50,000 Mom $30,000 $150,000 assets Parent Contribution $16,895 AGI – $80,000 Dad - 48 - $50,000 Mom $30,000 $150,000 business assets treated as business assets Parent Contribution $12,073 AGI – $80,000 Dad - 48 - $50,000 Mom $30,000 $150,000 business assets not counted Parent Contribution $11,052

15. IM vs FM • 728 Cases of Grant Eligible, First-Year Admitted Applicants • 28 had FM PC = IM PC – 3.9% • 247 had FM Parent Contribution less than IM Parent Contribution – 33.9% • 453 had FM Parent Contribution greater than IM Parent Contribution – 62.2%

16. The Tax Disconnect • FM tables are based upon taxes paid by 1040 Schedule A filers • How many 1040 A or EZ filers do you have? • Excludes sales tax • Doesn’t everyone pay sales tax on something? • Rates don’t vary by income

17. Tax Tables • FM has adjusted the 1967 Bureau of Labor Statistics (BLS) Standard of Living by inflation • Spending habits have changed since 1967 • Cell phones • Computers • Internet service • Cable

18. The Hypocrisy Disconnect • We want families to save for college yet do we give any realistic saving allowance to families with younger children? • FM spends down the family “wealth” on the oldest college bound child

19. The Asset Hypocrisy

20. Just the $$ • Home Equity • $20 billion • Business Equity • $1.1 billion • Farm Equity • $227 million • Parental Assets in Siblings Names • $171 million

21. The Home Equity Disconnect • Measure of a family’s economic strength over time • Tax advantages (Schedule A) • Refinancing as an option • Mortgage payments are stable • Renters are subject to random increases • Renters pay more of their income for housing

22. The Business Equity Disconnect • A great accountant can make the difference!

23. Needs Analysis • A good financial aid practitioner is an artist who uses needs analysis as a science • A great practitioner is a scientist who uses needs analysis as an art form

24. Expected Family Contribution • If it’s reasonable, most families can manage without major lifestyle or college choice changes • Sacrifice is assumed. The degree will depend on prior planning and the value the family places on a college education

25. Questions • Is it possible to recreate a partnership in how parent contributions – financial need – is determined? • Is it possible to create a needs analysis system that is based on objective, equitable and uniformly applied economic criteria?

26. Quixotic Hope I. Pell Formula – to control expenditures for entitlement programs Pell, ACG, SMART Grants II. A nationally formulated assessment tool that provides an equitable and uniformly applied approach to collecting and analyzing financial data for campus based funds – federal and institutional.