Understanding Need Analysis and the Tradeoffs Between Simplification and Equity

1. Understanding Need Analysis and the Tradeoffs Between Simplification and Equity Kathleen Little Senior Executive Director The College Board National Association of State Student Grant and Aid Programs June 2005

2. Goals of this Session • Understand where we’ve been and what has changed over time • Learn how the Federal Methodology works • FM and economic principles • FM strengths and weaknesses • Financial need or federal eligibility? • Think about where we are going • Tradeoffs between simplicity and equity

3. But first…. NASSGAP Need Analysis JEOPARDY!!

4. Year Congress required all students applying for federal student aid to complete the FAFSA What is 1992?

5. Year the first national system of need analysis was developed What is 1954?

6. Year home equity was eliminated from the federal need analysis formula What is 1992?

7. In 1992, the number of state-specific CSS Financial Aid Forms (FAFs) What is 43?

8. And now…. Final NASSGAP Need Analysis Jeopardy!

9. Source of data used to derive the FM State and Other Tax Allowance What is IRS Schedule A data?

10. Good Job! Let’s Move On….

11. Understanding Where We’ve Been April 1953 College Board Symposium: • Bidding wars for top students led to increases in merit aid • John Monro, Dean of Harvard College, proposed that the College Board establish a national system of need analysis: “A fair and reasonable approach to determining ability to pay requires complex calculations calling for a very detailed look at the family’s financial situation.”

12. A Brief History Lesson: From CM to UM to CM to FM to IM • 1954: CSS Methodology (PCS) • 1972: Basic Grant Methodology (Basic Grant App) • 1976: Uniform Methodology (FAF/FFS) • 1986: Congressional Methodology (FAF/FFS) • 1992: Federal Methodology (FAFSA) • 1992: Institutional Methodology (FAF Supplement replaced by CSS/PROFILE in 1995)

13. Principles of Need Analysis • Paying for college is a shared responsibility • Dependency status defines financing partnership • Responsibility of student and parents first • Federal and state governments and institutions are financing partners • Need analysis measures capacity to pay, not willingness • Families in similar circumstances should be expected to pay similar amounts (horizontal equity) • Families with more resources should be expected to pay appropriately more (vertical equity) • Family contribution reflects family’s ability to pay over time • Education like other large investments • Saving, paying from current income, borrowing

14. Understanding the FM Formula in 30 Minutes!(Dependent Students Only)

15. Treatment of Parent Income • Income is major component of EFC AGI/ taxable income + Total untaxed income - Parent’s Title IV income exclusions (Worksheet C) = Total Parent’s Income

16. Protecting Parent Income • Income Protection Allowance (IPA) is major allowance against income • Families with incomes below IPA cannot afford to pay college expenses • Employment Allowance • Recognizes expenses related to both parents working (additional clothing, transportation, etc.) • Taxes • U.S. income tax • State and other tax allowance • FICA allowance

17. FM Parent Contribution from Income • A portion of the parent’s available income is expected to pay college expenses Total Income • Total Allowances =Available Income (AI)

18. Issues with FM Treatment of Income • FM: Simple or equitable? • AGI vs. components of AGI • Allowances based on 1967 BLS data • State and other tax table ignores sales tax • Medical/dental expenses not captured on FAFSA; family must appeal • Professional judgment adjustment required

19. Treatment of Parent Assets • Assets contribute to financial strength • Ability to handle emergencies • Retirement well-being • Supplement to income • Liquid vs. non-liquid assets • An asset is an asset • Valuation presents challenges • Debate about which assets should be considered in FM

20. What Parent Assets Are Considered? • Current balances in cash, savings, and checking accounts • Investments • Other real estate, vacation homes, trust funds, stocks, bonds, etc. • Equity in business or farm • Family farm assets excluded

21. Assets Not Considered by FM • Primary home • Family farm • Life insurance • Retirement funds • Value of prepaid tuition plans • Art, jewelry, automobiles, etc.

22. Why Home Equity Considered in IM • Benefits of home ownership vs. renting • Home owner receives tax benefits • Renter’s assets fully taxed • Home owner can tap home equity • Social equity issues

23. Treatment of Parent Assets • Assets not counted if parents qualify for Auto Zero calculation or Simplified Needs Test • If assets considered: Cash, savings, checking accounts +Other real estate and investment equity +Adj. business/non-family farm net worth =Net Worth

24. Protecting Parent Assets • Education Savings and Asset Protection Allowance • Allowance based on age of older parent and marital status of parents • Intended to protect amount of assets needed to provide adequate income during retirement, factoring in expected social security benefits

25. Parent Contribution from Assets • Parents expected to contribute a portion of net worth to college expenses Net Worth -Education Savings and Asset Protection Allowance =Discretionary Net Worth x 12% asset conversion rate =Income Supplement

26. Issues with FM Treatment of Assets • Definition of assets • Home equity and family farms excluded • Little asset detail on FAFSA • Asset protection for retirement, but retirement assets not captured • Cliff effect of Simplified Needs Test

27. FM Parent Contribution • Based on FM definition of income and assets Available Income +Income Supplement =Adjusted Available Income x AAI assessment rate =Total Parent Contribution ÷ Number of children in college = Parent Contribution for the Student

28. Contribution from Student Income • Similar to parent contribution; fewer allowances Student’s total income -U.S. income tax -State and other taxes -FICA -IPA ($2,440) -Offset for parent’s negative AAI =Available Income (AI) x 50% =Student’s Contribution from Income

29. Issues with FM Treatment of Student Income • Low income students who work to help support family • Little income protection • High assessment rate • Possible double counting of income if student saves

30. FM Contribution from Student Assets • Same assets considered as for parent • No asset protection • Assets assessed at 35% (Student’s net assets X 35%)

31. Issues with FM Treatment of Student Assets • Savings disincentive • No asset protection • 35% assessment rate • Double-counting of income and assets • Income assessed at 50% • Assets assessed at 35%

32. FM Contribution from Student Student contribution from income +Student contribution from assets =Total Student Contribution

33. The FM EFC Expected Family Contribution Parent Contribution for the Student + Student Contribution = Expected Family Contribution

34. Measuring Effectiveness of FM • Horizontal equity • Removal of home equity • Vertical equity • Simplified Needs Test • Face validity • Medical/dental expenses • State/local tax table • Comprehensive data • Use of AGI as primary measure of ability to pay • Pressure to reduce questions on the FAFSA

35. Does FM Measure Need? • Many believe that FM determines federal eligibility but not financial need • Methodology subject to political pressure and budgetary concerns • FM supports equitable aid distribution if family circumstances are not complex • And if aid administrator uses sound professional judgment

36. College Board Goals in Upcoming Reauthorization • Improve access to postsecondary education for low income students • Increase equity in determination of eligibility for student aid funds • Simplify and streamline the federal student aid delivery process

37. Evaluating Proposals to Improve FM • Expand eligibility for Auto Zero calculation • Increase income limit to $25,000 • Adjust income threshold annually • Simplify eligibility criteria by using eligibility for federal means-tested programs such as Food Stamps or the federal free lunch program instead of type of tax form filed • Impact on state grant programs?

38. Evaluating Proposals to Improve FM • Reduce the FM student work penalty • Modify income assessment rate • College Board and NASFAA—use highest marginal tax rate applied to parents’ adjusted available income (22%--47%) • Advisory Committee—reduce assessment rate to 40% • Increase IPA by $1,000 • Impact on eligibility for state grant programs?

39. Evaluating Proposals to Improve FM • Treat all “529” plans as a parental asset for dependent students and as a student asset for independent students • Savings plans treated this way currently • Prepaid tuition plans not considered an asset; amount withdrawn considered a student resource • Information about prepaid tuition plans not currently captured on FAFSA • Impact on eligibility for state grant programs?

40. Other FM Proposals • Advisory Committee • Retain Simplified Needs Test, but use eligibility for federal means-test programs as qualifier instead of type of tax form filed • Phase in future updates to State and Other Tax Allowance to avoid loss of Pell Grant eligibility for large numbers of students • Modify definition of independent student • Students in foster care • Students whom the courts have recognized have no relationship with their parents

41. Other FM Proposals • The College Board • Eliminate Simplified Needs Test • Cliff effect in need analysis • Qualifying is not simple; few questions are dropped • Reduce savings disincentive • Add modest Asset Protection Allowance of $2,000 • Reduce assessment rate from 35% to 20% • Eliminating confusing terminology • Change Expected Family Contribution (EFC) to Federal Eligibility Index (FEI)

42. Simplifying the FAFSA • The College Board proposes: • Make online FAFSA smarter • Eliminate confusing non-germane questions • Taxable income questions for non-tax filers • Questions about student’s spouse if dependent • Do not introduce a second paper application • High schools not staffed to ensure student picks up correct version

43. Evaluating Proposals in Context of Goals • Increasing access for low income students is crucial • Early information re: student aid eligibility is important • Simplification of eligibility determination can make the message clearer • Expansion of Auto Zero eligibility • But…do simplification proposals impact our ability to distribute aid equitably? • Should our top priority be access or equity if both are not possible?

44. For questions about need analysis, please call us! • Need analysis our focus since 1954, and we’re happy to help • Staff resources in Reston, Virginia • Kathie Little: klittle@collegeboard.org • Linda Peckham: lpeckham@collegeboard.org • Susan McCrackin: smccrackin@collegeboard.org