Report Outlines Impact of Obama's FAFSA Simplification Proposals

The need to simplify the federal financial aid application and the potential impact of President Obama's proposals to simplify the FAFSA are detailed in a new report by the Council of Economic Advisers (CEA) and the National Economic Council (NEC).

The current aid application process is needlessly complicated, burdensome and difficult to verify, according to the report. This discourages more than one million students who would likely qualify for aid from applying and provides opportunities for applicants to game the system while penalizing other families for saving for college.

Obama's Simplification Plan  

To simplify the process, the Obama Administration is streamlining the online application using "skip logic," allowing applicants to skip questions that are not relevant to them. This summer the Department has:

  • Eliminated questions about parents' financial information for students who are at least 24 or married, allowing these applicants to skip 11 questions
  • Used a single screening question before the existing three questions about homelessness status, allowing the vast majority of students to skip the remaining questions
  • Allowed men over the age of 26 are to skip question about selective service registration.

The Department plans to implement additional skip logic improvements in January 2010, allowing students who qualify for the simplified needs formula to skip asset questions, since it is not used to determine their aid eligibility. In addition, questions about untaxed income and other financial information will be presented in a simplified and interactive "check box" format on one page. Status indicators, improved help text, and new instructions will also help guide applicants through the form.

In January 2010, the Obama administration will allow students who use the online FAFSA to apply for financial aid for the remainder of the 2009-10 academic year to electronically retrieve their relevant tax information from the IRS and transfer it to their FAFSA. Students will be able to click on a link that allows them to retrieve income information from the IRS website to complete the form. The Administration plans to evaluate this pilot as it continues to examine how to expand the electronic retrieval option to more students in the future.

The administration is also urging Congress to simplify the eligibility formula to eliminate 29 questions regarding savings and income adjustments -- information that is not on tax returns. The administration would replace these questions with a simple check-off asking students and parents whether they own more than $250,000 in savings and investments outside of certain exclusions such as their homes and retirement accounts. The Administration would also expand colleges' ability to adjust aid eligibility to address inequities.

"Most do not have savings even approaching this level," the report states. "Only four percent of 2007-08 aid applicants had more than $150,000."

The Impact of Complexity  

The complexity of the current student aid application makes it difficult for students to predict their aid eligibility and the true cost of college prior to enrollment, which hinders college attainment for low-income students from the very start, according to the report. For student aid to be effective in increasing college enrollment, students must be able to predict how much aid they will receive. Simplifying the student aid formula and application process would allow families to estimate aid amounts as they are deciding whether college is an affordable option.

The complexity also creates administrative costs and the information is difficult to verify, according to the report, which outlines three drawbacks of verification.

  1. It is time consuming and costly for both students and colleges. Colleges must handle nearly 4 million paper copies of tax returns each year. The Department's Inspector General has estimated that this process costs $80 per application in 1999-00, and the Advisory Committee on Student Financial Assistance estimates that the total cost is at least $432 million annually. The evidence suggests that the verification system does not work well. Comparing FAFSA income reports with the same families' actual tax returns, the Department of Education found that misreporting of income information on the FAFSA led to over $600 million in Pell grant overpayments in 2001 and 2002.
  2. Because the system relies on paper copies of tax returns submitted by students, there is no assurance that the tax returns submitted to colleges are the same as those filed with the IRS. The need to store paper tax returns in college offices also creates risks to students' privacy and to the security of their financial information.
  3. The system fails to identify many instances in which students misreport their financial information. Only about one-third of applications are verified, so misreporting on the other two-thirds goes undetected and unresolved. Even on applications that are subject to the verification process, most of the reported information -- including reported asset holdings -- is not verified.

The report also notes that asset tests discourage savings and are vulnerable to fraud. The FAFSA includes six questions about assets and savings, and the information provided enters into the formula for student aid eligibility. These questions exacerbate the complexity and add opportunities for gamesmanship. Moreover, in some cases their inclusion can penalize responsible families who have saved for college expenses.

Estimated Impact of Obama's Simplification Plan  

The intent of the detailed FAFSA questions is to collect information about sources of income that indicate a family's ability to help pay for college. But in practice many of these questions do little or nothing to improve the targeting of aid to needy students, the report contends. In nearly every case, fewer than 5 percent of FAFSA applicants have income in these extra categories, and in most cases the percentage is even lower -- and the responses are largely unverifiable.

Even where the questions have an impact, it is debatable whether they make the distribution of aid more fair or efficient, according to the report. The current FAFSA requires students to report scholarships that are taxed as income so as to exclude them from income for aid purposes. However, scholarships are only taxed as income if they exceed tuition and other educational expenses. As a result, the current student aid formula reduces the aid eligibility of students who have to work to pay their living expenses but not of those who receive a stipend and do not have to work at all.

The CEA and NEC analyzed financial aid applicant data from the Department for the 2007-08 academic year to better understand the impact of the Obama proposal on student aid awards. The results suggest that removing asset questions and all other financial questions not available through the IRS, while greatly simplifying the application, would have minimal impact on Pell grant eligibility.

For dependent students and for independent students with and without dependents there is nearly a one-to-one relationship between the Pell grant awarded under the current formula and what the student would receive if assets were not included. The relationship between the award amounts under the current formula and that which students would receive if both assets and income not reported to the IRS were excluded is slightly weaker but still very highly correlated. While the focus of this analysis is on Pell grants, the results are very similar if it is extended to include subsidized student loans. That is, few students would see changes in their eligibility for subsidized student loans if assets and other income were excluded from the financial aid calculation.

"The distributional effects of dropping non-IRS information would be small for current independent student applicants," the report states. "Pell awards would remain within $250 of their current levels for 88 percent of independent students."

State and Institutional Aid  

Several questions not needed for federal aid determinations are included on today's FAFSA at the request of some states. The report concludes that simplifying the FAFSA may convince some states to simplify their formulas.

"States may decide that relatively small changes to student scholarships are not worth introducing a great deal of complexity into the aid application process," the report states.

In addition, the report notes that the Department can work with states that choose to retain complex student aid formulas to minimize the additional burden on students. New Yorkers completing the FAFSA are sent to New York's online student aid application. FAFSA information is used to automatically complete 32 questions on New York's form, leaving only eight additional questions for students to answer.

Private colleges that award substantial amounts of their own aid often require their students to fill out an additional financial aid form, such as the College Board's CSS/Profile. However, the report notes that this form is used by only about 250 colleges and universities, according to the College Board.


Publication Date: 9/11/2009

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