Change in State and Local Tax Tables Could Cost 84,000 Pell Grants, Have Ripple Effect on State, Institutional Aid; NASFAA Offers Recommendations

As reported Friday, the Congressional Research Service (CRS) in a June 25 memorandum (now available on the NASFAA Web site) reported the first estimates on exactly how much the Education Department's recent change in IRS state and local tax tables will cost needy students and families--and the outlook isn't good. Once the revised tax tables are implemented and used to calculate Expected Family Contribution (EFC), Pell Grant costs will be reduced by about $270 million and an estimated 84,000 students will be denied federal Pell Grants entirely, according to the CRS memo, which cites ED Budget Service estimates that assume a $4,050 maximum grant.

The tax tables--which have not been updated since the 1994-1995 award year--are considered by some to be an inaccurate representation of a family's ability to pay for college, because the data they contain is at least three years old, and reflective of considerably different U.S. economy.

In a New York Times interview, Brian Fitzgerald, director of the Advisory Committee on Student Financial Assistance, estimated that more than one million students could receive smaller Pell grants because of the new formula. "It's a lot of money, and it comes at a bad time, when the students can least afford it," he said.

Fitzgerald also said the change "will have a ripple effect through all the other financial aid programs — state grants, loans and institutional dollars. The cumulative effect could be much larger."

ED officials have repeatedly said they have followed standard procedure, and Sally Stroup, ED's assistant secretary for postsecondary education, told the Washington Post "the changes will have a minimal impact on a handful of students."

NASFAA supports legislative efforts to temporarily suspend the implementation of ED's need analysis action updating the state and other tax tables. Bills to suspend the action or study the impact of the change have been introduced by Sen. Jon Corzine (D-N.J.), Sen. Ted Kennedy (D-Mass.), and Rep. George Miller (D-Calif.).

"We need time to sort this out," said Larry Zaglaniczny, NASFAA's Director of Congressional Relations. "There is no doubt ED acted within the scope of the law, but questions remain about the details and timing not only of the Department's action this year but also in the past."

NASFAA Recommendations

In NASFAA's HEA reauthorization recommendations sent to Members of Congress, the Association recommended replacing the Treasury Statistics of Income file with the data and tax model used by the Institute of Taxation and Economic Policy for the updating process.

The rationale for this recommendation was that the Institute of Taxation and Economic Policy's data and tax model "more sensitively recognize[s] the variance in state tax structures by increasing the number of income bands. The Treasury Statistics of Income file provides an inadequate assessment of the full effect of state and local taxes." Additionally, since sales tax was eliminated as an allowable deduction, the current updating language severely understates the effective tax rate.

"Certainly, we want a system that determines need as accurately as possible to reflect an individual's or family's ability to pay. But when there are serious questions of fairness, timing, past inaction, and the accuracy of the data--at least from a timeliness point of view--then student aid recipients who are negatively affected should not suffer consequences of such an action," Zaglaniczny said.

NASFAA offered support for an amendment to suspend for one year implementation of ED's "update" of the tax tables. However, such an amendment was not offered on the House floor when that body debated the fiscal year 2004 Labor, HHS, Education Departments Appropriations bill. "We will continue to support similar amendments," Zaglaniczny said.

NASFAA's reauthorization recommendations also contain a proposal that the Association hopes the Congress will adopt. "We recommend using data from a private sector group that can meet the standards of timeliness and accuracy that are necessary," added Zaglaniczny. "One of the themes of the administration is outsourcing federal activities in cases where the private sector can provide comparable services to the government's in terms of quality and at lower cost. Here's one area where NASFAA and the Administration should be in absolute agreement."

By Elizabeth B. Guerard
NASFAA Assistant Director of Communications

Posted July 21, 2003 on www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
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