The Education Department should do a better job annually updating the state and local tax tables used in calculating the expected family income (EFC) and determining aid levels to students, according to a January 28 Government Accountability Office (GAO) report. GAO also said in GAO-05-105 that ED should determine more effective data sources and methodologies for calculating the EFC.
The report, "Student Financial Aid: Need Determination Could Be Enhanced through Improvements in Educations Estimate of Applicants State Tax Payments," placed the blame for the lack of annual updates on ED, noting that "the lack of updates is primarily
because Education did not annually seek data needed to update the allowance or
establish effective internal control to guide the updating process."
GAO also criticized ED for not considering alternatives when tax data was not readily available.
The annual state and other tax allowance tables--which are based on Internal Revenue Service information and required by Congress--list specific percentage values, or rates, that are used to exclude a portion of students and families incomes in determining their EFC.
Despite the requirement for a yearly update to those tables, ED has not updated them since 1993. That changed this winter, however, when the Department of Education on December 23 published updated tax tables, to the chagrin of many higher education advocates.
The new rules, which take effect in Fall 2005, are in violation of the Higher Education Act's "Master Calendar" statutory provisions. Experts believe a likely result of the update will be tens of thousands of Pell Grant recipients losing their awards entirely and more than a million Pell recipients having reduced eligibility.
A group of lawmakers--mostly comprised of House and Senate Democrats--requested that the GAO examine the current structure and make recommendations for executive action. Specifically, the report said the Secretary of Education should:
- develop formalized updating procedures and document such procedures in writing. (For instance, ED should make annual written requests to the IRS for state and local tax information and document those requests. ED should also coordinate with the IRS to make sure officials know when relevant tax data will be publicly released.)
- revise the methodology for calculating the state and other tax allowance to more accurately reflect the differences in taxes paid between people of various income levels.
- assess the cost and reliability of available data, and examine the viability of using alternative data sources, such as Department of Commerce or Census Bureau data, or privately-collected data.
GAO also identified four strategies for addressing the limitations of the tax allowance that range from modest to more substantial changes:
- continue to use IRS data but with a revised method for calculating the allowance,
- substitute current IRS data with one of several alternative data sources,
- use the same allowance for all aid applicants without regard to state of residence, or
- collect information directly from the aid applicants themselves.
In a response published along with the report, the Education Department responded that the strategies offered by the GAO would all require congressional action. GAO responded that all suggestions except for the first option ("continue to use IRS data but with a revised method for calculating the allowance") would require legislative changes.
The report's "Highlights" section, which follows, provides more information on the GAO's findings.
Why GAO Did This Study
In 2003, the Department of Education (Education) proposed an update to the state and other tax allowance, a part of the federal need analysis for student financial aid. Most federal aid as well as some state and institutional aid is awarded based on the students cost of attendance less the students and/or familys ability to pay these costs--known as the expected family contribution (EFC). The allowance, which accounts for the amount of state and other taxes paid by students and families, effectively reduces the EFC. Given the potential impact of the allowance on the awarding of aid, we determined what factors have affected the updating of the tax data on which it is based, the effects the proposed 2003 update would have had on financial assistance for aid applicants, any limitations in the method for deriving the allowance, and strategies available to address them.
What GAO Found
While Education has been required to revise the allowance annually since 1993, prior to 2004 it attempted to update the allowance only twice--in 1993 and again in 2003--but the latter update was suspended. As a result, the 1988 IRS tax data used for the 1993 update remained in effect. The lack of updates is primarily because Education did not annually seek data needed to update the allowance or establish effective internal control to guide the updating process. Also, Education did not consider alternatives when data were not readily available.
Had the update been implemented in 2004-2005, the allowance would have decreased for most states; as a result, the EFC would have increased by about $500, on average, for a majority of aid applicants. Of those with an EFC increase, 38 percent would either have received less in Pell Grants ($144 less on average) or would have become ineligible for them; the percentage of recipients affected would have varied by income. Overall Pell Grant expenditures would have decreased by $290 million. Increases in EFCs could also have affected other forms of aid, including state aid; these effects in turn could have affected Stafford loans and Parent Loans for Undergraduate Students. The impact of the proposed update on Campus-Based, state, and institutional need-based aid would likely have varied based on state and institutional aid awarding policies and changes in state allowances.
Due to certain limitations of the IRS dataset with respect to calculating the allowance, and problems with how Education uses this dataset, the current allowance may not reflect the amount of taxes paid by students and families. The dataset is limited because the taxpayers included in it are generally not representative of aid applicants, it does not include all state and other taxes paid by students and families, and the tax data are several years older than the income information reported by applicants on aid applications. In addition to these limitations, Education does not make full use of the dataset to better reflect the varying tax rates paid by taxpayers in different income groups.
Strategies we identified for addressing the limitations of the tax allowance include (1) using IRS data with revisions to the method for calculating the allowance, (2) substituting IRS data with one of several alternative data sources, (3) using a standard allowance for all aid applicants irrespective of state of residence, or (4) collecting tax information directly from aid applicants. These could require modest to substantial changes, would differ in their impact on applicants and federal costs, and could require legislative changes.
What GAO Recommends
GAO recommends that the Secretary of Education, in the short run, (1) formalize procedures to ensure that Education annually requests and obtains the most current tax data from the Internal Revenue Service (IRS) and (2) revise the methodology for calculating the allowance to better reflect the varying tax rates paid by students and families in different income groups. In the longer run, GAO recommends that Education (3) determine whether more effective data sources or methodologies exist for deriving the allowance.
By Elizabeth B. Guerard
NASFAA Assistant Director for Communications
Posted February 1, 2005 on www.NASFAA.org, the Web Site of the
National Association of Student Financial Aid Administrators (NASFAA).
Copyright 2005. Redistribution to non-NASFAA institutions is prohibited
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