NASFAA President Dr. Phil Day Comments On Education Department's Student Aid Simplification Plan

The Department of Education recently released a proposal to simplify the student aid process for parents and students. In short, this proposal:

Pares down the FAFSA to the six data sets of no more than a total of 30 questions required to determine eligibility and amount of aid;
Provides instant notification of the student's Federal aid package by decoupling cost of attendance from aid determination;
Provides a single Federal grant and loan package with the availability of participation in a work study program that they can take to any school;
Directs more Federal funds to those individuals who truly are in need; and
Emphasizes a return on the taxpayers' investment.

NASFAA President and CEO Dr. Phil Day issued the following statement regarding the Department's recent recommendations to simplify the student aid process:

"The Department of Education's continued efforts to simplify the financial aid process for students and parents are extremely encouraging; simplification of this overly complex system is long overdue. The National Association of Student Financial Aid Administrators (NASFAA) shares the goals of simplification, and has long advocated these goals by proposing specific ideas through comments to Notices of Proposed Rulemaking, recommendations proposed in negotiated rulemaking, and in many other ways. NASFAA has also expressed concerns about the need to restructure and reform student aid beyond the issue of simplification. We expect to consider other components of the Department's strategy as the Association moves forward on its own strategic planning agenda for the future.

"Specifically, NASFAA is currently engaged in a broad-based National Conversation Initiative (NCI) that seeks to take an even more comprehensive assessment of the student aid system. NCI goes beyond an academic review of the student aid system by soliciting ideas from practicing financial aid professionals, who are closer to the intersection of student aid policy and its effects on students than anyone else. Through more than 23 sessions thus far, we have heard input from hundreds of financial aid professionals on issues including simplification, as well as other methods of promoting access and success for low- and moderate-income, disadvantaged, and underserved students.

"As President and CEO of NASFAA, I particularly welcome the discussion and debate the Department's plan will spur. NASFAA will evaluate these proposals as part of our NCI effort, along with other ideas proposed by the College Board, the Student Advisory Committee, other studies, and primarily, our own members."

The Department's proposed simplification plan is included below.

A Rational Approach to Federal Student Aid

Sara Martinez Tucker
Under Secretary of Education
U.S. Department of Education

"The entire financial aid system - including federal, state, institutional, and private programs - is confusing, complex, inefficient, duplicative, and frequently does not direct aid to students who truly need it."

The Secretary of Education's Commission on the Future of Higher Education

THE PROBLEM

It didn't need to be said - just about everyone involved in college preparation, access to college and financial aid has known this for some time. More important, parents and students have been frustrated in their efforts to fill out the application form, to understand what aid they might be eligible for, and to use information about this aid to plan for their college experiences.

Students and their parents, teachers, counselors, aid officers - they all say:

The aid application itself is complex and intimidating.
The result from using this application - an Expected Family Contribution - relies on a formula that is arbitrary, difficult to understand, lacks clarity and relevance, and is subject to "gaming."
Further, the EFC tells students and families "how much the student will NOT receive" rather than the aid they can receive.
Much of the data are unverifiable.
The multiplicity of programs is confusing.

But we made the statement to spur action. During our time as commissioners we also made the decision to ignore piecemeal approaches, such as just trying to simplify the Free Application for Federal Student Aid (FAFSA). We knew an attempted fix to one piece of the problem could have unintended consequences to others.

Congress, in the recently enacted Higher Education Opportunity Act, directed the Secretary of Education to:

Make the FAFSA more consumer friendly;
Develop a simplified form for low-income students;
Work to reduce income and asset information, and
Establish a program that would inform dependent students of possible federal aid in the Fall of their senior year of high school (based on data from two years prior).

Is fixing the current system of applying for and receiving Federal Student Aid what is needed? Consider the following.

How Federal Student Aid works:

On or after January 1st, high school seniors fill out the FAFSA - currently a 10-page document with more than 130 questions on 6 pages. Four pages of instructions are needed to provide clarity.
Of the question set, 45 questions capture the information needed to calculate amount of aid for which the student may be eligible - 37 on income, 6 on assets and 2 on specific household circumstances (family size and the number of household members in college).
Complex, theoretical statutory formulas then determine how much a family has for discretionary uses. An Expected Family Contribution (EFC) is derived from this number.
The EFC then drives the Pell Grant calculation and the calculation for federally subsidized student loans.
Cost of Attendance at the student's selected college also plays a role in determining the amount of subsidized and unsubsidized loan eligibility.
However, the Student Aid Report (SAR) sent to families has no information on student eligibility for grants or loans. Instead, a first-time college student gets only the EFC - in essence, the amount that a family needs to come up with to meet educational expenses. Returning students get only a little more information - the EFC and the cumulative balance of their Federal student loan debt.
Student-selected colleges or universities also are sent the SAR information.
Most students do not learn how much Federal aid they are eligible for until the mid- to late-Spring and some returning students do not know until the Summer preceding their Fall enrollment.

THE SOLUTION - Nothing Less than a Complete Overhaul is Needed

It doesn't have to be this way. A rational approach to Federal Student Aid would simplify access to aid, pool program funds so that students have portable portfolios - i.e., good at any campus the student chooses - with single grant, work study and loan components, and track return to students and taxpayers on the Federal investment.

To access Federal aid, the FAFSA should request information that is easily obtainable and verifiable and only ask the questions necessary to determine eligibility and award levels. And subsidized Federal aid should be targeted to the neediest students; be independent of other aid; be predictable and portable; be distributed through fewer programs, and be used by families to leverage additional state, institutional and private aid.

This rational approach to Federal Aid has four components:

A simplified FAFSA;
A Federal Student Aid Target (FSAT) that sets the maximum amount of Federal subsidized aid (grants and subsidized student loans) the neediest student could receive;
A Federal Student Aid Commitment (FSAC) that determines a particular student's eligibility, and
The consolidation of programs into single grant (Pell), loan (subsidized student loan, unsubsidized student loan, and Parent Loan for Undergraduate Students in both the Federal Family Education Loan and Direct Loan programs) and work study (Federal Work Study) programs.

Recommendation 1: Use Internal Revenue Service Adjusted Gross Income and Number of Exemptions Claimed to determine a student's eligibility for Federal aid.

In the current model, financial need is the difference between the cost of attending a postsecondary institution and the calculated amount the family is "expected" to contribute to that cost. This model uses the Expected Family Contribution (EFC) that is calculated according to formulas specified in Title IV of the Higher Education Act (HEA).

The EFC calculation essentially divides the family's financial resources between discretionary and non-discretionary (living expenses and taxes) uses. A portion of the discretionary resources is considered available to pay for postsecondary education expenses for the family member. Financial resources include both current income and portion of savings and other assets, however home equity and retirement assets are not included.

Current income includes both taxable and untaxed income and benefits. Taxable income is the adjusted gross income (AGI) reported on a federal income tax form. Untaxed income and benefits is defined in the HEA and, historically, included the value of the federal earned income tax credit (EITC), welfare and untaxed social security benefits, child support received, workman's compensation, voluntary payments to tax-preferenced individual retirement accounts, untaxed pension plan distributions, and the like.

As already stated, AGI is readily available to the financial aid applicant's family and is easily verifiable. Historically, certain of the untaxed income elements have likewise been readily available and easily verified. However, Congress eliminated most of these - EITC, the additional child income tax credit, welfare benefits, and untaxed social security benefits - from the formulas as part of the College Cost Reduction and Access Act enacted in 2007. The remaining untaxed income items, except for interest income on tax-free bonds and voluntary payments to tax-preferenced individual retirement accounts, are generally not readily available nor easily verified.

More broadly, AGI provides an important safeguard against potential abuse of the federal student aid system. Those who would improperly manipulate their financial circumstances for the purpose of gaming the aid system could do so only at the risk of violating federal income tax rules. Historically, repositioning of wealth to asset categories that are not considered in the federal formulas has generally been an area of concern. It is important to note, however, that those families most in need of federal college assistance have insufficient income, over the long term, to take advantage of any investment opportunities, let alone those that might increase their eligibility for federal student aid.

In short, eliminating the concept of an EFC and moving to a plan that determines eligibility for Federal aid based on the family's AGI and Number of Exemptions claimed provides simplicity and integrity to the process at the same time.

Recommendation 2: Connect AGI/Exemptions to the Department of Health and Human Services Poverty Levels to determine award size.

To ensure Federal dollars target the neediest students, AGI and number of IRS exemptions should be cross-referenced to an existing government income measure. This proposal recommends the Department of Health and Human Services (HHS) Poverty Income Levels. This provides consistency across the government in as much as HHS poverty levels are used to establish eligibility for and amount of assistance in many Federal means-tested benefit programs.

Recommendation 3: Replace the current FAFSA with a two-page, less than 30 question version that asks only for information that is easily obtainable, verifiable and necessary to determine eligibility and award levels.

The new FAFSA will have six data sets:

Identification information
Contact information
Eligibility information - school status and citizenship
Dependency status
IRS Adjusted Gross Income/Tax Exemption information
Certifications and authorizations

In addition, to facilitate the disbursement of Federal aid to secure other types of aid, the new FAFSA will ask students which schools and states should receive this information.

Instead of the current 45 questions that determine an EFC, two questions - IRS Adjusted Gross Income and Number of Exemptions Claimed - will determine the grant, work study and subsidized loan aid for which the student is eligible. This is possible because of the combination of a Federal Student Aid Target (FSAT) which is the maximum award amount for each of the Federal aid programs that the neediest students could receive and a Federal Student Aid Commitment (FSAC) which determines actual award levels for a particular student.

Students and families will have almost instant notification of the Federal aid they can use at any school they choose. And, because look-up tables can be created, families can plan their college experiences well before the student's senior year of high school.

Recommendation 4: Establish a Federal Student Aid Target (FSAT) that is based on 100% of Tuition and Fees, Books and Supplies, and Room and Board at a public, two-year college.

A first step in decoupling aid determination from Cost of Attendance at the student's college would be the establishment of a "Federal Student Aid Target" (FSAT). The FSAT would be set at a percentage of the average price of attending a postsecondary education institution. This proposal recommends the FSAT be the average price of tuition and fees, meals and housing, and books and supplies at two-year public community colleges. Further, this target should be increased annually at the Consumer Price Index (CPI) rate.

The rationale for selecting this target is two-fold. First, it puts attendance at a community college in reach for most Americans. Second, it serves as a significant Federal down payment for students that wish to attend other types of institutions. A target at this recommended rate would cover about 60% of the total cost of attendance at a four-year public college and about a third at a four-year private institution.

Recommendation 5: Establish a Federal Student Aid Commitment (FSAC) that is based on 250% of respective poverty levels for grants and 400% of respective poverty levels for work study and subsidized loans.

The second step is the establishment of the Federal Student Aid Commitment (FSAC). For a particular student, the portion of the FSAT that would be met by federally subsidized aid - grants and subsidized loans - would be the relationship between the family's AGI and IRS Exemptions and the Department of Health and Human Services (HHS) Poverty Levels. Policy makers would then have tools to allocate scarce Federal dollars to those students who are the most needy.

Federal unsubsidized aid - Unsubsidized Stafford loans and the PLUS loans (both parent and graduate student) - will be applied only after all other aid has been awarded. Within annual loan limits, unsubsidized aid can cover the difference between the student's Cost of Attendance and all other sources of aid.

Recommendation 6: Consolidate Federal aid programs into single grant, work study and loan (FFEL and Direct Loan) programs.

Students should have access to Federal dollars regardless of their school of choice. There is evidence that campus and state-based programs are not targeting funds to the most needy. As well, some grant programs are narrowly targeted or will soon sunset. Under current appropriations, consolidating all non-graduate level student assistance grant programs would add $1.4 Billion to the Pell program.

CONCLUSION

A rational approach to Federal Student Aid has many advantages:

Students and their families benefit from having a FAFSA that is easy to complete; encourages access and provides early and real-time feedback on the amount of Federal student aid the student will receive. It would provide better awareness of state and institutional value-added aid, and predictability of aid to promote persistence to a degree, certificate or license.
Taxpayers, too, benefit from this approach as it provides much-needed integrity to the aid process and can track the return from the Federal investment.
Policy makers can use the simplified data collection plan with any funding level to target student eligibility. This will allow for better alignment between policy goals and aid distribution. And, by having direct relationships with the students supported by Federal aid (though the funds will be continue to be distributed through the schools), policy makers will collect important information about student persistence. Finally, oversight capacity is enhanced with this more straightforward approach.

In short, this proposal:

Pares down the FAFSA to the six data sets of no more than a total of 30 questions required to determine eligibility and amount of aid;
Provides instant notification of the student's Federal aid package by decoupling cost of attendance from aid determination;
Provides a single Federal grant and loan package with the availability of participation in a work study program that they can take to any school;
Directs more Federal funds to those individuals who truly are in need; and
Emphasizes a return on the taxpayers' investment.

NEXT STEPS

In considering this blueprint for a rational approach to Federal Student Aid, the next Administration can consider:

Should measures of income (AGI) and family size (IRS Exemptions) alone determine eligibility for Federal subsidized aid?
Should these be connected to a specific income measure to determine award amount?
Should a target be established to base eligibility on the family's income alone and not to the cost of attendance at a particular school?
Should an up-front commitment be made to students/families based on their ability to pay?
What "levers" should be applied to the target (percentage of cost covering attendance at a particular type of school) and commitment level (percentage of HHS poverty level to be used in determining grant, loan and work study awards)?
What level of spending will be allocated for Federal Student Aid (i.e., maximum spending with current appropriation or optimized spending to ensure access and success for more Americans)?

At a minimum, students deserve a simplified FAFSA that encourages their participation in postsecondary education while protecting taxpayers by collecting verifiable information from which policy makers can make their determination on award eligibility and amount. At a maximum, these students also will be able to exercise choice by having a Federal aid package they can take to any school of their choice.

Posted 11/14/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.