Student Financial Aid
Need Determination Could Be Enhanced through Improvements in Education's Estimate of Applicants' State Tax Payments Gao ID: GAO-05-105 January 21, 2005In 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 student's cost of attendance less the student's and/or family's 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.
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
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-105, Student Financial Aid: Need Determination Could Be Enhanced through Improvements in Education's Estimate of Applicants' State Tax Payments
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GAO:
January 2005:
Student Financial Aid:
Need Determination Could Be Enhanced through Improvements in
Education's Estimate of Applicants' State Tax Payments:
GAO-05-105:
GAO Highlights:
Highlights of GAO-05-105, a report to congressional requesters:
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 student‘s cost of attendance
less the student‘s and/or family‘s 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.
Percentage of Recipients Who Would Have Seen a Pell Grant Reduction
with the Proposed Update, by Household Income:
[See PDF for image]
[End of figure]
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.
www.gao.gov/cgi-bin/getrpt?GAO-05-105
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Cornelia Ashby at
(202) 512-8403 or AshbyC@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The Current Tax Allowance Is Based on 1988 Data Due In Part to
Education's Limited Efforts in Updating the Allowance:
Education's Proposed Update Would Have Increased Expected Family
Contributions, Thereby Affecting the Allocation of Federal Aid and
Potentially State and Institutional Aid as Well:
The Current Allowance May Not Capture the Taxes Paid Due to the Type of
Data and Methodology in Use:
Four Strategies Might Address Some of the Limitations Associated with
the Tax Allowance and Would Yield a Variety of Effects on Federal
Spending and Aid Recipients:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Overview:
Datasets:
Estimation Methodology:
Calculation of Estimated Tax Rates from Alternative Data Sources:
Sampling Error:
Appendix II: State Selection Matrix--Ranking of Potential Impact of
Proposed Allowance, Listed by Category:
Appendix III: Average Tax Rates on Adjusted Gross Income, by State and
Income Level:
Appendix IV: Simulation of Tax Allowance Percentages under Various
Options, by State--Families with Adjusted Gross Income of $15,000 or
More:
Appendix V: Comments from the Department of Education:
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: State and Other Tax Allowance Established for Parents of
Dependents and for Independents with Children, Published in 1993:
Table 2: State and Other Tax Allowance Established for Dependents and
Independents without Children, Published in 1993:
Table 3: Proposed Allowance Changes and Estimated EFC Impacts by State:
Table 4: Percentage with a Pell Grant Decrease and Average Decrease by
State, Including Those No Longer Eligible for the Award:
Table 5: Estimated Impacts in Campus-Based Aid for Case Study Schools:
Table 6: Estimated Impacts in State Need-Based Aid for Two States:
Table 7: Publication Dates of SOI State and Local Tax Data:
Table 8: Comparison of Income Distribution in 2001 of FAFSA Applicants
and Federal Income Tax Itemizers:
Table 9: Framework for Evaluating Options Identified to Change the
State and Other Tax Allowance Relative to the Current Allowance in Use:
Figures:
Figure 1: Federal Student Need Analysis Methodology:
Figure 2: Estimated Amount of Student Aid Awarded in 2003-2004, by
Source of Aid:
Figure 3: Percentage of Recipients with a Decrease in Pell Award:
Figure 4: Median Percentage Change in Amount of Pell Award for Those
with a Decrease:
Figure 5: Percentage of Students Likely to Have Had a Change in
Subsidized Stafford Loans:
Figure 6: Framework for Evaluating the Alternative Datasets Identified
Relative to SOI Data:
Abbreviations:
ACSFA: Advisory Committee on Student Financial Assistance:
AGI: adjusted gross income:
ASEC: Annual Social and Economic Supplement:
AY: award year:
BEA: Bureau of Economic Analysis:
CEAD STAB: Cost Estimation and Analysis Division Statistical Abstract:
COA: cost of attendance:
CPS: Current Population Survey:
EFC: expected family contribution:
FAFSA: Free Application for Federal Student Aid:
FY: fiscal year:
HEA: Higher Education Act:
IM: Institutional Methodology:
IRS: Internal Revenue Service:
ITEP: Institute on Taxation and Economic Policy:
NSLDS: National Student Loan Data System:
PLUS: Parent Loans for Undergraduate Students:
SEOG: Supplemental Educational Opportunity Grant:
SOI: Statistics of Income:
United States Government Accountability Office:
Washington, DC 20548:
January 21, 2005:
Congressional Requesters:
In 2003-2004, an estimated $98 billion in financial aid was awarded to
students for postsecondary education through the Title IV federal
student aid programs, as well as state and institutional grant
programs.[Footnote 1] Title IV aid is currently awarded based on a
formula specified in the Higher Education Act (HEA); many states and
postsecondary institutions also use this formula to award their own
student aid. A substantial portion of this aid is awarded based on the
difference between a student's cost of attendance and an estimate of
the student's and/or family's ability to pay these costs--called the
expected family contribution (EFC)--determined by this formula. To
apply for Title IV aid, students submit a Free Application for Federal
Student Aid (FAFSA) on which they report their own and/or their
families' income, assets, and federal income tax expenses. State and
other tax expenses, on the other hand, are not collected on the FAFSA
form. Rather, Education uses a rate specified in law, subject to
revision by Education--called the state and other tax allowance--to
estimate such taxes.
Congress incorporated the state and other tax allowance as a part of
the formula by including in the Higher Education Act a series of tables
listing the applicable allowance for students and families by state.
The tables list specific percentage values, or rates, that are used to
exclude a portion of students' and families' incomes in determining
their EFC. Thus, under the formula, the state and other tax allowance
effectively reduces the EFC for students and families. The allowances
were originally developed based on information compiled by the
Department of Treasury's Internal Revenue Service's (IRS)-Statistics of
Income (SOI) Division, specifically state and other taxes paid by
taxpayers and reported on their federal income tax returns.
While the Department of Education (Education) is required by law to
update the state and other tax allowance, its proposal to do so in 2003
was met with substantial concern because it was the first update in a
number of years and because the update would likely affect the EFC for
students and families and the amount of student aid received. In view
of the uncertainty and controversy that followed Education's proposed
update and Congress' decision to suspend the update for 1 year, you
asked us to shed light on issues associated with the tax allowance
question and the department's proposed 2003 update. This report
examines (1) what tax data form the basis of the current tax allowance
and what factors have affected regular updates, (2) the effect
Education's proposed 2003 update would have had in award year 2004-2005
on financial assistance for students and families, (3) the extent to
which current methods for determining the allowance accurately measure
how much students and families have paid in state and other taxes, and
(4) the strategies available to address any problems in deriving the
allowance.
To do our work, we reviewed federal laws governing how Education is to
update the state and other tax allowance and examined documents
pertaining to this process. We used Education's aid applicant sample
file from the 2002-2003 award year to estimate changes to the expected
family contribution and Pell Grant awards nationally that would have
resulted from Education's proposed update. We analyzed Education's Cost
Estimation and Analysis Division's Statistical Abstract (CEAD STAB)
data to estimate the proportion of financial aid recipients who could
have experienced a change in their federal loans as a result of the
proposed update. We assessed the reliability of the aid applicant and
CEAD STAB data and determined that they were sufficiently reliable for
our review. To obtain estimates on changes in state-provided need-based
aid programs, we contacted two states, one with a likely high level of
impact (Wisconsin) and the other with a likely low level of impact
(Tennessee). To illustrate changes in students' receipt of Title IV aid
and need-based aid provided by schools, we relied on estimates from
four schools--two public institutions (University of Wisconsin-Madison
and Middle Tennessee State University) and two private nonprofit
institutions (Marian College of Fond du Lac and Carson-Newman College).
To develop strategies to address the allowance's limitations in
measuring students' and parents' state and other tax payments, we
identified and analyzed alternative data sources that have state and
local tax information. Finally, to gain further perspective on our
objectives, we interviewed officials from the Advisory Committee on
Student Financial Assistance (ACSFA)[Footnote 2] and other federal
officials, along with state, school, and national association officials
as well as other student financial aid experts.
We conducted our review from October 2003 through November 2004 in
accordance with generally accepted government auditing standards. For a
more detailed explanation of our methodology, see appendix I.
Results in Brief:
The current tax allowance is based on 1988 tax data due in part to
Education's limited efforts to update the allowance. Congress
incorporated the allowance into law in 1986 but did not establish a
mechanism for updating the allowance until 1992. In amending the Higher
Education Act in 1992, Congress directed Education to annually revise
the allowance tables after reviewing the IRS' Statistics of Income file
and determining the percentage of income that each state's taxes
represent for those residents. While Education has published allowance
tables annually since 1993, prior to 2004, it attempted to update the
allowance tables twice--once in 1993 and once in 2003--but the latter
update was suspended. As a result, the allowance--based on 1988 data
that was first incorporated into the allowance tables in 1993--
continued to be based on 1988 data. One reason the allowance was not
updated more frequently was because Education did not annually seek
data needed to update the allowance. For example, Education records
indicate that it only sought data to update the allowance for 6 years
of the 11-year period from 1993 to 2003. Another reason is that
Education was unwilling to incur costs to acquire data and therefore
did not consider alternatives when data were unavailable cost-free.
Further, when the IRS did make more current tax data freely available
via the Internet, starting in 2000, Education did not become aware of
this fact and did not take steps to make use of the data until 2003. In
addition, Education could not provide us with written procedures
guiding staff on the routine steps necessary to update the tax
allowance, nor did it maintain detailed records of its efforts to
obtain data.
Education's proposed update would have decreased the state and other
tax allowance for most states, which, in turn, would have increased the
expected family contribution for a majority of student aid applicants;
the increase in expected family contribution would have, in turn,
affected the allocation of federal aid and potentially state and
institutional aid as well. We estimate that the update to the state and
other tax allowance would have affected over half of the students
applying for aid by increasing their EFC by about $500 on average (or
from an average of about $9,620 to about $10,115) for those who would
have had an EFC increase. The amount of the EFC increase generally
would have been larger for students from states with a larger decrease
in their state and other tax allowance. For example, residents of
Delaware, which would have had a 4 percentage point decrease in its
allowance for families--the largest decrease among the states--would
have experienced an EFC increase of about $830 on average. With respect
to Pell Grants, our national analysis shows that EFC increases from the
update would have likely resulted in a decrease in Pell Grant awards
for about 36 percent of students, and an additional 92,000 applicants
(2 percent) would no longer have been eligible for the grant. Because
these EFC changes would have affected Pell and other grant aid,
Stafford and PLUS loan award amounts would in turn have been affected
as well. Our case studies show that as EFC would have increased,
subsidized Stafford loan awards would have decreased while unsubsidized
Stafford loan awards would have increased. However, these case studies
also show that most federal Campus-Based aid awards would have largely
been unaffected by changes in the EFC. The effect of EFC changes on
state and institutional grants would have varied because the EFC would
have decreased in some states more than in others and because aid
policies vary across states and institutions.
As a result of certain limitations of the SOI dataset for the purpose
of calculating the allowance and problems with how Education uses this
dataset, the current state and other tax allowance may not fully
reflect the amount of taxes paid by students and families. The dataset
itself is not ideally suited for calculating the allowance because it
is limited to financial data from those who itemize their taxes, does
not include state and local sales taxes, and is several years older
than the income information reported by students and families on the
FAFSA. SOI tax information may not be representative of families
applying for financial aid because SOI compiles state and local tax
data only for those who itemize their deductions, and itemizers may pay
different effective tax rates for a given level of income than
nonitemizers. Also, while state and local sales taxes were reflected in
SOI data when Congress first incorporated the tax allowance, subsequent
tax reform legislation eliminated the deductibility of sales taxes,
effectively removing this information from the SOI dataset. Although
more recent legislation provides taxpayers who itemize the choice of
deducting either sales or income taxes, the law allows this only for
the 2004 and 2005 tax years. Moreover, SOI tax data are generally
released about 2 years after each tax year, so it is not possible to
match this information with the income information that applicants
report on the aid application. In addition to the limitations of the
SOI dataset, Education's calculation of the allowance does not
accurately consider the varying taxes paid by different income groups.
As a result, Education's calculation of the allowance is overestimated
for lower-income groups and underestimated for higher-income groups.
We identified four strategies to address some of the limitations
associated with the tax allowance. While not exhaustive, these
strategies include (1) continuing to use SOI data but with a revised
method for calculating the allowance, (2) substituting SOI data with
data from one of several alternative sources, (3) using the same
allowance for all aid applicants without regard to state of residence,
and (4) collecting information directly from the aid applicants
themselves. The calculation, for example, might be modified to better
reflect the taxes paid by different income groups than the current
methodology. An option that would not require calculating an allowance
would be to collect information about actual taxes paid directly from
aid applicants by adding questions to the aid application, making it
possible to collect income, asset, and tax information for the same
year. Selecting among these strategies would require a number of
considerations: the effect on federal expenditures, the impact on aid
applicants, and the availability and reliability of tax data from
alternative sources. These options could range in their impact on
federal expenditures for the Pell Grant and other federal programs. For
example, depending on the option chosen, the effect would range from a
$200 million decrease in Pell Grant expenditures to an increase of
$400 million in the 2004-2005 award year.
* In this report, we recommend that the Secretary of Education improve
the department's process for updating the state and other tax allowance
by formalizing procedures, and documenting them in writing, to ensure
that the Department of Education annually requests and obtains the most
current tax data from SOI and revise the methodology for calculating
the state and other tax allowance to more accurately consider the
varying taxes paid by students and families. In addition, we recommend
that the Secretary determine whether alternative methodologies and/or
data--including those identified in this report--would allow the
department in the future to more effectively calculate and update an
allowance for state and other taxes.
Background:
The Higher Education Act specifies a formula, known as the federal need
analysis methodology, that is used to determine students' eligibility
for federal student aid. A variety of federal grants and loans are
available to assist students pay postsecondary expenses. While some
federal aid is allocated based on a student's need for financial aid
that is determined by the formula, other federal aid is allocated
regardless of need. Many states and institutions have their own student
aid programs, providing students an additional source of aid to help
pay for postsecondary expenses.
Federal Need Analysis Methodology:
The federal need analysis methodology is used to determine a student's
need for financial aid by comparing a student's and/or family's
expected family contribution to the student's cost of attendance (COA).
The EFC is defined as the household financial resources that are
considered available to help pay for the student's postsecondary
education expenses and is calculated by reducing the household
financial resources reported by aid applicants on the Free Application
for Federal Student Aid by certain expenses and allowances, including a
state and other tax allowance. A student is classified as either
financially dependent on his or her parents or independent in the
financial aid process. This classification is important because it
affects the factors used to determine a student's EFC. For dependent
students, the EFC is based on both the students and parents' income and
assets, as well as whether the family has other children enrolled in
college. For independent students, the EFC is based on the student's
and, if married, spouse's income and assets and whether the student has
any dependents other than a spouse, and the number of family members
enrolled in college.
To capture and reflect changes in students' and families' state and
other tax liabilities, Education is responsible for annually updating
the state and other tax allowance tables that were established in the
HEA. Education determines the state and other tax allowance based on
state and local tax information from federal tax returns filed with the
Internal Revenue Service and compiled by its Statistics of Income
Division. For dependent students and independent students without
children, the allowance is composed of state and local income taxes.
For parents of dependent students and independent students with
children, personal property taxes and real estate taxes are added to
the allowance.
The costs of attending a postsecondary institution that a student faces
include tuition, fees, books, and living expenses. The student may be
able to receive financial aid to help cover costs of attendance
depending on where the student wants to enroll as well as the student's
and family's financial resources. If the price of attendance is greater
than the expected family contribution, the difference between the two
represents the student's financial need. If the EFC is greater than the
price of attendance, the student is not eligible for federal need-based
aid but may still qualify for aid that is not based on need. (See fig.
1.):
Figure 1: Federal Student Need Analysis Methodology:
[See PDF for image]
Note: Not all assets are considered under the federal student need
analysis methodology. For example, the methodology does not include the
principal place of residence.
[End of figure]
Postsecondary institutions are responsible for determining individual
student's eligibility for specific sources of financial aid and
compiling these sources to meet each student's need--a process known as
packaging. Part of this process involves deciding which types or
sources of aid should be awarded first--for example, grants or loans,
federal or nonfederal aid, need-based or non-need-based aid. In
awarding aid, institutions typically first package any grants for which
the student is eligible and then offer loans. Another factor considered
in packaging aid is whether to reduce aid from any source in a
student's package to offset an aid award from another source.
Federal Aid Provided under Title IV of the Higher Education Act:
Title IV of the HEA, as amended, authorizes the following federal aid
programs:
* Pell Grants--Pell Grants are grants to low-and middle-income
undergraduate students who have federally defined financial need and
who are enrolled in a degree or certificate program. In general, a
student's Pell Grant award is determined by subtracting a student and
family's EFC from either the maximum allowable Pell Grant award,
currently $4,050, or the COA, whichever is less.
* Stafford and PLUS Loans--These loans may be made by private lenders
and guaranteed by the federal government (guaranteed loans) or made
directly by the federal government through a student's school (direct
loans).
* Subsidized Stafford Loans--Subsidized loans are made to students
enrolled at least half-time in an eligible program of study that have
federally defined financial need. The federal government pays the
interest costs on the loan while the student is in school. Subsidized
loans are subject to certain maximum loan limits and are awarded based
on the difference between a student's COA less EFC and other awards of
student aid including Pell Grants, state or institutional grants, etc.
A change in a student's EFC may--or may not--affect the amount of a
subsidized loan award depending on its effect on other components of
the student's financial aid package.
* Unsubsidized Stafford Loans--Unsubsidized Stafford loans are non-
need-based loans made to students enrolled at least half-time in an
eligible program of study. Although the terms and conditions of the
loan (e.g., interest rates) are the same as those for subsidized loans,
students are responsible for paying all interest costs on the loan.
While Stafford unsubsidized loans are not need-based aid, a change in a
student's or family's EFC may nonetheless affect the amount a student
may borrow. Unsubsidized loans are awarded based on the difference
between a student's COA less other awards of student aid--including
Pell Grants, state and institutional grants, and subsidized loans.
These loans are subject to the combined maximum loan limits for
subsidized and unsubsidized loan awards. A change in a student's EFC
that affects Pell Grant, subsidized loan, or state or institutional
grant awards may therefore affect the amount of an unsubsidized loan
award.
* PLUS Loans--PLUS loans are non-need-based loans made to creditworthy
parents of dependent undergraduate students enrolled at least half-time
in an eligible program of study. Borrowers are responsible for paying
all interest on the loan. Like unsubsidized loans, PLUS loans are
generally awarded based on the difference between a student's COA less
other awards of student aid including unsubsidized loan awards. As is
the case with unsubsidized loans, a change in a student's or family's
EFC can affect the amount of a PLUS loan that a parent may borrow.
Dependent students may borrow combined subsidized and unsubsidized
Stafford loans up to $2,625 in their first year of college, $3,500 in
their second year, and $5,500 in their third year and beyond.
Independent students and dependent students without access to PLUS
loans can borrow combined subsidized and unsubsidized Stafford loans up
to $6,625 in their first year, $7,500 in their second year, and $10,500
in their third year and beyond. There are aggregate limits for an
entire undergraduate education of $23,000 for dependent students and
$46,000 for independent students and dependent students without access
to PLUS loans.
* Campus-Based Aid--Participating institutions receive separate
allocations for three programs from Education. Funds are distributed to
institutions in part on the basis of the institution's previous
allocation levels and in part on the basis of the aggregate financial
need of eligible students in attendance. The institutions then award
the following aid to students:
* Supplemental Educational Opportunity Grants (SEOG)--SEOG grants are
grants for undergraduate students with federally defined financial
need. Priority for this aid is given to Pell Grant recipients. In
general, an annual SEOG award may not be less than $100 and may not
exceed $4,000.
* Perkins Loans--Perkins loans are low-interest (5 percent) loans to
undergraduate and graduate students. Interest does not accrue while the
students are enrolled at least half-time in an eligible program.
Priority is given to students who have exceptional federally defined
financial need. Students can borrow up to $4,000 for any year of
undergraduate education with an aggregate limit of $20,000.
* Work-Study--Work-Study is employment in on-or off-campus jobs for
which students who have federally defined need earn at least the
current federal minimum wage. The institution or off-campus employer
pays a portion of their wages, while the federal government pays the
remainder. Work-study is awarded based on the difference between a
student's need less other aid awarded.
Students Received about $98 Billion in Federal, State and Institutional
Aid in 2003-2004.
Students received an estimated $98 billion in financial aid in award
year 2003-2004 from the Title IV federal aid programs as well as state
and institutional grants, of which the federal government provided more
than two-thirds. Federal assistance is composed of both loans and
grants, and most federal grant aid is need-based. States distributed
about $6 billion in student aid.[Footnote 3] Institutions provided
about $23 billion in the forms of need-based grant and merit-based aid.
(See fig. 2.):
Figure 2: Estimated Amount of Student Aid Awarded in 2003-2004, by
Source of Aid:
[See PDF for image]
Notes: Federal aid is based on fiscal year figures, and state and
institutional aid is based on award year amounts. Because of rounding,
the sum of aid awarded under the various programs in the figure above
is less than the actual total of $97.9 billion.
[End of figure]
The Current Tax Allowance Is Based on 1988 Data Due In Part to
Education's Limited Efforts in Updating the Allowance:
The current state and other tax allowance is based on 1988 tax data due
in part to Education's limited efforts in updating the allowance. While
Education has been required to revise the allowance tables annually
since 1993, prior to 2004 it had attempted to update the allowance
twice--once in 1993 and once in 2003--but the latter update was
suspended. As a result, the 1988 tax data used for the 1993 update are
still in effect. The lack of updates is primarily because Education did
not annually seek data needed to update the allowance and did not
establish effective internal control to guide the updating process. In
addition, Education did not consider alternatives when data were not
readily available.
The Current Tax Allowance Is Based on 1988 Tax Data:
While Education has published the allowance tables used to award Title
IV aid in the Federal Register annually since 1993, prior to 2003 these
tables had been based on 1988 tax return information compiled by SOI.
Congress incorporated the state and other tax allowance into the HEA in
1986 on the basis of 1983 SOI data but did not establish a mechanism to
update the basis of the allowance until 1992. Amending the Higher
Education Act in that year, Congress directed Education to "publish in
the Federal Register—revised table[s] of State and other tax
allowances" annually, and to "develop such revised table[s] after
review of the Department of the Treasury's Statistics of Income file
and determination of the percentage of income that each State's taxes
represent" for those residents. Education published the first updated
tables of the allowance in 1993 after reviewing SOI's 1988 tax data,
the most recent data available at that time. Tables 1 and 2 present
these revised tax allowances, by dependency status and state.
Table 1: State and Other Tax Allowance Established for Parents of
Dependents and for Independents with Children, Published in 1993:
Source: 1993 Federal Register.
State of residence: Alaska, Nevada, Tennessee, Texas, Wyoming;
Income level (percentage): Less than $15,000: 3;
Income level (percentage): $15,000 or more: 2.
State of residence: Florida, Louisiana, South Dakota, Washington;
Income level (percentage): Less than $15,000: 4;
Income level (percentage): $15,000 or more: 3.
State of residence: Alabama, Mississippi;
Income level (percentage): Less than $15,000: 5;
Income level (percentage): $15,000 or more: 4.
State of residence: Arizona, Arkansas, Connecticut, Illinois, Indiana,
Missouri, New Mexico, North Dakota, Oklahoma, West Virginia;
Income level (percentage): Less than $15,000: 6;
Income level (percentage): $15,000 or more: 5.
State of residence: Colorado, Georgia, Idaho, Kansas, Kentucky, New
Hampshire, Pennsylvania;
Income level (percentage): Less than $15,000: 7;
Income level (percentage): $15,000 or more: 6.
State of residence: California, Delaware, Hawaii, Iowa, Montana,
Nebraska, New Jersey, North Carolina, Ohio, South Carolina, Utah,
Vermont, Virginia;
Income level (percentage): Less than $15,000: 8;
Income level (percentage): $15,000 or more: 7.
State of residence: Maine, Maryland, Massachusetts, Michigan,
Minnesota, Rhode Island;
Income level (percentage): Less than $15,000: 9;
Income level (percentage): $15,000 or more: 8.
State of residence: District of Columbia, Oregon, Wisconsin;
Income level (percentage): Less than $15,000: 10;
Income level (percentage): $15,000 or more: 9.
State of residence: New York;
Income level (percentage): Less than $15,000: 11;
Income level (percentage): $15,000 or more: 10.
State of residence: Other areas;
Income level (percentage): Less than $15,000: 4;
Income level (percentage): $15,000 or more: 3.
[End of table]
Table 2: State and Other Tax Allowance Established for Dependents and
Independents without Children, Published in 1993:
State of residence: Alaska, Nevada, South Dakota, Tennessee, Texas,
Washington, Wyoming;
Percentage: 0.
State of residence: Florida, New Hampshire;
Percentage: 1.
State of residence: Connecticut, Illinois, Louisiana, North Dakota;
Percentage: 2.
State of residence: Alabama, Arizona, Mississippi, Missouri, New
Jersey, Pennsylvania;
Percentage: 3.
State of residence: Arkansas, Colorado, Georgia, Indiana, Kansas,
Michigan, Nebraska, New Mexico, Oklahoma, Rhode Island, Vermont,
Virginia, West Virginia;
Percentage: 4.
State of residence: California, Delaware, Idaho, Iowa, Kentucky, Maine,
Massachusetts, Montana, North Carolina, Ohio, South Carolina, Utah,
Wisconsin;
Percentage: 5.
State of residence: Hawaii, Maryland, Minnesota, Oregon;
Percentage: 6.
State of residence: District of Columbia, New York;
Percentage: 7.
State of residence: Other areas;
Percentage: 2.
Source: 1993 Federal Register.
[End of table]
Although Education has published allowance tables annually since 1993,
the published allowances continued to be based on 1988 SOI data until
2003, when new tables based on 2000 SOI tax data were published.
Education intended to use the new tables to award student aid in 2004-
2005 but did not do so in light of legislation that prohibited it from
doing so. As a result, the state and other tax allowance used to award
financial aid continued to be based on 1988 tax data.[Footnote 4]
Education Did Not Annually Seek Data to Update the Allowance, Consider
Alternatives when Such Data Were Not Readily Available, or Establish
Effective Internal Control to Guide the Updating Process:
Prior to 2003, Education's efforts to update the allowance were
limited: It neither annually sought data to update the allowance nor
pursued alternatives when SOI data it had used previously were not
readily available. According to Education's records, the department
only sought data to update the allowance for 6 of the 11 years since it
was first directed to annually update the tax allowance[Footnote 5].
SOI records also document that Education did not routinely request
data. Even when Education did request data, it is difficult to
determine exactly what data were requested because such requests were
not made in writing. Rather, Education's documentation consists of
informal file notes of telephone contacts with SOI officials that are
minimal and do not describe the substance of what was discussed.
Furthermore, as of the end of our audit work, Education could not
provide us with written procedures guiding staff on the routine steps
necessary to update the tax allowance or to identify what data would be
needed to update the allowance.
After Education published the 1993 update to the allowance, on the
basis of 1988 SOI tax data, Education sporadically sought data from SOI
to develop subsequent updates. According to both Education and SOI
officials, however, SOI would not have provided these data on a cost-
free basis. According to SOI officials, the 1988 tax data was produced
to illustrate the type of information SOI could develop that clients,
such as states, might find useful and be willing to purchase in the
future. SOI never intended to produce the data as a regular series, and
the fact that it was useful for Education's purposes was coincidental.
Education's records do not indicate what actions the agency undertook
when it first learned that SOI would not provide data cost-free,
including the extent to which it considered paying for such data.
Education officials told us, however, that they never sought a cost
estimate from SOI because they did not wish to pay for the
data.[Footnote 6] Moreover, Education officials told us that they did
not consider using data other than SOI data because they believed
Education did not have the discretion to do so under the law. Beginning
in 2000, about 1 year after Education last contacted SOI, SOI began to
annually publish on its Web site data that Education could have used to
update the allowance.[Footnote 7] However, Education was unaware of
these data because it did not contact SOI again until 2003 for the
purpose of making its proposed update that year.
As we have pointed out in numerous reports, weak internal control can
be a contributing factor to, or cause of, insufficient execution of
agency responsibilities. Collectively, internal controls are an
integral component of an organization's management intended to provide
reasonable assurance that, among other things, operations are effective
and efficient. Education's failure to fully document its attempts to
update the allowance over the past several years and its lack of
written procedures to guide staff efforts to ensure that they take the
steps necessary to update the allowance, such as a checklist, are
indicative of an ineffective system of internal control. Our Standards
for Internal Control in the Federal Government provides guidance to
agencies to help them assess, evaluate, and implement effective
internal controls that can be helpful in improving their operational
processes.[Footnote 8]
Education's Proposed Update Would Have Increased Expected Family
Contributions, Thereby Affecting the Allocation of Federal Aid and
Potentially State and Institutional Aid as Well:
Under the proposed update, the state and other tax allowance would have
decreased for most states; the change in the allowance, in turn, would
have increased the amount that families are expected to contribute by
about $500 on average for a majority of student aid applicants. Of
those aid applicants with an increase in their EFC, some would have
received lower Pell Grant awards or would have become ineligible for
Pell Grants. Increases in EFCs would not only have affected Pell Grants
but possibly other forms of aid, and these effects in turn would have
affected Stafford and PLUS loan awards. The extent to which the
proposed update would have affected federal Campus-Based, state, and
institutional aid would likely have varied according to factors such as
aid awarding policies and changes in a state's allowance.
Under the Proposed Update, Expected Family Contributions Would Have
Increased by about $500, on Average, for a Majority of Student Aid
Applicants:
Education's tax allowance update would generally have increased the
dollar amount that families would be expected to contribute to a
student's education, but the percentage of student aid applicants
affected would have varied by state and household income, and the size
of the increase would have varied by state. EFCs would increase by
about $500 on average for those with an increase (from an average of
about $9,620 to about $10,115), but aid applicants from states with
larger decreases in their tax allowance rates would have had a larger
increase in their EFCs.[Footnote 9] Table 3 shows the proposed changes
to the allowance and the estimated EFC impacts, by state. For example,
Delaware would have had a 4 percentage point decrease in its tax
allowance for families earning $15,000 or more[Footnote 10]--from
7 percent to 3 percent--and a 2 percentage point decrease for
individuals,[Footnote 11] resulting in an EFC increase of $834 on
average, among applicants in Delaware with an increase. In contrast,
Nevada would have had a 1 percentage point decrease in the allowance
for families (and a 1 percentage point increase for individuals), and
its residents would have had an expected contribution increase of $186
on average. Similarly, the percentage of applicants affected would have
varied from state to state. In Wisconsin, for example, the percentage
of student aid applicants affected would have been slightly over
80 percent, in contrast to Connecticut, where just under 1 percent of
applicants would have been affected. With regard to household income,
over 90 percent of families earning more than $25,000 would have been
expected to contribute more under the update, while only about
20 percent of families earning $25,000 or less would have been expected
to contribute more. Across all states, we estimate that the update
would have affected more than 60 percent of aid applicants and would
have resulted in an EFC increase of $3.5 billion collectively in award
year 2004-2005.
Table 3: Proposed Allowance Changes and Estimated EFC Impacts by State:
State: Alabama;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 59;
Estimated average EFC dollar increase for those with an increase: 311.
State: Alaska;
Percentage point change in the state and other tax allowance:
Families: -1;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 62;
Estimated average EFC dollar increase for those with an increase: 261.
State: Arizona;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 47;
Estimated average EFC dollar increase for those with an increase: 385.
State: Arkansas;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 62;
Estimated average EFC dollar increase for those with an increase: 410.
State: California;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 45;
Estimated average EFC dollar increase for those with an increase: 406.
State: Colorado;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 75;
Estimated average EFC dollar increase for those with an increase: 571.
State: Connecticut;
Percentage point change in the state and other tax allowance:
Families: 0;
Percentage point change in the state and other tax allowance:
Individuals: +2;
Estimated percentage of students with an increase in their EFC: 1;
Estimated average EFC dollar increase for those with an increase: 76.
State: Delaware;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 80;
Estimated average EFC dollar increase for those with an increase: 834.
State: District of Columbia;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 60;
Estimated average EFC dollar increase for those with an increase: 485.
State: Florida;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 64;
Estimated average EFC dollar increase for those with an increase: 298.
State: Georgia;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 67;
Estimated average EFC dollar increase for those with an increase: 384.
State: Hawaii;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 68;
Estimated average EFC dollar increase for those with an increase: 746.
State: Idaho;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 69;
Estimated average EFC dollar increase for those with an increase: 321.
State: Illinois;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 60;
Estimated average EFC dollar increase for those with an increase: 459.
State: Indiana;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 75;
Estimated average EFC dollar increase for those with an increase: 406.
State: Iowa;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 78;
Estimated average EFC dollar increase for those with an increase: 781.
State: Kansas;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 77;
Estimated average EFC dollar increase for those with an increase: 531.
State: Kentucky;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 66;
Estimated average EFC dollar increase for those with an increase: 340.
State: Louisiana;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 61;
Estimated average EFC dollar increase for those with an increase: 415.
State: Maine;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 78;
Estimated average EFC dollar increase for those with an increase: 610.
State: Maryland;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 75;
Estimated average EFC dollar increase for those with an increase: 462.
State: Massachusetts;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 79;
Estimated average EFC dollar increase for those with an increase: 717.
State: Michigan;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 73;
Estimated average EFC dollar increase for those with an increase: 746.
State: Minnesota;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 81;
Estimated average EFC dollar increase for those with an increase: 673.
State: Mississippi;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 53;
Estimated average EFC dollar increase for those with an increase: 283.
State: Missouri;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 60;
Estimated average EFC dollar increase for those with an increase: 425.
State: Montana;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 69;
Estimated average EFC dollar increase for those with an increase: 515.
State: Nebraska;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 79;
Estimated average EFC dollar increase for those with an increase: 716.
State: Nevada;
Percentage point change in the state and other tax allowance:
Families: -1;
Percentage point change in the state and other tax allowance:
Individuals: +1;
Estimated percentage of students with an increase in their EFC: 50;
Estimated average EFC dollar increase for those with an increase: 186.
State: New Hampshire;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 73;
Estimated average EFC dollar increase for those with an increase: 808.
State: New Jersey;
Percentage point change in the state and other tax allowance:
Families: -1;
Percentage point change in the state and other tax allowance:
Individuals: +1;
Estimated percentage of students with an increase in their EFC: 63;
Estimated average EFC dollar increase for those with an increase: 263.
State: New Mexico;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 62;
Estimated average EFC dollar increase for those with an increase: 432.
State: New York;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 67;
Estimated average EFC dollar increase for those with an increase: 639.
State: North Carolina;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 68;
Estimated average EFC dollar increase for those with an increase: 493.
State: North Dakota;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 78;
Estimated average EFC dollar increase for those with an increase: 736.
State: Ohio;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 73;
Estimated average EFC dollar increase for those with an increase: 589.
State: Oklahoma;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 65;
Estimated average EFC dollar increase for those with an increase: 308.
State: Oregon;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 69;
Estimated average EFC dollar increase for those with an increase: 519.
State: Pennsylvania;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 67;
Estimated average EFC dollar increase for those with an increase: 713.
State: Rhode Island;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 60;
Estimated average EFC dollar increase for those with an increase: 697.
State: South Carolina;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 67;
Estimated average EFC dollar increase for those with an increase: 718.
State: South Dakota;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 64;
Estimated average EFC dollar increase for those with an increase: 589.
State: Tennessee;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 52;
Estimated average EFC dollar increase for those with an increase: 371.
State: Texas;
Percentage point change in the state and other tax allowance:
Families: -1;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 51;
Estimated average EFC dollar increase for those with an increase: 189.
State: Utah;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 73;
Estimated average EFC dollar increase for those with an increase: 345.
State: Vermont;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 80;
Estimated average EFC dollar increase for those with an increase: 614.
State: Virginia;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 73;
Estimated average EFC dollar increase for those with an increase: 623.
State: Washington;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 53;
Estimated average EFC dollar increase for those with an increase: 429.
State: West Virginia;
Percentage point change in the state and other tax allowance:
Families: -3;
Percentage point change in the state and other tax allowance:
Individuals: -2;
Estimated percentage of students with an increase in their EFC: 68;
Estimated average EFC dollar increase for those with an increase: 527.
State: Wisconsin;
Percentage point change in the state and other tax allowance:
Families: -4;
Percentage point change in the state and other tax allowance:
Individuals: -1;
Estimated percentage of students with an increase in their EFC: 81;
Estimated average EFC dollar increase for those with an increase: 802.
State: Wyoming;
Percentage point change in the state and other tax allowance:
Families: -2;
Percentage point change in the state and other tax allowance:
Individuals: 0;
Estimated percentage of students with an increase in their EFC: 61;
Estimated average EFC dollar increase for those with an increase: 408.
Source: GAO analysis.
Notes: Dependent students whose state of residence is different from
that of their parents were counted as being from their parents' state.
Since the EFC for a family is based upon both the parents' and the
student's income, the EFC changes reported above for each state may
reflect not only the change in the allowance for that state but also
the change for the state of residence for students attending school in
another state. For example, Connecticut, which has an increased
allowance, may have families with an EFC increase because the children
of those families may be attending school and residing in another state
with a decreased allowance.
The sampling errors for the average EFC increase for Alaska,
Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Maine,
Montana, Nevada, New Mexico, North Dakota, Rhode Island, South Dakota,
Vermont, and Wyoming vary from slightly over 5 percent (for Maine and
New Mexico) to 34 percent (for Connecticut). All others have a sampling
error at or below 5 percent.
[End of table]
If Expected Family Contributions Had Increased, Some Aid Applicants
Would Have Received Lower Pell Grant Awards or Become Ineligible for
Them:
Had Education's proposed update been adopted, thus raising the expected
family contribution for aid applicants, 38 percent of recipients would
have either seen a decrease in their Pell Grant award or would have
become ineligible for the grant altogether; taken together, the average
reduction among those with a decrease in their amount would have been
$144. In particular, 36 percent of recipients would have seen a
decrease of $133 on average in their Pell Grant award but would have
remained eligible for the awards in award year 2004-2005. Another
92,000 recipients, or 2 percent of those receiving Pell Grants, would
no longer have been eligible and typically would no longer have
received the minimum Pell Grant award of $400. As a result, the
proposed update would have decreased overall federal Pell Grant
expenditures by $290 million. Students residing in states with larger
decreases in their allowances would have faced larger decreases in Pell
Grant amounts and are more likely to have become ineligible for them.
Table 4 shows the average decrease in Pell Grant awards for those who
would have seen a decrease in their Pell Grant award or who would have
become ineligible for them, by state.
Table 4: Percentage with a Pell Grant Decrease and Average Decrease by
State, Including Those No Longer Eligible for the Award:
State: Alabama;
Percentage with a decrease in Pell[A]: 38%;
Average dollar decrease in Pell[B]: -$111.
State: Alaska;
Percentage with a decrease in Pell[A]: 28%;
Average dollar decrease in Pell[B]: -$83.
State: Arizona;
Percentage with a decrease in Pell[A]: 34%;
Average dollar decrease in Pell[B]: -$115.
State: Arkansas;
Percentage with a decrease in Pell[A]: 42%;
Average dollar decrease in Pell[B]: -$160.
State: California;
Percentage with a decrease in Pell[A]: 29%;
Average dollar decrease in Pell[B]: -$121.
State: Colorado;
Percentage with a decrease in Pell[A]: 47%;
Average dollar decrease in Pell[B]: -$156.
State: Connecticut;
Percentage with a decrease in Pell[A]: 0% [C];
Average dollar decrease in Pell[B]: -$100.
State: Delaware;
Percentage with a decrease in Pell[A]: 58%;
Average dollar decrease in Pell[B]: -$194.
State: District of Columbia;
Percentage with a decrease in Pell[A]: 39%;
Average dollar decrease in Pell[B]: -$174.
State: Florida;
Percentage with a decrease in Pell[A]: 40%;
Average dollar decrease in Pell[B]: -$107.
State: Georgia;
Percentage with a decrease in Pell[A]: 43%;
Average dollar decrease in Pell[B]: -$104.
State: Hawaii;
Percentage with a decrease in Pell[A]: 47%;
Average dollar decrease in Pell[B]: -$216.
State: Idaho;
Percentage with a decrease in Pell[A]: 42%;
Average dollar decrease in Pell[B]: -$123.
State: Illinois;
Percentage with a decrease in Pell[A]: 38%;
Average dollar decrease in Pell[B]: -$118.
State: Indiana;
Percentage with a decrease in Pell[A]: 46%;
Average dollar decrease in Pell[B]: -$119.
State: Iowa;
Percentage with a decrease in Pell[A]: 57%;
Average dollar decrease in Pell[B]: -$224.
State: Kansas;
Percentage with a decrease in Pell[A]: 53%;
Average dollar decrease in Pell[B]: -$168.
State: Kentucky;
Percentage with a decrease in Pell[A]: 41%;
Average dollar decrease in Pell[B]: -$118.
State: Louisiana;
Percentage with a decrease in Pell[A]: 35%;
Average dollar decrease in Pell[B]: -$113.
State: Maine;
Percentage with a decrease in Pell[A]: 54%;
Average dollar decrease in Pell[B]: -$174.
State: Maryland;
Percentage with a decrease in Pell[A]: 46%;
Average dollar decrease in Pell[B]: -$112.
State: Massachusetts;
Percentage with a decrease in Pell[A]: 48%;
Average dollar decrease in Pell[B]: -$172.
State: Michigan;
Percentage with a decrease in Pell[A]: 47%;
Average dollar decrease in Pell[B]: -$199.
State: Minnesota;
Percentage with a decrease in Pell[A]: 57%;
Average dollar decrease in Pell[B]: -$181.
State: Mississippi;
Percentage with a decrease in Pell[A]: 35%;
Average dollar decrease in Pell[B]: -$120.
State: Missouri;
Percentage with a decrease in Pell[A]: 40%;
Average dollar decrease in Pell[B]: -$122.
State: Montana;
Percentage with a decrease in Pell[A]: 48%;
Average dollar decrease in Pell[B]: -$174.
State: Nebraska;
Percentage with a decrease in Pell[A]: 54%;
Average dollar decrease in Pell[B]: -$216.
State: Nevada;
Percentage with a decrease in Pell[A]: 25%;
Average dollar decrease in Pell[B]: -$80.
State: New Hampshire;
Percentage with a decrease in Pell[A]: 51%;
Average dollar decrease in Pell[B]: -$175.
State: New Jersey;
Percentage with a decrease in Pell[A]: 26%;
Average dollar decrease in Pell[B]: -$90.
State: New Mexico;
Percentage with a decrease in Pell[A]: 42%;
Average dollar decrease in Pell[B]: -$155.
State: New York;
Percentage with a decrease in Pell[A]: 45%;
Average dollar decrease in Pell[B]: -$175.
State: North Carolina;
Percentage with a decrease in Pell[A]: 46%;
Average dollar decrease in Pell[B]: -$162.
State: North Dakota;
Percentage with a decrease in Pell[A]: 48%;
Average dollar decrease in Pell[B]: -$229.
State: Ohio;
Percentage with a decrease in Pell[A]: 46%;
Average dollar decrease in Pell[B]: -$163.
State: Oklahoma;
Percentage with a decrease in Pell[A]: 41%;
Average dollar decrease in Pell[B]: -$115.
State: Oregon;
Percentage with a decrease in Pell[A]: 44%;
Average dollar decrease in Pell[B]: -$163.
State: Pennsylvania;
Percentage with a decrease in Pell[A]: 46%;
Average dollar decrease in Pell[B]: -$179.
State: Rhode Island;
Percentage with a decrease in Pell[A]: 41%;
Average dollar decrease in Pell[B]: -$162.
State: South Carolina;
Percentage with a decrease in Pell[A]: 49%;
Average dollar decrease in Pell[B]: -$194.
State: South Dakota;
Percentage with a decrease in Pell[A]: 41%;
Average dollar decrease in Pell[B]: -$176.
State: Tennessee;
Percentage with a decrease in Pell[A]: 36%;
Average dollar decrease in Pell[B]: -$110.
State: Texas;
Percentage with a decrease in Pell[A]: 24%;
Average dollar decrease in Pell[B]: -$83.
State: Utah;
Percentage with a decrease in Pell[A]: 47%;
Average dollar decrease in Pell[B]: -$148.
State: Vermont;
Percentage with a decrease in Pell[A]: 49%;
Average dollar decrease in Pell[B]: -$161.
State: Virginia;
Percentage with a decrease in Pell[A]: 47%;
Average dollar decrease in Pell[B]: -$170.
State: Washington;
Percentage with a decrease in Pell[A]: 34%;
Average dollar decrease in Pell[B]: -$115.
State: West Virginia;
Percentage with a decrease in Pell[A]: 47%;
Average dollar decrease in Pell[B]: -$168.
State: Wisconsin;
Percentage with a decrease in Pell[A]: 54%;
Average dollar decrease in Pell[B]: -$226.
State: Wyoming;
Percentage with a decrease in Pell[A]: 40%;
Average dollar decrease in Pell[B]: -$134.
Total USA;
Percentage with a decrease in Pell[A]: 38%;
Average dollar decrease in Pell[B]: -$144.
Source: GAO analysis.
[A] The sampling errors for Alaska, Delaware, District of Columbia,
Vermont, and Wyoming vary from 5.2 percentage points (for Delaware) to
5.6 percentage points (for Alaska). All others are at or below 5
percentage points.
[B] The average reflects the reduction for those with a decrease as
well as those who would have lost eligibility. The sampling errors for
Alaska, Delaware, District of Columbia, Hawaii, Idaho, Maine, Montana,
Nebraska, Nevada, North Dakota, New Hampshire, Rhode Island, South
Dakota, Vermont, and Wyoming vary from slightly over 5 percent (for
Nebraska) to 15 percent (for Alaska). All others are at or below
5 percent.
[C] The actual figure for Connecticut is 0.1 percent, which rounds to 0
percent for the purposes of this table.
[End of table]
Students with relatively higher household incomes would have been more
likely to face a decrease and would have faced substantially greater
decreases in their Pell Grant awards than those with lower household
incomes.[Footnote 12] On the other hand, the impact of the proposed
update would not seem to have varied much by whether students are
financially independent of their families. Figures 3 and 4 show the
proportion of those facing a decrease in Pell awards and the median
amount of such decreases, by income group.
Figure 3: Percentage of Recipients with a Decrease in Pell Award:
[See PDF for image]
[End of figure]
Figure 4: Median Percentage Change in Amount of Pell Award for Those
with a Decrease:
[See PDF for image]
Note: The sampling error for Independents earning $50,001 to $100,000
is 7 percentage points. The error for all other categories is 5
percentage points or less.
[End of figure]
Changes in EFCs Could Have Affected Stafford and PLUS Loan Awards:
Stafford and PLUS loans could have been affected due to EFC changes as
well. Those applicants for whom a change in EFC would have resulted in
a change in other aid received--including Pell, state, and
institutional grants--would likely have seen a change in their federal
loans. This is because federal loan amounts depend, in part, on the
amount of other aid received. However, even if a change in EFC would
not have changed other aid received,[Footnote 13] some students may
still have seen a change in their subsidized Stafford loan
amount.[Footnote 14] Among those currently receiving federal loans, we
estimate that over 20 percent of subsidized and unsubsidized Stafford
loan holders and about 85 percent of PLUS loan holders could have seen
a change in their loan amount due to their EFC increase. (See app. I
for an explanation of our estimation methodology.) Figure 5 shows the
proportion of undergraduate Stafford loan recipients who could have had
a change in their subsidized loan amounts, by income and dependency
status. Our case studies of students at selected schools for whom a
change in EFC would have resulted in a change in their federal loans
show that as the EFC would have increased, subsidized loans would have
decreased, and unsubsidized loans would have increased in response to
the decreases in subsidized loans and other forms of financial aid. In
addition, PLUS loans could have made up for these decreases as
well.[Footnote 15]
Figure 5: Percentage of Students Likely to Have Had a Change in
Subsidized Stafford Loans:
[See PDF for image]
[End of figure]
The Extent to Which the Proposed Update Would Have Affected the
Allocation of Federal Campus-Based, State, and Institutional Need-Based
Aid Would Likely Have Varied:
While changes in the EFC could have affected Campus-Based awards,
institutions have some discretion in allocating federal Campus-Based
aid; as a result, the effects of the proposed update would have likely
varied across institutions. The effect of the update on state and
institutional need-based aid would also have varied based on
differences in state and institutional aid awarding policies and on how
much the tax allowance would have changed for each state.
Institutions Have Discretion in Allocating Federal Campus-Based Aid, So
the Effects of the Proposed Update Would Likely Have Varied:
Our case studies of students at the four selected schools show that
even though the EFC for the majority of students would have changed,
Campus-Based awards would tend not to have been affected by the
proposed update. However, some students would have been affected, and
the effect would have varied across schools, due in part to differences
in award policies. Specifically, had the proposed allowance been
implemented for 2004-2005, we estimate that less than 15 percent on
average of case study students receiving Supplemental Educational
Opportunity Grants and Work-Study aid would have faced a lower
award.[Footnote 16] The effects would have varied significantly by
school because of differences in schools' eligibility criteria for
Campus-Based awards and the maximum awards provided. For example,
eligibility for SEOG at one case study school is capped at an EFC of
$3,850, whereas eligibility at another is at an EFC of $2,800, so a
student whose EFC increased from $2,700 to $2,900 would have become
ineligible for an SEOG at one school but not the other. As another
example, one school offers $3,000 in Work-Study, and another limits the
amount to $1,000, thereby demonstrating the different amounts involved.
With regard to Perkins loans, we estimate that about 20 percent of
students at the case study schools on average would have seen a
decrease in their loan amount due to the proposed update. For students
who see decreases in their Perkins loans, the decrease would have been
about $1,200 on average but would have varied significantly by school
due to differences in eligibility criteria. Table 5 shows the case
study results of changes in these three school-administered federal
programs.
Table 5: Estimated Impacts in Campus-Based Aid for Case Study Schools:
Form of Campus-Based aid: Supplemental Educational Opportunity Grants;
Percentage with a decrease: 11%;
Average dollar decrease for those affected: $500.
Form of Campus-Based aid: Work-Study;
Percentage with a decrease: 14%;
Average dollar decrease for those affected: $1,200.
Form of Campus-Based aid: Perkins Loans;
Percentage with a decrease: 21%;
Average dollar decrease for those affected: $1,200.
Source: GAO analysis of case study results.
Note: Dollar figures were rounded to the nearest $100. While an
increase in EFC may result in decreases in Campus-Based awards for some
recipients, the amount of such decreases would become available for
redistribution to others.
[End of table]
The Effect of the Proposed Update on State Need-Based Aid Would Have
Varied Based on State Policies and Changes in the Tax Allowance:
The majority of states use the federal need analysis methodology to
allocate state need-based aid; as a result, the proposed update could
have affected the amount of and the extent to which students receive
state grants. The effect would have varied by state due to, among other
factors, differences in changes to the tax allowance by state and
differences in state award policies. In Wisconsin, for example, we
estimate that over 50 percent of state aid award recipients in our case
study would have seen a decrease in their state award. In contrast, in
Tennessee, just over 10 percent of recipients in our case study would
have seen a decrease in their state award. The average reduction for
Wisconsin students would have been less than that for Tennessee
students due to the differences in how the states compute awards:
Wisconsin's computation decreases aid for each dollar increase in EFC
by less than Tennessee's computation. (See table 6.):
Table 6: Estimated Impacts in State Need-Based Aid for Two States:
Wisconsin;
Percentage with a lower amount: 53%;
Average dollar decrease: -$115.
Tennessee;
Percentage with a lower amount: 13%;
Average dollar decrease: -$220.
Source: GAO analysis of case study results.
Note:Dollar figures are rounded to the nearest $5.
[End of table]
The Effect of the Proposed Update on Institutional Need-Based Aid Would
Vary Based on Institutional Policies and Changes in the EFC and Other
Factors:
As with state aid, the effect of the proposed update on the need-based
aid provided by schools themselves would have varied significantly
across schools due to, among other factors, differences in
institutional award policies and changes in the EFC of students
attending the institutions. However, the impact would be limited to
schools that use the federal methodology to award aid. Since
institutional aid may change as a result of both changes in the EFC and
changes in other aid awarded, the effect of the increased EFC on
institutional aid cannot be easily determined. For example, a school
that bases its award solely on EFC might decrease its award as a result
of an EFC increase, while a school that bases institutional aid on
other aid awarded might increase the institutional award for some
students. At the two private nonprofit schools included in our case
studies,[Footnote 17] our results show that while more than 20 percent
of students at each school would have faced a decrease in institutional
need-based aid under the proposed allowance, more than 10 percent of
students at these same schools would have received more institutional
aid. Overall, case study students attending one private nonprofit
school would have seen a decrease in institutional aid of almost $800
on average, whereas students at the other school would have seen a
decrease of over $425 on average.[Footnote 18]
The Current Allowance May Not Capture the Taxes Paid Due to the Type of
Data and Methodology in Use:
As a result of certain limitations of the SOI dataset for the purpose
of calculating the allowance and problems with how Education uses this
dataset, the current state and other tax allowance may not reflect the
amount of taxes paid by students and families. The dataset is limited
for this purpose because the taxpayers included in it are generally not
representative of financial aid applicants, the tax data it provides do
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 students and families on the FAFSA. In addition to the
limitations of the SOI dataset, Education does not make full use of the
dataset to account for the varying tax rates paid by taxpayers in
different income groups.
The Tax Data Used for the Allowance May Not Represent Those Taxes Paid
by Financial Aid Applicants:
The tax allowance calculated by Education may not reflect the taxes
paid by most financial aid applicants because it is drawn only from
those who itemize deductions on federal income tax returns--filers who
may be taxed at a different rate than those who do not itemize. Because
many FAFSA applicants have lower income--and taxpayers in lower income
groups tend not to itemize--many applicants may not itemize.
Specifically, we estimate that about 63 percent of FAFSA applicants do
not itemize.[Footnote 19] Further, itemizers and nonitemizers within
the same gross income group may have different state and other tax
rates. On the one hand, for example, itemizers may be more likely to
own a home than nonitemizers and thus would have a higher state and
local tax liability due to real estate taxes. Conversely, those who
itemize on their federal tax return may be more likely to itemize on
their state return--and therefore have larger deductions, a lower state
taxable income, and thus a lower state income tax than those who do not
itemize on their federal return.
Data Used for the Current Allowance No Longer Include State and Local
Sales Taxes:
Although sales taxes were included in SOI data when Congress formally
provided for a tax allowance in the 1986 HEA amendments,[Footnote 20]
tax reform legislation subsequently disallowed the deduction of state
and local sales taxes, effectively eliminating them from this dataset.
Therefore, the data collected by SOI for tax year 1987 and beyond have
not reflected all state and other taxes. Excluding sales taxes may
cause the allowance to be lower than it otherwise would be, especially
for students and families who reside in states where sales taxes
compose a significant portion of state and local revenue. In October
2004, Congress passed and the President signed the American Jobs
Creation Act of 2004, which provides taxpayers who itemize deductions
the choice of claiming a state and local tax deduction for either sales
or income taxes, but only for tax years 2004 and 2005. As a result, the
data collected by SOI for tax years 2004 and 2005 will likely include a
mix of sales and income tax deductions reflecting the choices made by
tax filers. Were these data used to update the allowance, the
deductibility of sales taxes could increase the allowance for students
and families, especially for those who reside in states where sales
taxes compose a significant portion of state and local revenue.
Regardless, the SOI data will not reflect both state and local sales
and income taxes paid by individual taxpayers, as was the case prior to
tax year 1987.
SOI Tax Data Are Several Years Older than Reported Income Information:
SOI data available for any given award year are several years older
than the income information reported by aid applicants on the FAFSA.
For example, in its proposed update for award year 2004-2005 that was
published in May 2003, Education used 2000 SOI data, the most recent
available at the time of its data request. Because applicants would
report 2003 income information for award year 2004-2005, had the
allowance been implemented, there would have been a mismatch of 3 years
between the tax data and the income data.[Footnote 21] Table 7 shows
when SOI publishes the state and local tax data after the end of a tax
year. Some time lag between the end of a tax year and when SOI
publishes data for that year is expected because returns are collected
after the end of the tax year and because of the time needed for
processing those returns. This time lag could be extended when there
are unexpected difficulties in processing the returns. For example,
2002 tax data were published after about 2 years, while 2000 and 2001
were published in 15 months. Further, SOI officials reported that the
agency may be unable to publish the 2003 tax tables because it has been
experiencing technical problems in processing returns from that
year.[Footnote 22]
Table 7: Publication Dates of SOI State and Local Tax Data:
Tax year: 1997;
Publication date: June 2000;
Elapsed time in months: 29.
Tax year: 1998;
Publication date: February 2001;
Elapsed time in months: 25.
Tax year: 1999;
Publication date: July 2001;
Elapsed time in months: 18.
Tax year: 2000;
Publication date: April 2002;
Elapsed time in months: 15.
Tax year: 2001;
Publication date: April 2003;
Elapsed time in months: 15.
Tax year: 2002;
Publication date: October 2004;
Elapsed time in months: 21.
Source: Interviews with SOI officials and GAO analysis.
[End of table]
Education's Calculation of the Allowance Does Not Fully Consider
Varying Tax Levels Paid by Different Income Groups:
Education's method of calculating the state and other tax allowance
does not accurately capture the amount in taxes paid by students and
families. While Education calculates an allowance for each of the two
income categories established by Congress--those earning less than
$15,000 and those earning $15,000 or more[Footnote 23]--its methodology
does not take into account the varying level of taxes paid by these two
groups. To determine the allowance for families with income less than
$15,000, Education uses the total of state and local taxes paid by all
tax itemizers regardless of income, despite the fact that the SOI data
provide separate information for 12 different income groups.[Footnote
24] Education's methodology likely overestimates the taxes paid by the
lower-income group for two reasons. First, higher-income individuals
generally face higher tax rates than lower-income individuals. Our
analysis of 2001 SOI tax data shows that those with an income below
$20,000 have a state and other tax liability of about 3 percent on
average, while those with an income of $20,000 or more have an average
5 percent tax liability. (See app. III.) Second, higher-income
individuals are also more highly represented in the SOI data than
lower-income individuals. For example, our analysis of the 2001 income
distribution of financial aid applicants and of itemizers shows that
about 35 percent of aid applicants have an income of less than $20,000,
while less than 10 percent of itemizers have incomes in that range.
(See table 8.):
Table 8: Comparison of Income Distribution in 2001 of FAFSA Applicants
and Federal Income Tax Itemizers:
Percentage of FAFSA applicants;
Dollars: 0 or Less: 2.51%;
Dollars: 0.01 to 9,999: 15.44%;
Dollars: 10,000 to 19,999: 16.76%;
Dollars: 20,000 to 29,999: 15.50%;
Dollars: 30,000 to 49,999: 18.60%;
Dollars: 50,000 to 74,999: 13.95%;
Dollars: 75,000 to 99,999: 8.40%;
Dollars: 100,000 to 149,999: 6.45%;
Dollars: 150,000 to 199,999: 1.51%;
Dollars: 200,000 to 499,999: 0.81%;
Dollars: 500,000 to 999,999: 0.06%;
Dollars: 1 million or more: 0.01%.
Percentage of itemizers;
Dollars: 0 or Less: 0.76%;
Dollars: 0.01 to 9,999: 2.07%;
Dollars: 10,000 to 19,999: 5.12%;
Dollars: 20,000 to 29,999: 7.85%;
Dollars: 30,000 to 49,999: 20.70%;
Dollars: 50,000 to 74,999: 24.85%;
Dollars: 75,000 to 99,999: 16.27%;
Dollars: 100,000 to 149,999: 12.87%;
Dollars: 150,000 to 199,999: 4.12%;
Dollars: 200,000 to 499,999: 4.25%;
Dollars: 500,000 to 999,999: 0.73%;
Dollars: 1 million or more: 0.40%.
Sources: GAO analysis of Education's 2002-2003 sample of FAFSA
applicants and data from the Internal Revenue Service's Statistics of
Income Division.
Note: The 12 income groups shown in this table are those used by SOI to
display state and local tax information.
[End of table]
To calculate the allowance for the higher-income group, Education
deducts a percentage point from the rate it calculates for the lower
income group, a process that fails to account for the fact that higher-
income individuals face higher tax rates than lower-income individuals.
Since the estimate for the lower-income group reflects more of the
taxes paid by those with higher income, this methodology likely
underestimates the taxes paid by this higher-income group.
Four Strategies Might Address Some of the Limitations Associated with
the Tax Allowance and Would Yield a Variety of Effects on Federal
Spending and Aid Recipients:
We have identified four strategies for addressing the limitations of
the tax allowance that range from modest to more substantial changes to
the process: (1) continue to use SOI data but with a revised method for
calculating the allowance, (2) substitute SOI data with one of several
alternative data sources, (3) use the same allowance for all aid
applicants without regard to state of residence, or (4) collect
information directly from the aid applicants themselves. Except for the
first option, use of these strategies would require legislative
changes. Also, these four strategies differ in their impacts on federal
costs and on aid applicants.
Use SOI Data with a Revised Methodology:
The first strategy would be to make better use of SOI data to calculate
the tax allowance, such as by modifying how the allowance is calculated
and coordinating with SOI to ensure that the most recently available
data are used. Education could use the SOI data on separate income
bands to calculate the allowance for families rather than using the
aggregate totals that SOI publishes.[Footnote 25] This would ensure
that tax rates for different income bands are based on information more
representative of those groups. With regard to coordinating with SOI,
Education obtained SOI data for tax year 2000 for its update in 2003
about 3 months before SOI published data for tax year 2001. Thus, when
Education published its proposed update in 2003, it was not based on
the most recently available data. Coordinating with SOI could reduce
the mismatch between the year of the income data collected from
applicants and the tax data collected from SOI from 3 to 2 years.
Education officials acknowledged that in the future, they may have the
flexibility to wait for more recently available SOI data and still meet
their schedule for publishing notice of a proposed update to the state
and other tax allowance. Appendix IV shows what the tax allowance would
be under this strategy for each state.
Replace SOI Data with One of Several Other Datasets:
The second strategy would be to discontinue use of SOI tax data and to
replace it with publicly available data, such as the following:
* Bureau of Economic Analysis Personal Income and U.S. Census Bureau
Tax Tables:
* Description--The Bureau of Economic Analysis (BEA) annually publishes
"Personal Income" tables, which cover aggregate household income, by
state and are based on data from federal and state government programs,
such as state unemployment insurance programs.[Footnote 26] The U.S.
Census Bureau annually publishes "State Government Tax Collections"
tables, which include overall state figures for individual income
taxes, real estate taxes levied by states but not local governments,
property taxes, and sales taxes for both individuals and businesses.
This information is gathered by the U.S. Census Bureau through a mail
canvass of appropriate state government offices that are directly
involved with state-administered taxes; locally collected and retained
tax amounts are not included in the survey. Both sets of tables and
related documentation are available via the Internet.[Footnote 27]
* Use--Education could calculate the allowance by combining the
information from both sets of tables. This approach has three potential
advantages over using SOI data: The BEA data includes income from the
entire population, including both filers and nonfilers, and the census
data covers all tax filers instead of only itemizers, whereas SOI data
only include itemizers, sales taxes are included in the tax collections
tables--although they include taxes paid by businesses--and information
is available 4 months after the end of a year.[Footnote 28] This allows
income data reported by aid applicants and tax information
corresponding to the prior year to be used to develop the allowance. A
disadvantage of census data as compared with SOI data is that property
tax information is more limited. Like the SOI data, the tables
published by the BEA and the U.S. Census Bureau reflect aggregate
measures of taxes and income and would not necessarily reflect the
experiences of the typical family. Also, because the BEA and the U.S.
Census Bureau report information in the aggregate--whereas SOI data are
separated into different income bands--Education would need to make
adjustments to differentiate tax rates by income.
* U.S. Census Bureau--Current Population Survey (CPS)--Annual Social
and Economic Supplement (ASEC):
* Description--The Census Bureau annually publishes the Annual Social
and Economic Supplement to the Current Population Survey, which
includes income, estimated state income taxes, and estimated real
estate taxes. The CPS household income information is gathered through
a survey of 100,000 households. State income tax information is
estimated by the U.S. Census Bureau based on reported income and filing
status information and review of state income tax regulations. Real
estate tax information is generated in a similar manner. Household
characteristics are matched to the Census Bureau's American Housing
Survey to provide simulated real estate and property taxes. The CPS
dataset and related documentation are available via the Internet.
* Use--Education could use CPS household-level data to generate tax
allowances by income. An advantage of using the CPS is that it allows
Education to estimate the taxes paid by the typical family rather than
the taxes paid in aggregate, and CPS data also reflect the entire
population--itemizers, nonitemizers, and nonfilers. Two disadvantages
are that although we have assessed the information collected by the
U.S. Census Bureau in generating the CPS to be reliable, the CPS tax
information is not based on actual taxes paid but rather on U.S. Census
Bureau tax models and is therefore subject to error and that the CPS
does not include sales taxes. In addition, CPS data are available only
somewhat sooner than SOI data, and because of the size of its sample, a
3-year average must be taken to generate reliable state-level
information.
* Institute on Taxation and Economic Policy (ITEP)--Who Pays? A
Distributional Analysis of the Tax Systems in All 50 States:
* Description--ITEP is a nonprofit research and education organization
that has published two reports on state taxes, one in 1996 and one in
2003, both entitled Who Pays? A Distributional Analysis of the Tax
Systems in All 50 States. According to an ITEP official, ITEP plans to
publish future updates every 3 years. These reports present estimated
state information on income, real estate, property, and sales tax
rates. The ITEP state tax tables are based on the 1988 public-use SOI
sample of 365,000 federal tax returns, stratified so that they are
representative at the state level and aged to reflect the most recent
statistics on general population and tax filer characteristics
published by the IRS and the U.S. Census Bureau. These returns and
state tax regulations are analyzed to estimate state, local, real
estate, property, and sales taxes paid based on household
characteristics. Adjustments are made to reflect potential nonfilers as
well. These reports are available via the Internet.
* Use--Were Education to determine ITEP data reliable, Education could
use the ITEP tax figures to generate tax allowances by income
band.[Footnote 29] Two advantages of ITEP data are that they include
sales taxes and that an adjustment is made to estimate what nonfilers
pay in sales taxes, whereas SOI data do not reflect sales taxes and do
not account for nonfilers. A disadvantage is that ITEP's income bands
are not consistent across states and do not match those established by
Congress.
While these publications are publicly available, Education could also
contract with any of these organizations to customize a dataset for the
purpose of developing the tax allowance.
Apply a Standard Allowance to All Aid Applicants, Regardless of State
of Residence:
The third strategy would be to apply the same allowance to all aid
applicants, regardless of their state of residence. This would involve
creating a standard allowance based on the CPS that reflects the median
taxes paid by all households.[Footnote 30] This strategy would have the
advantage of simplifying the need analysis methodology, but a
disadvantage is that it would not account for the variation in taxes
paid across states or income bands. For example, using a standard
allowance may on average underestimate the taxes paid by those from
high-tax states but may overestimate the taxes paid by those from low-
tax states.
Collect Tax Information Directly from Aid Applicants:
The fourth strategy would be to collect tax information directly from
aid applicants by adding questions to the financial aid application
form. Under this strategy, applicants would report state and other
taxes along with their federal taxes paid, information that could be
used to reduce available household financial resources directly, making
an allowance unnecessary. While documentation would likely be available
for aid applicants to use in reporting their state income and property
taxes, documentation concerning sales taxes may not be as readily
available. Independent of this report, the Advisory Committee on
Student Financial Assistance is currently assessing this strategy in
the context of simplifying the financial aid application process and is
expected to release its report in early 2005. One of the options
considered by the Advisory Committee on Student Financial Assistance is
to have the FAFSA questions tailored to the applicant, where applicants
from different states (and with different financial circumstances)
would answer different questions, and questions not relevant to an
applicant would not be asked. Education officials expressed concern
with this strategy because it might add to the administrative burden of
students, schools, and Education. For example, Education's current
guidance directs applicants to specific line items from their federal
tax returns for their federal taxes paid, and it would be difficult to
do the same with state taxes, given the variations among state tax
forms. Because institutions are required, on a limited basis, to verify
information reported by students and families on the FAFSA, Education
officials noted that having students and families report additional
information on the FAFSA could increase the burden on institutions of
verifying such information.
Strategies Would Differ in Terms of Their Effects on Federal Student
Aid Expenditures and Financial Aid Applicants:
These various strategies would have differed in their impacts on
federal expenditures and on financial aid applicants if they were
applied to the 2004-2005 award year.[Footnote 31] First, each strategy
would have changed federal expenditures for grant and loan programs,
for acquiring data, and for other administrative activities. For
example, we estimate that Pell Grant program expenditures could have
increased by as much as $400 million or decreased by as much as $200
million were the different options adopted and used to allocate aid for
2004-2005. Second, each strategy would have affected the amount of
federal, state, and institutional aid that financial aid applicants
receive and the number of applicants receiving such aid. For Pell
Grants, using a standard allowance of 4 percent would have caused about
83,000 recipients to become ineligible for the program, but the other
options would have affected fewer recipients. Table 9 shows the
potential merits of each option in terms of federal expenditures for
the Pell Grant program and the impact on expected family contribution,
and table 10[Footnote 32] shows the extent to which the tax allowances
calculated under each strategy would accurately reflect state and local
taxes paid by students and families.
Table 9: Framework for Evaluating Options Identified to Change the
State and Other Tax Allowance Relative to the Current Allowance in Use:
Change in federal Pell Grant expenditure[G];
Proposed 2004- 2005 tables: - 0.3 billion;
Strategy I: SOI with revised methodology[A]: + 0.1 billion;
Strategy II: Alternative data sources: BEA/Census[B]: + 0.2 billion;
Strategy II: Alternative data sources: CPS (ASEC)[C]: - 0.2 billion;
Strategy II: Alternative data sources: ITEP[D]: + 0.4 billion;
Strategy III: Standard allowance (4%)[E]: - 0.2 billion;
Add question to FAFSA[F]: - -.
Percentage of students facing a reduction in Pell Grant award;
Proposed 2004-2005 tables: 38;
Strategy I: SOI with revised methodology[A]: 19;
Strategy II: Alternative data sources: BEA/Census[B]: 11;
Strategy II: Alternative data sources: CPS (ASEC)[C]: 32;
Strategy II: Alternative data sources: ITEP[D]: 2;
Strategy III: Standard allowance (4%)[E]: 29;
Add question to FAFSA[F]: --.
Percentage of students facing a reduction in Pell Grant award:
Percentage retaining eligibility;
Proposed 2004-2005 tables: 36;
Strategy I: SOI with revised methodology[A]: 19;
Strategy II: Alternative data sources: BEA/Census[B]: 11;
Strategy II: Alternative data sources: CPS (ASEC)[C]: 31;
Strategy II: Alternative data sources: ITEP[D]: 2;
Strategy III: Standard allowance (4%)[E]: 27;
Add question to FAFSA[F]: --.
Percentage of students facing a reduction in Pell Grant award:
Percentage not retaining eligibility (number of students affected)[H];
Proposed 2004-2005 tables: 2; (92,000);
Strategy I: SOI with revised methodology[A]:
