For many, the Free Application for Federal Student Aid (FAFSA) process can seem either a hazing ritual or a rite of passage. Submitting the form is the gateway into the world of federal financial aid. It’s first step in getting a Pell Grant, a student loan, or a work-study campus job.
So why must it put Texas students and others at a disadvantage?
As the FAFSA has grown more complicated (it now includes 108 questions), the need to simplify it has been a rare point of bipartisan consensus. And over the last few years, significant improvements have been made — most notably the introduction of an online filing option with a built-in web tool that allows applicants to pull their tax data from the IRS directly into the form.
As Congress negotiates reauthorization of the Higher Education Act, further simplification is both desirable and achievable. But the problems with the FAFSA go beyond complexity. There’s also an issue of fairness.
The federal government primarily uses FAFSA information to calculate each student’s Expected Family Contribution (EFC) — essentially the government’s estimate of how much a family can afford to pay for college. Generally speaking, the lower your EFC, the more aid you are likely to be eligible for. But this EFC formula has a number of problems, and amending the EFC formula should be a priority for policymakers, particular policymakers representing Texas.
The first and most glaring problem is that Texas — and other states without state income taxes — are unfairly punished.
The EFC formula allows applicants to shield part of their income from the assessment rates, similar to the way deductions on federal 1040 forms shield income from tax rates. One such “deduction” in the EFC formula is for “state and other” taxes. But it isn’t based on how much the applicant pays in states taxes, but rather what state they live in. Thus, most Texan parents only get an allowance of 2 percent of their income, whereas similar parents in California get a 7 percent allowance (see Table A1).
As a result, Texans will receive much less financial aid. For example, a 26-year-old Californian earning $25,000 per year would typically receive a Pell grant of $1,300 next year. But an identical Texan would get $600 less simply for being from Texas rather than California.
There’s an easy fix: replace the EFC’s state-specific allowances with a uniform allowance.
A second issue is that student work and savings are “taxed” at a very high rate.
The EFC’s assessment rate on student earnings for dependent students is 50 percent above an exemption of $6,660. So, if a student from a low-income is currently receiving a Pell Grant, every dollar they earn above $6,660 reduces their Pell Grant by 50 cents — the equivalent of a 50 percent income tax rate. By way of comparison, the current top federal tax rate is 37 percent. So the Pell Grant student working in the cafeteria is essentially paying a 50 percent tax rate, while the college president making $570,000 pays 37 percent.
The assessment rate on such a student’s assets is also quite high: 20 percent. Every $1 the student has in a savings account will reduce their Pell Grant by 20 cents. But keep in mind that this rate will be applied each year the student is in college. If they are in college for four years, $1 in a savings account could reduce their Pell Grants by 80 cents over their four years of college.
Such high assessment rates discourage working while in college, and they penalize savings prior to and during college. Granted, for many students, these assessments will mostly affect the types and amounts of loans they are eligible for. But because grants don’t need to be repaid, the impact on Pell Grant students can be dramatic. These students typically face myriad other obstacles in going to college. We shouldn’t add one more roadblock in the form a 50 percent “tax” as well.
FAFSA simplification is a worthwhile goal, and should absolutely be part of the negotiations on reauthorization of the Higher Education Act. But we shouldn’t stop there. Attention should also be paid to what’s done with the information on the FAFSA, and that entails revisiting the EFC formula. Texas students, as well as students who diligently work and save during college, shouldn’t be penalized unfairly.