Federal Student Aid Need Analysis: Background and Selected Simplification Issues

Publication Date: October 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Education

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Abstract:

A federal "need analysis" system underlies the annual allocation of billions of dollars in student financial aid supported by Title IV of the Higher Education Act. Aid applicants provide detailed financial and other information on the Free Application for Federal Student Aid (FAFSA), used to determine the financial resources students and their families are expected to use to meet postsecondary education expenses -- the Expected Family Contribution (EFC). At issue is the system's complexity, and the barrier it may pose for aid-eligible students, particularly low-income students. Two key simplification questions addressed in this report are: How much of the data currently collected by the FAFSA is used to determine the EFC and eligibility for federal aid? Can the EFC be calculated using fewer data?

Nearly all of the financial information gathered by the FAFSA is used to calculate EFCs and determine federal aid eligibility, or to support administration of federal aid programs. The FAFSA can be filed electronically or in paper format. The paper version, used by a large number of filers, is the primary focus of this analysis because it requires many filers to respond to a broader array of questions. The 20042005 paper version has 135 questions. Over two-thirds are involved in calculating the EFC, determining federal student aid eligibility, and determining federal student aid packaging. About 4% are clearly unrelated to the federal need analysis process.

Three basic EFC estimation models, constructed for this report, examine the effects on the EFC calculation of the three major categories of financial information utilized in need analysis: base income information (adjusted gross income -- AGI); additional income information to further adjust available income; and asset information. This model-based analysis shows that base income data play the lead role in determining EFCs. The contributions of the additional income and asset information vary by population. The analysis suggests that from a technical (i.e., mathematical) standpoint it is probably feasible to explore ways in which the financial information utilized for federal need analysis and aid eligibility determinations could be streamlined, without deviating dramatically from the EFC values generated under the current system.

Efforts to simplify the federal need analysis system are likely to be influenced significantly by several fundamental tensions: the ability of the system to gather sufficient information to make relatively fine financial distinctions among families may be adversely affected by some simplifying steps; the federal system is intended to support the awarding of federal, state, and institutional aid, meaning that simplifying changes will be assessed by their impact on the awarding of aid from each source; and, given the billions of dollars and millions of individuals involved, simplifying changes with even proportionately modest effects potentially involve hundreds of millions of dollars and thousands of individuals.

This is a background report and will not be updated. A separate report will be available shortly tracking legislative action on need analysis simplification.