Help People Save by… Simplifying the FAFSA?

FAFSA. The mere mention of the famously complicated questionnaire that determines one’s federal financial aid awards can send shivers down the spine of recent high-school graduates and their parents. Perhaps no longer. Education Secretary Arne Duncan (along with Jill Biden) visited Banneker High School in Washington last week to discuss a new, streamlined version of the FAFSA form going into effect this year.

Nearly 50 questions have been eliminated from the previous form, and the Federal Government is also encouraging families to complete the form online, which would allow them to automatically skip irrelevant questions, as well as more easily re-input financial data when re-applying in subsequent years.

Additionally, the simplification process means that low-income families are now allowed to bypass certain questions on financial assets, removing a mild disincentive to put money away for higher education

But what about removing disincentives for families long before a child is knocking on the college door?

While the announced reforms allow students and parents to estimate their Expected Family Contribution in the years prior to applying and entering school – a useful tool for families trying to save for college, pending legislation (passed in the House, waiting in the Senate) would go even further. The Student Aid and Fiscal Responsibility Act contains a provision that removes asset questions from the FAFSA, and in its stead placing a $150,000 asset cap on eligibility for Pell Grants and subsidized Stafford Loans. In addition, the Act creates an ambiguously-defined College Access and Completion Fund, and our recommendations for how to use those monies to incentivize savings can be found here.

To be sure, the current financial aid application process contains more perceived than real barriers to saving. For example, only 5.6% of the assets in a 529 college savings account – assuming it is in a parent’s name – can be used to determine eligibility for federal aid, creating minimal impact on the final award received by most low-income families. However, according to a few 529 plan administrators with whom I’ve spoken, families often cite a fear of losing financial aid as a reason for not saving. By unequivocally saying that low- and middle-income families will not be asked about financial assets, the Federal Government would be continuing a trend of removing barriers to saving, seen prominently in the removal of asset limits for eligibility in the Supplemental Nutrition Assistance (or food stamp) Program in 2008. 

Removing perceived barriers is still only part of the battle. With penalties for saving removed, Congress and the Obama Administration should focus on policies that give families a nudge to proactively save for higher education. These policies could include facilitating enrollment and contribution by: establishing accounts in kindergarten or earlier, allowing enrollment and contribution at tax time, giving employers an incentive to open accounts for families and worker retraining, and progressive matching, among others.