July 16, 2015
On July 8, the Gates Foundation released its proposal for reforming the Free Application for Federal Student Aid (FAFSA). With the average first-time FAFSA applicant currently answering over 60 questions, many college access advocates believe the form is too complicated and burdensome for students and their families. Gates’ proposal calls for streamlining completion of the FAFSA in a few ways, like importing tax information already provided to the IRS and allowing filers to use two year old tax data (“prior-prior-year” data) to allow for earlier filing. But Gates also proposes one new and important change to the way financial information from the majority of applicants is used to determine aid eligibility.
The reform proposed by Gates would simplify the current FAFSA by sorting applicants based on one question about their financial situation: did the household need to fill out any additional schedules when filing their federal income taxes two years ago? Most people can fill out just the 1040 or even a simplified version of the tax return. However, tax schedules are required when taxpayers get a certain amount of their income from non-wage sources, or if they want to itemize deductions. This includes forms to report more than just a small amount of capital gains or losses, dividend or interest income, business gains and losses, and other non-wage income.
Gates estimates that three in four FAFSA applicants don’t file tax schedules, so simplifying the form for those who don’t file schedules could have a significant, positive impact on FAFSA completion rates. At the same time, it could also appease those concerned that removing assets from the FAFSA altogether, as some have proposed, would cause families with ample non-wage resources to qualify for aid they may not actually need. In other words, it would be simpler for students and families to fill out the FAFSA while still maintaining the integrity of federal need calculation.
Currently, when an applicant fills out the FAFSA, his financial situation is used to determine whether he'll fill out a standard form or a simplified form that skips questions. Each form calculates the student’s Expected Family Contribution (EFC) in a slightly different way. Here's how it works: the regular EFC formula adds "available income" (total income minus some designated allowances) to the amount students and families are expected to contribute from assets. That's then divided by the number of college goers in the household to produce the EFC. For the 2015-2016 award year, people who are unemployed, filed 1040A or 1040EZ tax forms, or received federal means-tested benefits in 2013 or 2014 are eligible to use the simplified EFC formula if their income is also $49,999 or less for the year. Unlike the regular formula, the simplified formula does not require applicants to enter information on family assets. So, the EFC for those who qualify to use the simplified formula is just derived from the expected contribution from income.
While the current FAFSA already sorts applicants by financial situation, Gates’ proposal differs significantly in how it sorts applicants. The method in the Gates proposal has nothing to do with income. Instead, a much simpler system takes its place: those who file tax schedules -- less than a quarter of applicants -- would answer a few additional questions about the net worth of their assets and have data from their tax schedules pulled from the IRS.
This new way of sorting FAFSA applicants would eliminate a lot of the complexity in the current form and would offer long sought middle ground in the tradeoff between simplicity and precision when determining what a family can contribute to a college education.
We continue this discussion in another post comparing two families’ EFC and Pell Grant eligibility using FAFSA formulas and Gates’ proposed formulas. "