Simplifying Tax Incentives and Aid for College: Progress and Prospects

A recent paper from researchers with the National Bureau of Economic Research, Simplifying Tax Incentives and Aid for College: Progress and Prospects, updates and expands upon prior research and analysis of proposals for simplifying the application for federal financial assistance for college. The report argues that the Free Application for Federal Student Aid (FAFSA) is too long and too confusing, contains too many unnecessary questions, and undermines the effectiveness of federal student aid programs in encouraging more students to enroll in college.

After describing the various federal financial aid programs including both the traditional aid programs—Pell and loans—and those delivered through the tax code, the paper includes an analysis of eliminating the FAFSA as the application for traditional student aid and instead solely using information from the IRS.  The authors argue that federal financial aid paperwork would be greatly reduced if the Department of Education could calculate aid eligibility using only IRS data and eliminate all non-IRS questions from the FAFSA (questions that have little to no impact on aid eligibility).

Among the report’s findings:

• Although since 2007, 24 questions have been removed from the FAFSA, an additional 12 new questions have been added. Thus, the FAFSA continues to contain significantly more questions than the most commonly used tax forms – the FAFSA has 116 questions, the 1040EZ has 38 questions, and the 1040A has 84 questions.

• While it takes 9 questions on the 1040EZ and 44 questions on the 1040A to calculate an individual’s federal tax liability, it takes 66 questions on the FAFSA to calculate an individual’s eligibility for traditional federal student aid.

• Removing questions related to assets from the FAFSA, the questions that add to the complexity of the FAFSA the most, has little effect on a student’s eligibility for Pell. The authors’ analysis finds that that 95% of Pell applicants would see zero dollar change in their Pell grants if assets were removed from the FAFSA and for 97 percent of aid applicants removal of assets from the FAFSA would result in a less than $100 change in their Pell grant.

• As one other option for simplifying the aid process by relying primarily on tax data, the authors’ analysis finds a 0.95 correlation between current baseline Pell and Pell eligibility using only adjusted gross income (AGI), taxes paid, state of residence, family size, marital status, and type of federal income form filed as the elements for determining Pell eligibility.

• Although the U.S. Department of Education has taken proactive steps to streamline the electronic filing of the FAFSA through the use of skip logic and through making arrangements with the IRS to allow individuals to electronically import their tax data into the FAFSA, the FAFSA-IRS link currently serves too few students and families. Due to a mismatch in timing between the filing of tax forms and the filing of financial aid applications, IRS tax data is available too late in the year to be meet most financial aid filing deadlines.  The authors argue that this problem could be overcome if the Department of Education were to move to the use of prior-prior year tax data for determining student aid eligibility. Given the relative stability of family incomes across multiple years, such a move would have little effect on students’ eligibility for financial assistance.