For almost two decades now, millions of aspiring college students seeking financial aid have been required to fill out the Free Application for Federal Student Aid (FAFSA). With the goal of simplifying and streamlining the aid process, the form is intended to allow for a myriad of federal, state, and school-based financial aid programs to direct money to the students who need it. Since many programs are designed primarily to help lower-income students, this is accomplished by collecting detailed financial information on the students and their families, with the information being used to calculate each student’s expected family contribution (EFC). The EFC is essentially what the government deems the family can afford to pay. A student’s eligibility for financial aid is then based on the difference between the cost of attendance and the EFC.
The goals of the process are laudable, but the “current FAFSA and EFC formulas have long been questioned by financial aid professionals, academics, families, and others with regard to the complexity, relevance, and fairness of the formulas.” As the Spellings Commission put it,
"our financial aid system is confusing, complex, inefficient, duplicative, and frequently does not direct aid to students who truly need it. There are at least 20 separate federal programs providing direct financial aid or tax benefits to individuals pursuing postsecondary education. For the typical household [the FAFSA] is longer and more complicated than the federal tax return. Moreover, the current system does not provide definitive information about freshman year aid until the spring of the senior year of high school, which makes it hard for families to plan and discourages college attendance."
The two biggest problems with the FAFSA are its cost and the uncertainty concerning aid eligibility and awards arising from its’ complexity. The estimated cost of determining and administering aid is at least $4 billion per year. Comparable, and potentially even better, outcomes could be achieved at a fraction of that cost. The complexity of the current system also discourages its intended beneficiaries from even applying. Many of the poorest students and families see the financial aid process as “a long ordeal of scaling access barriers: poor information, unfair expected contributions, impenetrable forms, inflexible processes, burdensome verification, lack of coordination among funding sources, and insufficient total aid.” Moreover, even after completing the FAFSA, students are not informed of any of the aid available to them. That information is not revealed until months later when schools that they’ve been accepted to make offers. If this information were available to students prior to application season, it would help them to make more informed choices.
The Costs of the Current System are Too High
The current system, particularly its cornerstone, the FAFSA, impose large costs on nearly everyone involved. The largest direct cost of the FAFSA falls on students and their families. This cost primarily comes from the considerable time it takes to fill out the form, due to its length and complexity. The Department of Education acknowledges that the “volume and type of data required on the FAFSA can be intimidating and daunting for students and families.” The 2009-2010 FAFSA lists 104 questions with another 29 sub questions. “To answer just three of these questions, students must complete three additional worksheets with nearly 40 additional questions.” Secretary of Education Arne Duncan noted that "you basically have to have a Ph.D. to figure that thing out."
According to Harley Frankel, executive director of the College Match program, “It takes a huge amount of work to track down the financial documents students need for the FAFSA, and then figure out the answers for all the income and asset questions. Our students would be much better off if we had those extra hours to help them apply to schools and prepare for college life.”
The Department of Education officially estimates that it should take an hour to complete the form, but this is widely acknowledged to be unrealistic. Some students and families spend as many as 20 hours completing the form, and others have resorted to hiring professionals for help. The consensus among scholars is that 10 hours is a conservative estimate.
The Department of Education reported that FAFSA applications for the first half of 2009 were up 19.7 percent over the previous year, to 11.8 million. Taking the average of 10 hours to fill out the form, an update of the calculation by Susan Dynarski and Judith E. Scott-Clayton indicates that the implied cost to families is $2.3 billion, assuming that their time is valued at the average hourly rate of $19.29.
The FAFSA-based system also imposes large costs on colleges. It is estimated that “colleges spend over $2 billion annually on salaries for staff who administer federal financial aid/or other aid based on the federal aid formula.” While some of these expenses would be required regardless of the aid system, a significant portion of them are tied directly to the FAFSA.
Perhaps the most wasteful requirements are imposed by the verification process, which is “bloated, burdensome, and costly to institutions and the federal government, and provides questionable results.” Currently, schools are required to verify the information on the FAFSA for at least 30 percent of applicants. The “costs of verification are high for both students and schools. Students have to gather and copy original documents that can be difficult and costly to track down.” Moreover, students
may also be required to complete and follow complex and lengthy paper forms and processes that ask for data not required to determine their eligibility for student aid. For example, “auto-zero” eligible students need only provide one financial data element, adjusted gross income, in order to qualify automatically for the maximum Pell Grant. These students find, however, that they are required to provide all of the data on the full paper FAFSA in order to complete the verification process.
Schools also bear large costs of the verification process, which takes an estimated 1.75 million hours of aid officers' time.262 According to the Advisory Committee on Student Financial Assistance,
verifying FAFSA data is a major and expensive administrative burden. An audit by the U.S. Department of Education’s Inspector General calls the verification process “labor intensive and costly for schools.” According to an analysis by the federal Advisory Committee on Student Financial Assistance, “[I]t would cost about $90 to verify an application for student financial aid. With today’s application volume, verification is estimated to cost at least $432 million per year. This estimate does not include the costs when a single application is verified by more than one school.”
As postsecondary education becomes more and more expensive, increasing numbers of potential students will fill out the FAFSA. If the recent increase in FAFSA applications continues, and if the proportion of applications that are verified stays at recent levels, schools will need to spend around a half billion dollars on verification for the 2009-2010 school year. Additionally, since many students require a good deal of help in navigating the financial aid process, and the task of creating and processing Student Aid Reports is time consuming, we would estimate that another half-billion dollars in financial aid office budgets could be chalked up to the FAFSA process.
Lastly, scholars estimate the financial cost to the government of administrating the FAFSA to be about $220 million.
The FAFSA Intimidates Its Intended Beneficiaries
Financial aid is largely designed for the purpose of providing assistance to students from low income families. But the “financial aid application process, whether in its paper or online form, is long, confusing, intimidating in tone, and requires a great deal of personal and family financial information that can be especially difficult for students from low-income families to collect. Some of the questions, such as those asking for checking account balances, create the inaccurate impression that parents and students will have to spend their last pennies before any aid is made available.” The complexity obscures the fact that there is aid available. Around half of high school counselors say that a lack of information about financial aid is always, frequently, or sometimes important for students who end up not enrolling in college. Nor do all who enroll get the aid they are qualified for; There exists a “large and growing number of lower income college students who do not apply for aid, even though they are likely eligible for a Pell grant: an estimated 1.5 million in 2004 alone.”
Why is this happening? Gary Orfield has shown that many low-income families are confused by the rules and procedures required to document eligibility. Behavioral economists have expanded on this, and have “concluded that people's choices are strongly influenced by the default provided them.” This is troubling because “high school students of all income levels overestimate the cost of college… [and] low-income students are pessimistic about their ability to pay for college,” leading to the uncomfortable conclusion that “the default option for lowincome students is to not go to college.”
Part of the reason for this is the complexity of the FAFSA. Since many low-income families either don’t file taxes, or are eligible for simplified tax forms, the FAFSA may very well be the most complicated government document they are confronted with. And being a government document, it contains “unfamiliar language — terms like ‘emancipated minor’ and ‘unaccompanied youth’ —[that can] intimidate and confound families.”
Another reason that students and parents may fail to complete the form is that for families concerned about how to pay for college, filling out the FAFSA doesn’t actually provide any additional information, nor do anything to reduce their uncertainty about how they are going to pay for college. Once the FAFSA is completed, the students are informed of their expected family contribution (EFC). But the EFC tells the students how much they can pay, not how much aid they are eligible to receive. Thus, “even after completing a lengthy and often confusing application, the student and family have no more information on their ability to finance the student’s education than before the application was completed. In most cases, a student does not learn of the types or amounts of financial aid he or she is eligible to receive until notified by the postsecondary schools listed on the FAFSA.” This would be analogous to trying to buy a home without knowing what mortgage you qualify for.
The Needed Reforms
The solution to the first problem, that the form is costly for students and parents to fill out and for schools and the government to process and verify, is to obtain much of the required data from the IRS instead of from students. “Of the 28 income and asset questions on the FAFSA, 22 ask for data that comes directly from lines on the IRS Form 1040. Of the 20 questions on the income worksheets required to complete the FAFSA, nine ask for data from IRS forms. That’s a total of 31 questions—about two-thirds of all the currently required income and asset questions—that can be answered automatically and removed from the FAFSA forms.” Getting data directly from the IRS would not only simplify the process for students, but would reduce errors and save on verification costs as well. Broadly speaking, there is plenty of precedent for such a policy, as individuals routinely authorize the IRS to share their information with other parties. Moreover, the law firm of Holland & Knight examined the legality of such a policy and found that “When authorized by the aid applicant, there are no legal barriers preventing the Department of Education from receiving and using data directly from the IRS.” Seizing on this opportunity, a pilot program has been launched that will import IRS data into the applications of online applicants.
While there are some problems, such as what to do with people who aren’t required to file taxes and what year(s) of data to use, these issues pale in comparison to the costs of maintaining the status quo.
While getting data directly from the IRS would be a vast improvement, merely simplifying the process is not enough. Over the years, multiple efforts have been made to simplify the FAFSA, but despite “a decade of effort to simplify the financial aid process, students and families are often still baffled by this process and cringe at the sight of application forms.”
In the late 1990s, two simplified formulas were mandated, the automatic zero EFC and the Simplified Needs Test. After changes in the income requirements in 2007, 44 percent of students were eligible to use them. However, these “efforts do not appear to have simplified the aid application process. Among those who had their FAFSA processed using the simplified needs test and who were eligible to skip the asset questions, 48 percent provided asset information. Among those who had their application processed under the automatic-zero EFC formula, 90 percent responded to questions that they were not required to answer.” Forms filled out online can have skip logic applied – a helpful but sometimes unexploited feature.
Indicative of past and likely future efforts that merely attempt simplification is the fafsa4caster, an online tool designed to help students gauge what their EFC will be. The immediate display of the results is terrific (after a couple pages of legalistic boilerplate about this just being an estimate), and paints a broad picture of what a student’s financial situation will look like. But the process itself cannot exactly be described as user-friendly. The first page is a list of technical browser requirements – something most applications and websites wait to display until there is an actual problem. As you begin, three screens are displayed where biographical information is entered (name, address, SSN, birthday, etc.). This should seemingly eliminate the need for agespecific questions. However, this was not the case, as the first question on the next page was “Before January 1 of this year, was the student 23 or older?” This continues for some time, as your mounting irritation morphs into dejected resignation. Another question reads, “As of today, what is the student's (and his/her spouse's) total current balance of cash, savings, and checking accounts?” By the time you’re done (the Department of Education estimates that it takes 30 minutes, though that seems just as unrealistic as their estimate of one hour for the real FAFSA), you feel as though you might as well have just filled out the normal FAFSA.
A two-page EZ FAFSA has been recently mandated as well. If past attempts at simplification are any indication, this will not be terribly effective, either. Recently, the Department of Education has made some changes to the online form, which seeks to avoid unnecessary questions and to provide more information on likely aid amounts in a timely manner.
Instead of merely tinkering with the source of that data needed for the existing formulas, the formulas themselves should be changed. A Department of Education analysis found that student eligibility “can be determined using significantly less data than what is currently required. Specifically, eligibility for subsidized federal aid, targeted to the neediest students, can be determined using only the family’s IRS Adjusted Gross Income and the number of IRS exemptions claimed.”
The inclusion of the extraneous (and costly to collect and verify) data adds enormously to the complexity of the aid process but does little to enhance the desired distribution of aid. Susan Dynarski and Judith Scott-Clayton estimate that getting rid of all but a few of the financial and household information questions would change Pell Grant eligibility “by less than $100 for 76 percent of aid applicants.” They argue that much of the form can be eliminated without dramatically altering the aid students get because, one, many of the questions on the FAFSA are only relevant to a few families, and, two, many of the remaining questions apply to only the top or the bottom of the income distribution, who already either qualify for no or full aid, rendering the additional information “irrelevant.”
One set of irrelevant questions concerns the assets of the students and their parents, which have been roundly criticized. To begin with, they are “intimidating” for students and their families, since they give the impression that no aid will be available unless they’ve spent everything they have. Moreover, including assets on the form has very little effect on the distribution of aid. The Department of Education says that “more than 90 percent of current Pell grant recipients would be unaffected by the removal of assets from the EFC formula, and, thus, from the form.” This is because “few households have assets that are ‘taxed’ by the aid formula. Families hold the vast majority of their wealth in homes and retirement funds, both of which are protected by the aid formula.”
The formulas should also be changed to avoid creating perverse incentives. The Advisory Committee on Student Financial Assistance recommends changing the “tax” rates in a number of areas. One is student earnings - for every dollar that a student earns during the year, a student can expect to have his or her aid reduced by 50 cents. Conceptually, this is equivalent to a 50% tax, which is a big disincentive for students to work. Another area is the treatment of college savings plans, which creates “ horizontal inequities: identical families with identical lifetime earnings can be treated very differently by the aid system, with aid reduced for the family that has sacrificed consumption in order to save for college.”
Barriers to Reform
One of the main obstacles to reform is the notion that a simplified FAFSA would not serve the needs of all states, schools, and scholarship organizations. After all, the FAFSA was intended to be a universal, catch-all form. Some argue that there is little point in having a very simple FAFSA if the students are required to fill out numerous other forms.
Given what we know today, these goals are misguided. Even the current monstrosity is not sufficient for many schools, whose students are required to fill out the College Board’s CCS Financial Aid Profile. This form goes even further than the FAFSA in trying to determine ability to pay by requiring even more detail on family finances, particularly family assets.
The desire to be everything to everybody has led to a “least common denominator” situation. For instance, “all students today are required to answer the approximately 20 nonfinancial questions on the FAFSA required by various state aid agencies, regardless of their own state’s data requirements.” In other words, the goal of universality has not been achieved, and the catch-all goal, to the extent it has been achieved, is achieved only by burdening every student in the country with irrelevant questions. A better FAFSA would focus on one thing and one thing only: determining eligibility for means-tested federal financial aid. If states or schools want something else, then they are free to try and impose those costs on their applicants.
A second obstacle in the way of reform is the existing law. The current system is so complex precisely because Congress has mandated that the formula for determining aid account for so many things. Any meaningful reform will require statutory action by Congress.
Historically, the aid formula has been difficult to simplify since “changes raise flags for elected officials and constituency groups. The resulting concerns about equity and cost tend to politicize and ultimately stall attempts to simplify the FAFSA by altering the aid formula.”
This hints that it may be easier to scrap the entire system and start over from scratch, since the new system could be presented as a complete package, and compared to the existing dysfunctional system as a whole. This would avoid the problem of only looking at one small piece at a time, each typically unobjectionable in isolation, but combining to give us the extremely complicated, costly, and inefficient system we have today.
The current FAFSA imposes costs of roughly $3.5 billion ($2.3 billion on families to fill out the FAFSA; half a billion by schools for verification, another half a billion to help students navigate and understand the aid system, and $220 million for the government to process applications). Under reasonable conditions, a simplified process that relied on IRS data and informed students what aid they would receive rather than what they were expected to pay could radically reduce this figure to an estimated $900 million, resulting in savings of $2.6 billion, while at the same time providing greater benefits to students.