CBO’s Bottom Line: Making Financial Aid Simpler and Smarter

As panelists at hearings held by both the House and Senate education committees last week made clear, there is near unanimity on the fact that the financial aid “system” is layered with inconsistencies, redundancies, and overlapping federal programs. Students find it confusing and un-navigable, so despite all the taxpayer investments in student aid, students often don’t know how to access them or which benefits to use. Surveys have found that 80 percent of college-eligible students who don’t enroll say grant aid is “very” or “extremely” important in their choice not to attend college, but only 12 percent even applied for aid.

The complications and barriers to applying for and receiving federal financial aid are a hot topic. Last week’s hearings explored options for simplifying the system. And more solutions are the subject of a new report out this week from the National College Access Network (NCAN). Sooner, Simpler, Smarter: Policy Change for Better College Choice is a product of consortium on financial aid simplification and transparency, of which New America is a part. Some of the consortium’s ideas include providing financial aid eligibility information earlier and automatically. For example, lawmakers could:

• Automatically notify families about federal financial aid eligibility using IRS and Department of Education data, including families of young children;
• Use prior-prior year data (data from two years earlier) to notify families about Pell Grant eligibility sooner;
• Calculate aid eligibility using information on federal tax returns to simplify or eliminate the FAFSA, and base Pell Grant eligibility only on income and family size; and
• Maintain Pell Grant eligibility for recipients once they are enrolled in postsecondary education.

But until now, we didn’t have much sense of how these changes might affect students – or taxpayers’ bottom line. A report published in September by the nonpartisan Congressional Budget Office (CBO) outlines options for reform of the Pell Grant program – including a few devoted to simplifying the financial aid process. A look at CBO’s price tag could give a sense of how valuable these and other reforms could be for students, and for taxpayers.

Option 1: Simplify the Free Application for Federal Student Aid (FAFSA)

CBO first looks at a proposal that would change the way students apply for federal financial aid, making it, yes, simpler—which could encourage many more students to apply for aid.  Right now, students must submit income information from their (or their parents’) tax forms. Students with an annual family Adjusted Gross Income between $24,000 and $50,000 must also provide information on certain assets – like bank accounts, real estate other than the primary residence, etc. This provides another layer of complexity for students, despite the fact that the assets limits affect fewer than 4 percent of dependent students.

CBO looked at removing the “assets test” from the FAFSA and making it entirely based on tax return information. If Congress implemented those changes, the Department of Education would issue about 2 percent more grants averaging $1,500 – some to newly eligible students who wouldn’t have to report that income now, and some to new would-be students who otherwise wouldn’t have applied because the application was too complex. Additionally, about 20 percent of the grants that are already awarded would be larger under the new formula, by about $350 on average. Those changes would cost only about $1 billion annually, or $10 billion over the 10-year budget window – a low cost relative to the numbers of new students who might apply for and graduate from college.

There is a potential danger to simplifying or eliminating the FAFSA, though: Many colleges, especially ones with high tuition and high aid amounts, require the College Board’s CSS Profile to receive institutional aid, because the Profile requires even more information about students’ and families’ assets. Lightening the FAFSA load should be coupled with safeguards to ensure colleges don’t add back that burden with yet another aid application. For more on the CSS profile and how schools use it to fleece students, check out our earlier post. [Full disclosure: College Board is also a member of this consortium.]

Option 2: Tie Pell Grant Eligibility to Federal Poverty Level

The formula for calculating Pell Grant eligibility is a complicated one – it includes the family’s income, assets, family size, and other family members in school. That means students usually can’t know what aid they’ll receive—and therefore what college will cost them—until after they complete the FAFSA during their senior year of college.

CBO looked at a proposal to link eligibility to the federal poverty guidelines, instead. Families could use a simple table to calculate their expected college costs – and expected aid eligibility. Assuming the maximum Pell Grant was only available to families with Adjusted Gross Incomes (AGI) of 150 percent of the federal poverty level (about $35,000 for a family of 4) or below, with smaller grants for families between 150 and 250 percent of the FPL (almost $59,000 for a family of 4).

Using those numbers, 3 percent fewer students would receive grants over the next 10 years, and Congress would save $1.4 billion. That’s because about 7 percent of current Pell students would no longer be eligible, and about 4 percent more students would be eligible. Students in smaller families would receive larger grants (in particular, 32 percent of independent students with no dependents would see larger grants, while less than 1 percent would see their grants reduced). Twenty-two percent of students in families of at least 2 would receive larger grants, and 4 percent would receive smaller grants. [About 59 percent of Pell recipients are independent students, though it’s not clear how many of those have dependents themselves.] 

The Pell Grant CBO report answers some questions about the costs and effects of key changes as we continue to develop and model ways to make the high-school-to-college easier and more seamless. But with all the ideas out there about improving college access and completion—including those in the recent NCAN report—we hope CBO will be able to produce more cost estimates for policymakers on these critical issues. Check back with EdCentral for more updates on the Simplification and Transparency Consortium in the coming weeks and months. "