In 2003, the Department of Education (Education) proposed an update to the state and other tax allowance, a part of the federal need analysis for student financial aid. Most federal aid as well as some state and institutional aid is awarded based on the student's cost of attendance less the student's and/or family's ability to pay these costs--known as the expected family contribution (EFC). The allowance, which accounts for the amount of state and other taxes paid by students and families, effectively reduces the EFC. Given the potential impact of the allowance on the awarding of aid, we determined what factors have affected the updating of the tax data on which it is based, the effects the proposed 2003 update would have had on financial assistance for aid applicants, any limitations in the method for deriving the allowance, and strategies available to address them.
Recommendations for Executive Action
|Department of Education||To ensure that relevant tax data from the Statistics of Income are requested systematically and that the most recent data are obtained, in the short run, the Secretary of Education should develop formalized updating procedures and document such procedures in writing. Such procedures could include (1) making annual written requests to the Internal Revenue Service for state and local tax information and documenting those requests and (2) coordinating with the IRS to make sure Education knows when SOI data will be publicly released and to ensure that the most currently available data are used.|
|Department of Education||To better capture the amount of taxes paid by students and families, in the short run, Education should revise its methodology for calculating the state and other tax allowance. Revisions could include using tax figures reflective of the different income groups to calculate the allowance rather than figures based on all itemized tax returns.|
|Department of Education||To determine whether alternative methodologies and data would better enable Education to annually update the allowance, in the longer run, Education should assess the cost and reliability of available data, including the alternative data sources identified in this report. If Education determines that statutory changes are needed to implement more effective alternatives, it should seek such changes from Congress.|