Student Financial Aid: Need Determination Could Be Enhanced through Improvements in Education's Estimate of Applicants' State Tax Payments

GAO-05-105 Published: Jan 21, 2005. Publicly Released: Jan 28, 2005.
Jump To:
Skip to Highlights

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.

Skip to Recommendations


Recommendations for Executive Action

Agency Affected Recommendation Status
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.
Closed – Implemented
The Department of Education has developed formalized procedures for updating the federal need analysis formula's state and other tax allowance. The written procedures identify the needed data--Statistics of Income (SOI) data--and note where they may be obtained. The procedures also include steps on how to calculate the allowance for parents as well as various categories of students (dependent and independent) and stipulate that the most recent tax-year data available should be used for updating the allowance.
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.
Closed – Not Implemented
The Department of Education (Education) stated in 2006 that it prefers to continue to use publicly available information in the annual updates of all the need analysis formula parameters and thus could not accommodate this recommendation for the 2006-07 award year. In 2008, Education reported that it decided to propose a statutory change to increase the various income protection allowances in the need analysis formula as a substitute for the state-specific tax tables. Although OMB approved this approach, the statutory change was not implemented, and the formula still uses a state and other tax allowance. In 2009, Education reported that it had not released specific recommendations regarding its FY 2010 budget policy to streamline the financial aid process, thus it is premature to engage a process that would modify current practice regarding the need analysis formula.
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.
Closed – Implemented
In 2006, the Department of Education reported that it assessed the data and decided to propose a statutory change to increase the various income protection allowances in the need analysis formula as a substitute for the state-specific tax tables. In documentation provided by Education in July 2008, the agency explained that it decided to pursue the statutory change because IRS data are not timely and that the increased income protection allowances will provide larger benefits to lower-income applicants. OMB approved this approach to the issue. Education addressed this recommendation by assessing the data and seeking statutory changes.

Full Report