Federal Student Aid Need Analysis: Background and Selected Simplification Issues

CRS Report for Congress
Federal Student Aid Need Analysis:
Background and Selected Simplification Issues
Updated October 4, 2004
Adam Stoll
Specialist in Social Legislation
Domestic Social Policy Division
James B. Stedman
Specialist in Social Legislation
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

Federal Student Aid Need Analysis:
Background and Selected Simplification Issues
Summary
A federal “need analysis” system underlies the annual allocation of billions of
dollars in student financial aid supported by Title IV of the Higher Education Act.
Aid applicants provide detailed financial and other information on the Free
Application for Federal Student Aid (FAFSA), used to determine the financial
resources students and their families are expected to use to meet postsecondary
education expenses — the Expected Family Contribution (EFC). At issue is the
system’s complexity, and the barrier it may pose for aid-eligible students, particularly
low-income students. Two key simplification questions addressed in this report are:
How much of the data currently collected by the FAFSA is used to determine the
EFC and eligibility for federal aid? Can the EFC be calculated using fewer data?
Nearly all of the financial information gathered by the FAFSA is used to
calculate EFCs and determine federal aid eligibility, or to support administration of
federal aid programs. The FAFSA can be filed electronically or in paper format. The
paper version, used by a large number of filers, is the primary focus of this analysis
because it requires many filers to respond to a broader array of questions. The 2004-
2005 paper version has 135 questions. Over two-thirds are involved in calculating
the EFC, determining federal student aid eligibility, and determining federal student
aid packaging. About 4% are clearly unrelated to the federal need analysis process.
Three basic EFC estimation models, constructed for this report, examine the
effects on the EFC calculation of the three major categories of financial information
utilized in need analysis: base income information (adjusted gross income — AGI);
additional income information to further adjust available income; and asset
information. This model-based analysis shows that base income data play the lead
role in determining EFCs. The contributions of the additional income and asset
information vary by population. The analysis suggests that from a technical (i.e.,
mathematical) standpoint it is probably feasible to explore ways in which the
financial information utilized for federal need analysis and aid eligibility
determinations could be streamlined, without deviating dramatically from the EFC
values generated under the current system.
Efforts to simplify the federal need analysis system are likely to be influenced
significantly by several fundamental tensions: the ability of the system to gather
sufficient information to make relatively fine financial distinctions among families
may be adversely affected by some simplifying steps; the federal system is intended
to support the awarding of federal, state, and institutional aid, meaning that
simplifying changes will be assessed by their impact on the awarding of aid from
each source; and, given the billions of dollars and millions of individuals involved,
simplifying changes with even proportionately modest effects potentially involve
hundreds of millions of dollars and thousands of individuals.
This is a background report and will not be updated. A separate report will be
available shortly tracking legislative action on need analysis simplification.

Contents
In troduction ......................................................1
Interest in Simplification............................................2
Overview of Need Analysis and Aid Packaging..........................3
Calculation of the EFC..............................................6
Dependency Status.............................................6
Steps in Calculating the EFC.....................................6
Special EFC Conditions.........................................8
FAFSA ..........................................................8
Number of Questions and Primary Purposes.........................9
Findings ....................................................12
Questions of Complexity...................................12
Not Every Question Must Be Answered.......................13
How Does the Income and Asset Information Collected on the FAFSA
Contribute to the Determination of the EFC?.......................13
Summary Comments..........................................21
Conclusion ......................................................21
List of Figures
Figure 1. Flow Chart of Need Analysis................................5
List of Tables
Table 1. Distribution of 2004-2005 Paper FAFSA Questions by
Primary Purpose..............................................10
Table 2. Amount of Variation in EFCs For Different Types of
Students Explained by Selected Income and Asset Information.........16
Table 3. Estimated Change in EFC for Different Types
of Students Upon Elimination of Selected Income and Asset Information.17
Table 4. Estimated Change in EFC With Elimination of Selected
Income and Asset Information for Students with Incomes Under $50,000.19
Table 5. Dependent Students With Incomes Under $50,000 Whose Estimated
EFCs Increase by $500 or More When Selected Income and Asset
Information is Eliminated from Need Analysis......................20

Federal Student Aid Need Analysis:
Background and Selected
Simplification Issues
Introduction
A federal “need analysis” system underlies the annual allocation of billions of
dollars (nearly $69 billion in FY2004) in student financial aid supported by Title IV
of the Higher Education Act (HEA, P.L. 89-329, as amended).¹ Annually, this
system involves millions of current and potential students who apply for federal
student aid by providing detailed financial and other information on the Free
Application for Federal Student Aid (FAFSA). FAFSA data are used in statutorily
defined formulas to determine the amount of financial resources students and their
families are expected to direct toward postsecondary education expenses — the
Expected Family Contribution (EFC). Financial need for need-based federal student
aid programs is determined by the EFC and its relationship to students’ cost of
attendance; relying on the calculation of need, financial aid administrators (FAAs)
in postsecondary institutions package federal, state, and institutional aid for aid
applicants.
As the Congress deliberates over the reauthorization of the HEA, it is
considering issues involving the federal need analysis system. A perennial issue has
been the complexity of the system, and concern that it poses a barrier to aid for
eligible students, particularly low-income students. This report begins with a brief
discussion of the interest in need analysis simplification. It then provides a basic
overview of the federal need analysis system, and analyses of two issues related to
simplification — the data requirements of the FAFSA, and the contribution of key
financial information to the EFC calculation for each applicant. The questions
addressed respectively by these analyses are the following:
^!For what purposes are data collected on the FAFSA? Are data
collected that are unrelated to determining the EFC and eligibility
for, and amount of, federal aid? Is there evidence that students may
be submitting some data unnecessarily?

¹ Title IV of the HEA authorizes the sources of generally available federal student aid —
Pell Grants, Stafford Loans, Federal Work-Study, Federal Supplemental Educational
Opportunity Grants, and Federal Perkins Loans. These last three sources of aid are known
collectively as the campus-based student aid programs because financial aid administrators
at participating educational institutions have discretion in awarding their institutions’ shares
of funding from these programs. Similar flexibility is not afforded financial aid
administrators in the Pell Grant or Stafford Loan programs.

^!To what extent do the various income and asset data used in
calculating the EFC actually influence the size of the EFC? Can it
be calculated using fewer data than at present?
This is a background report and will not be updated. A separate report will be
available shortly tracking legislative action on need analysis simplification.
Interest in Simplification
Interest in simplifying the need analysis process through which students apply
for, and secure, federal student aid springs particularly from the belief that the
complexity of the process poses a barrier to college access, particularly for low-
income students. As the National Dialogue on Student Financial Aid, convened by
the College Board, recently reported:
Evidence suggests that the degree of complication in applying for aid leads to
reduced access, especially for first-generation college students. Increased
simplicity in our aid system would likely result in significant increases in²
enrollment rates for students from low-income backgrounds.
The National Dialogue called on the federal government to simplify the federal
student aid application process.
Economist Thomas Kane suggests that the multi-billion dollar federal Pell Grant
program fails to play its intended role of increasing enrollment rates of low-income
individuals, in part, because the need analysis process is difficult for students and
families to navigate. He writes:
[T]he Pell Grant program requires remarkable foresight. One has to fill out a
FAFSA, be assigned an expected family contribution and receive an award letter³
from a school simply to learn how much federal aid is on offer.
If low-income families in particular find the need analysis system problematic,
demographic trends offer little comfort to those concerned about access to
postsecondary education. These trends suggest that, in the future, an increasing
proportion of the potential college-going-population will be low-income.⁴

² National Dialogue on Student Financial Aid, Challenging Times, Clear Choices: An Action
Agenda for College Access and Success, Jan. 2003, pp. 7-8. Online at
[http:// www.college board.c om/prod_downloads/about/news_info/natdial/intro_
challenging.pdf].
³ Thomas J. Kane, College-Going and Inequality: A Literature Review, prepared for the
Russell Sage Foundation, June 30, 2001, no pagination, at
[http://www.russellsage.org/special_interest/socialinequality/revkane01.pdf]. An overview
of the need analysis process is provided later in this CRS report.
⁴ For a discussion of the implications of these demographic trends on college access, see
Advisory Committee on Student Financial Assistance, Access Denied: Restoring the
(continued...)

Overview of Need Analysis and Aid Packaging
The present federal need analysis system is the product of the 1992
reauthorization of the HEA, which combined two federal systems — one then in use
for the Pell Grant program, the other used for campus-based aid and Stafford Loans
— into a single need analysis system. The Congress intended this single, simplified
system, using a common application form (the FAFSA), to be the sole basis to the
greatest extent possible for the determination of need for federal, state, and
institutional aid.⁵
Any need analysis process, including the current federal one, will be the product
of numerous compromises and, at times, arbitrary decisions about such issues as who
is responsible for contributing financially toward a student’s college expenses, how
much families need to meet living expenses or to meet retirement needs, and which
income and asset resources can be tapped to pay college bills and to what extent.
Further, among the challenges is deciding where to strike the balance between
a system that is simple for students and families to navigate and understand, and a
system that accurately and fully measures the breadth and availability of aid
applicants’ financial resources. This challenge is compounded for the federal need
analysis system which, as noted, is intended to serve not only federal aid distribution,
but also the allocation of state and institutional aid. To the extent that the federal
EFC calculations are accepted by FAAs as a reasonable measure of financial
contribution, the FAFSA and EFC can function as the basis for aid packaging at all
levels. But, if states or higher education institutions feel that the process does not
adequately gauge available resources or determine an appropriate contribution, they
may supplement, or diverge from, the federal system in awarding their own state or
institutional aid.
The following is a simplified view of the need analysis and aid packaging
process that underlies the awarding of federal student aid. HEA, Title IV, Part F
delineates much of the process which is described below and depicted in Figure 1.
It begins with the FAFSA through which basic financial and non-financial

⁴ (...continued)
Nation’s Commitment to Equal Educational Opportunity, Feb. 2001. In that report, the
Advisory Committee discounted the negative influence of the current process of applying
for federal student aid, arguing that it had been simplified and was not the barrier it once
was. Rather, its primary concern was that the level of federal student aid directed to low-
income students was inadequate to meet their needs.
⁵ The intended broader reach of the application form is made clear in the statutory language
mandating its development. The Secretary of Education is charged with identifying the data
items to be included in the application, but these items are to “be selected in consultation
with States to assist in the awarding of State financial assistance.” (HEA, Section 483(a)(1))
The HEA further specifies, “In no case should the number of such data items be less than
the number included on the form on the date of enactment of the Higher Education
Amendments of 1998.” Possibly, the intension of the latter provision is to ensure that state
student aid-related data elements will continue to be included.

information is gathered from a student. Although considered in more detail below,
the primary information reported on the FAFSA includes:
^!data identifying the aid applicant;
^!financial information for the student and his or her family (e.g.,
adjusted gross income — AGI);
^!non-financial information describing attributes of the student and
family (e.g., number of dependents in college);
^!information that will be used to determine eligibility for federal,
state, or institutional aid (e.g., whether or not the aid applicant has
completed his or her first bachelor’s degree);
^!information that will be used to package student aid (e.g., asking if
aid applicants are willing to borrow or work, in addition to receiving
grant aid); and
^!dissemination-related information (e.g., names of schools to which
FAFSA data and the EFC should be provided).
FAFSA data are submitted to the so-called Central Processor, an entity working
under contract for the U.S. Department of Education (ED) that calculates the aid
applicant’s EFC based on statutorily defined rules. From the Central Processor, the
EFC and other summary data are reported to FAAs and to the FAFSA filer.
An FAA is responsible for calculating the aid applicant’s cost of attendance
(COA) and then determining financial need:
^!For HEA, Title IV programs, except the Pell Grant program,
financial need generally equals: COA minus EFC.⁶
^!Under the Pell Grant program, need generally equals: maximum
annual Pell Grant being awarded minus EFC.
At this juncture, the FAA’s role is to package financial aid for the aid applicant.
This package starts with the Pell Grant, the federal foundation for student aid. Other
aid, such as campus-based funds, state and institutional aid, and Stafford Loans, are
added to create the student’s aid package. The aid applicant is then notified
concerning the composition of the financial aid package.
Some of these calculations vary from FAA to FAA. Not only does the aid
administrator have some discretion in the awarding of campus-based student aid, but
Section 479A of the HEA explicitly gives FAAs discretion to adjust, on a case by
case basis, the COA or the values of the items used to calculate the EFC to “allow for
treatment of an individual eligible applicant with special circumstances.” The statute
offers examples of these special circumstances (such as the recent unemployment of
a family member) where the FAA might exercise this professional judgement if he
or she chooses to do so.

⁶ The actual calculation of need for these programs is more complicated than shown because
the FAA is to take into account other estimated financial assistance received by the aid
applicant.

Figure 1. Flow Chart of Need Analysis
Student and Family
Provide FAFSA
Information:
^F^A^{FSA Data}
^�¾^Basic^I^D^D^a^ta^S^u^bmi^t^t^e^{d t}^o^Ce^nt^r^a^l^P^r^o^c^e^ssor
^�¾^F^e^deral^Pro^g^ramEFC Calculation
^Elig^ibility^D^a^ta
^�¾^S^t^ate^and^Iⁿ^s^titutiona^{l A}ⁱ^dby Central
^Elig^ibility^D^a^taProcessor Using
^�¾^EF^{C F}ⁱ^nancial^DataSelected FAFSA
^�¾^EF^{C Non-}^Fⁱ^nancia^l^Data
^�¾^Aⁱ^{d P}^ackagⁱⁿ^gData:
^�¾^Dissemⁱ^{nation Data}^�¾^Iⁿ^co^me
^�¾^Asset^s
^�¾^De^pendenc^y^Status
^�¾^N^u^{mber i}ⁿ^Colle^ge
^EF^C^an^d^Oth^e^r^Data
^T^r^aⁿ^sm^it^ted^to^Sch^o^o^l
^EF^{C a}^nd^O^t^he^r^D^a^t^a
^T^r^an^sm^itted^to^S^t^u^d^en^t
Financial Aid Administrator
Determines:
^�¾^COAStudent Aid
^�¾^Fⁱ^{nancial Need}Record to
^�¾^{Student Aid}^Pa^ckag^e
Student
Award
Notification
to Student
Source: CRS analysis.

Calculation of the EFC
Before considering the data actually collected on the FAFSA and its role in the
determination of an aid applicant’s EFC, it is useful to have a general understanding
of how the EFC is calculated.
Dependency Status
One of the initial considerations in calculating the EFC is determining whether
the financial resources of a student’s parents are to be considered. Parental financial
resources are not considered in determining the EFC if the student meets the
statutory definition of an independent student, that is, if he or she meets any of the
following conditions:
^!is 24 years of age or older;
^!is married;
^!is enrolled in a graduate or professional program;
^!has a dependent other than a spouse;
^!is an orphan or ward of the court (or was a ward until age 18); or
^!is a military veteran.
Importantly, the EFC calculation process differs for two kinds of independent
students: those independent students who have no legal dependents other than,
perhaps, a spouse; and those independent students who have legal dependents other
than a spouse (this group is described in this report as “independent students with
children”).
Any applicant for federal need-based aid who does not meet one of the
conditions listed above is automatically treated as a dependent student for Title IV
aid purposes. For such a student, information on parental resources must be
submitted on the FAFSA and will be used in calculating the EFC.
Steps in Calculating the EFC
The process for calculating the annual EFC is described in very general terms
below. This description applies to the 2004-2005 award year.⁷
The EFC for a dependent student and his or her parents is determined by
adding together an expected contribution from the parents and an expected
contribution from the student.

⁷ The description omits significant details. ED has posted descriptions of the EFC
calculations for recent years at [http://www.ifap.ed.gov/IFAPWebApp/
currentEFCInforma tionPag.j sp].

The parental contribution portion of the EFC is computed as follows:
Step 1. Parents’ available income is calculated by determining total income
(AGI⁸ plus certain untaxed income, minus certain other income and financial
benefits), and then subtracting various allowances for such things as basic living
expenses (the so-called “income protection allowance”), federal taxes, and state and
other taxes.
Step 2. Parent’s discretionary net worth is calculated by adding together
cash, savings, net worth of investments, net worth of businesses and farms (but
excluding the value of the family home or the family farm), and then subtracting an
allowance to protect assets needed for retirement, future education, and emergencies.
Step 3. The contribution from available income and discretionary net worth
is calculated by applying a progressive assessment schedule (with a minimum
assessment rate of 22% and a maximum rate of 47%) to the combined total of
parents’ available income and 12% of discretionary net worth,⁹ and then dividing the
result by the number of college students in the family, excluding the parents.
Next, the dependent student’s portion of the EFC is determined as follows:
Step 4. A contribution from the dependent student’s income is calculated
equal to 50% of his or her available income (a similar determination to that of
parental available income, although the income protection allowance is appreciably
smaller for the dependent student).
Step 5. A contribution from the dependent student’s assets is determined equal
to 35% of his or her own net worth (unlike the parental calculation of discretionary
net worth, no asset protection allowance is subtracted from the dependent’s net
worth).
Finally, the total EFC for the dependent student is determined as follows:
Step 6. The parental contribution from available income and discretionary net
worth (see step 3 above) is added to the dependent student’s contributions from
income and from assets (see steps 4 and 5 above).
For an independent student with children, the calculation of the EFC is
identical to that for determining the parental contribution for a dependent student
(steps 1 through 3 above).
For an independent student with no dependents other than a spouse, if any,
the calculation of the EFC is similar to that for determining the contributions from
a dependent student’s own income and assets (steps 4 and 5 above). The assessment

⁸ For aid filers who did not file a federal income tax return, income information included on
their W-2 forms is used instead of AGI in the need analysis process.
⁹ Given the maximum rate of the assessment schedule, not more than 5.64% of the parental
discretionary net worth can be expected in contribution (12% * 47% = 5.64%).

rates applied to income and assets are the same; the income protection allowances
differ. Significantly, unlike for the dependent student, there is a protection allowance
applied to this independent student’s net worth of assets.
Special EFC Conditions
There are two major circumstances under which the EFC calculation requires
markedly less information from an aid applicant. Under the simplified needs test,
no assets are considered in calculating the EFC for a dependent student if his or her
parents’ AGI is less than $50,000 and the student and parents meet certain conditions
applied to their tax returns.¹⁰ Similarly, assets are not considered in determining the
EFC for an independent student if the AGI of the student (and spouse, if any) is less
than $50,000.¹¹
Further, there is an automatic zero EFC. That is, the EFC is automatically set
to zero in the event a dependent student’s parents, or an independent student with
children, have AGI that is not greater than $15,000 (the current maximum amount
of income rounded to the nearest $1,000 that one can earn and still be able to claim¹²
the maximum federal earned income tax credit). The automatic zero EFC is not
provided to independent students without dependents.
FAFSA
This section analyzes the data collected on the FAFSA and addresses questions
related to how these data are used, such as, how many questions are asked of aid
filers, what the answers are used for, to what extent are questions related to federal
aid allocation, and to what extent are they used solely for allocation of non-federal
aid.
The FAFSA can be filed with the central processor electronically or in a paper
form. The analysis below focuses primarily on the collection of data using the paper
version of the 2004-2005 FAFSA filed by new aid applicants because it appears to
require filers to answer a broader array of questions than the available electronic
version.¹³ Despite significant growth in electronic filing of the FAFSA, a large
portion and number of filers continue to use the paper application. According to ED
data, with much of the processing cycle for 2003-2004 completed, about 18 million

¹⁰ To be eligible for the simplified needs test, the student and his or her parents must not
have to file an income return, or must file or be eligible to file a federal tax form 1040A or
1040EZ. This requirement is also met if the parents or student file a form 1040 if that form
is filed only to claim the federal Hope or Lifetime Learning tax credit.
¹¹ The tax form/filing requirements specified above must also be met by the independent
student and spouse.
¹² The tax form/filing requirements specified for the simplified needs test must also be met.
¹³ The paper and electronic versions of the 2004-2005 FAFSA can be filed at anytime
between Jan. 1, 2004 and June 30, 2005.

new and renewal FAFSAs¹⁴ had been filed.¹⁵ Of the over 11.5 million new
applications, nearly 29% or over 3.3 million were submitted by aid applicants
themselves on paper. In addition, of the remaining new applications submitted
electronically, about 1.7 million were filed by financial aid administrators on behalf
of aid applicants. For some of these applications, financial aid administrators may
have had the applicants fill out and sign a paper FAFSA; the administrators then
submit the FAFSA data electronically.¹⁶
Number of Questions and Primary Purposes
The 2004-2005 paper FAFSA has 135 questions. This count differs from the
numbered questions on the FAFSA which go up to 103. It includes unnumbered
questions appearing on FAFSA worksheets A, B, and C. These worksheets, used to
gather information on additional sources of income to be added or subtracted from
taxable income in the EFC determination, ask filers to answer 20 specific questions
about their income and, if they are dependent students, to also answer the same 20
questions separately about their parents’ income. As a result, 40 questions are
considered to be generated by the worksheets. Further, this count treats several
clusters of questions as single questions — aid applicant’s name (i.e., last name, first
name, middle initial), permanent mailing address (i.e., number and street, city state,
and zip code), driver’s license (i.e., license number and issuing state),
father/stepfather’s name (i.e., last name and first initial), and mother/stepmother’s
name (i.e., last name and first initial).
In Table 1, the FAFSA questions are divided into 10 different categories
according to their primary purpose, with an 11^th category for the few questions whose
use is unclear. The determination of how responses to specific FAFSA questions
might be used was based on information contained in three publications from ED.¹⁷
This table provides examples of the kinds of data requested by category and the
number of FAFSA questions falling into each category.

¹⁴ Typically, students who have in a prior year submitted an original FAFSA are able to
apply for aid in a subsequent year with a renewal FAFSA which requests significantly less
information.
¹⁵ The latest data are available at
[http://ifap.ed.gov/eannouncements/0527ApplicRe ceivSchbySource0405.html ].
¹⁶ U.S. Department of Education, Federal Student Aid Handbook 2004-2005, Application
and Verification Guide, p. AVG-4, available online at
[ ht t p: / / www.i f ap.ed.gov/ s f a handbooks/ at t achme nt s/ 0405AV Gma st er f i l e 032404.pdf ] .
¹⁷ Completing the FAFSA 2004-2005, The Application Questions, available online at
[http://st udent ai d.ed.gov/ s t udent s / publ i cat i ons / c ompleting_fafsa/ 2004_2005/ques.html ];
Federal Student Aid Handbook 2004-2005, Application and Verification Guide, available
online at
[http://www.ifap.ed.gov/sfahandbooks/attachments/0405AVGmasterfile032404.pdf]; and
High School Counselor’s Handbook 2004-2005, available online at
[http://ifap.ed.gov/chandbooks/attachme nts/0405HSCHB.pdf].

CRS-10
Table 1. Distribution of 2004-2005 Paper FAFSA Questions by Primary Purpose
Primary purposeExamples of information requestedNumber of questions
entification of the aid applicantName; address; Social Security number12
U.S. citizenship status; whether applicant will have first bachelor’s degree
before July 1, 2004 (with rare exceptions, Pell Grants are awarded only to
termination of federal financial aid eligibilitystudents who have not yet earned their first bachelor’s degree); whetherapplicant was ever convicted of possessing or selling illegal drugs; whether6
an applicant is a male 18 to 25 years of age and registered with the
Selective Service
ⁱ^{ki/CRS-RL32083}Grade level at beginning of the 2004-2005 school year (among other uses,
^g/waging of federal financial aidthis information establishes which annual limits on the amount in Stafford6
^s^.orLoans that can be borrowed apply to the aid applicant); applicant’s interest
^le^akin securing loans or work-study assistance
^://wikitermination of the EFC — income-relatedAGI for 2003; untaxed Social Security benefits54
^h^ttp
termination of the EFC — asset-relatedNet worth of current investments; savings account balance6
Whether applicant was born before January 1, 1981; whether applicant is
ination of the EFC — non-financialcurrently married; whether applicant has children receiving more than halfof their support from applicant (all of this information is part of the effort21
ationto establish whether the applicant is independent of his or her parents for
aid purposes)
Whether applicant intends to live on-campus, off-campus, or with parents
termination of the COA(this information reportedly is useful to FAAs in projecting applicants’6

COA)

CRS-11
Primary purposeExamples of information requestedNumber of questions
ination of EFC and other FAFSASchool codes of up to six schools that applicant wants to receive FAFSA7
ationand EFC information; applicant’s e-mail address
Applicant’s and parent’s signatures (the application states: “If you are the
parent or the student, by signing this application you agree, if asked to
alidation and verification of FAFSA dataprovide information that will verify the accuracy of your completed6
form.”); month and year a dependent applicant’s parents were married,
separated, divorced, or widowed
termination of eligibility for, and aid from,Highest year of school aid applicant’s father and mother completed(reportedly, some state agencies use this information to award aid); when6
ramsaid applicant became legal resident of his or her state
ⁱ^{ki/CRS-RL32083}
^g/wNumber of federal income tax exemptions claimed for 2003 (this
^s^.orinformation is not used in calculating the EFC and the sources consulted to
^le^akdetermine the purposes of various questions are silent regarding the use of5
^://wikithis particular information)
^h^ttp
^C^R^{S an}^aly^s^is^.

Findings
In general, most questions fall uniquely into one of these 11 categories, with the
first nine constituting those directly related to federal student aid need analysis. For
Table 1, each question on the FAFSA is counted only once, even if it might have
fallen into multiple categories. Any question that could be included not only in one
of the first nine categories but also the 10^th — determination of eligibility for, and aid
from, state and institutional aid programs — is counted only in one of the initial nine
categories. As a result, the count of questions in the 10^th category includes only those
questions that do not also contribute to federal student aid need analysis.
Based on Table 1, it appears that 60% (81 questions) of the 135 questions are
primarily involved in calculating applicants’ EFCs, either providing financial
information or non-financial information. Over two-thirds (93 questions) are part of
the cluster of questions involved in calculating the EFC, determining federal student
aid eligibility, and determining federal student aid packaging. In contrast, only about
4% (six questions) are clearly unrelated to the federal need analysis process, falling
into the 10^th category.
Questions of Complexity. Relevant to the issue of simplification is whether
the format and layout of the FAFSA is unduly complex or whether the data sought
by specific FAFSA questions might be difficult for applicants to generate. In general,
the former is beyond the scope of the present report. With regard to the latter, some
comments are in order. Generally, it would appear that most of the non-financial
data requested would be relatively easy for applicants to provide (e.g., name, address,
and grade level at beginning of 2004-2005 school year). Of course, issues may arise
with wording of specific questions even if the information sought is straightforward.
Many of the financial questions related to income are linked by the FAFSA to
specific lines in an aid applicant’s or parents’ federal income tax returns. This
presumably makes the provision of this information easier if the applicant has
followed the advice in the FAFSA instructions that he or she have completed federal
income tax returns prior to filling out the FAFSA.
Two kinds of financial information requested on the FAFSA may be difficult
for some aid filers to generate — asset information and the supplementary income
information requested on the FAFSA worksheets A, B, or C. A potential difficulty
with assets, such as businesses, investment farms, or real estate other than a home
lived in by the aid filer, is determining their net worth as requested by the FAFSA.
Although some of the supplementary income information sought on the worksheets
is linked to specific lines on federal income tax forms (e.g., earned income credit),
some is not (e.g., welfare benefits and untaxed Social Security benefits). The latter
may not be easily generated by filers. Further, several of the worksheet questions are
open-ended — for example, on worksheet B, filers are asked to delineate “any other
untaxed income or benefits not reported elsewhere on worksheets A and B, such as
workers’ compensation, untaxed portions of railroad retirement benefits, Black Lung
Benefits, disability, etc.” Due to their broad open-ended nature, such questions may
be particularly troubling for some FAFSA filers.

Not Every Question Must Be Answered. Not every new FAFSA filer is
required to answer each of the 135 questions identified in this analysis.¹⁸ Regardless
of whether they file paper or electronic versions of the FAFSA, independent students
do not respond to the 47 questions concerning parental financial and non-financial
information — 27 of them are numbered questions on the FAFSA and 20 are
questions on worksheets A, B, and C.
Technically, for federal aid allocations, all questions concerning assets can be
skipped by applicants eligible for the simplified needs tests (under which assets are
not considered in calculating the EFC), as can asset and some income questions by
applicants eligible for the automatic zero EFC. But this option is available only to
those who file on the Web. Those filers are advised that they may ignore certain
income or asset questions depending upon whether they meet the criteria for either
of these special conditions for EFC calculation, although they are also informed that
the separate determination of eligibility for state or institutional aid may require such
data.¹⁹
In contrast, students who submit the paper FAFSA are to answer all income and
asset related questions, regardless of whether they are eligible for the simplified
needs test or the automatic zero EFC. The instructions for the paper FAFSA do note
that some applicants might be able to skip asset questions if they apply over the
Internet. As a result, students who are unwilling or unable to file electronically (e.g.,
they prefer not to transmit family financial information over the Internet, or they do
not have access to the Internet) will be required to answer several questions that are
unnecessary for determination of their EFC and federal student aid. Some of these
questions call for relatively complex financial information, such as net worth of
assets or information on various kinds of untaxed income.²⁰
How Does the Income and Asset Information
Collected on the FAFSA Contribute to the
Determination of the EFC?
This section of the report considers the roles varied income and asset data
collected by the FAFSA play in determining the EFCs of federal financial aid
applicants. The analysis presented in this section examines how the major categories
of financial information used in need analysis influence EFC calculations. The

¹⁸ As noted earlier, students submitting renewal FAFSAs are required to submit significantly
less information.
¹⁹ See presentation slides made available by ED in document entitled FAFSA on the Web for
2004-2005, at
[http://ifap.ed.gov/eannouncements/atta chme nts/1024FOT WScreenShotsAttach.ppt].
²⁰ As noted, the FAFSA and EFC calculations are intended to serve federal, state, and
institutional aid programs. As a result, for some FAFSA filers, this income and asset
information may be necessary for determining eligibility for state and institutional aid,
although unnecessary for determining the EFC.

findings from the analysis are discussed in light of questions that have arisen about
whether the EFC could be calculated using fewer data than at present.
The analysis upon which this section of the report is based utilizes data on
federal financial aid applicants from the National Postsecondary Student Aid Study
(NPSAS).²¹ NPSAS provides nationally representative data on a sample of
postsecondary students. The analysis relies on a series of NPSAS-based EFC
estimation models. These models utilize FAFSA data (available through NPSAS)
to estimate the EFCs that would be produced when certain broad categories of
information are excluded from the need analysis process.
Three basic estimation models have been constructed to produce three alternate
estimates of EFCs. Each model uses less information than is currently used in need
analysis. The modeled EFCs produced through these estimation models are
compared to actual EFCs to shed light on the influence of the excluded information.
The analysis measures the extent to which EFCs would change from those
currently calculated. It should be stressed that a change in a student’s EFC might
affect his or her eligibility for student aid, but need not. For example, a student may
have such a large EFC that even with a significant decline he or she would still be
ineligible for need-based aid. Nevertheless, for many students a decline in the EFC
will spell greater need for need-based aid and potentially more awarded aid, while an
increase in the EFC will reduce need and possibly reduce the amount of aid they will
be awarded.
As has been noted, three basic EFC estimation models have been constructed.
They are designed to produce estimated EFCs that can be used to examine the
influence of the three major categories of financial information utilized in need
analysis: base income information (AGI); additional income information (extra
income information gathered through FAFSA worksheets which is used to further
adjust one’s available income); and asset information. Each estimation model is
described below.
^!Model 1: This model substitutes AGI for Total Income in the EFC
calculation. It calculates EFCs based solely on AGI and asset
contributions — excluding the additional income information (i.e.,
the information gathered through FAFSA worksheets) from
consideration in need analysis.
^!Model 2: This model excludes asset contributions from need
analysis calculations. It calculates EFCs based solely on available
income (utilizing all income information).
^!Model 3: This model substitutes AGI for Total Income and
excludes asset contributions in the calculation of the EFC. It
essentially calculates an EFC based exclusively on AGI.

²¹ The latest available NPSAS provides FAFSA data for the 1999-2000 award year. The
FAFSA for that year does not differ significantly from the 2004-2005 FAFSA analyzed in
the preceding section of this report.

Each of the three models excludes certain information. However, in each of the
models, all other aspects of need analysis calculations (i.e., the adjustments and
allowances described earlier) are unaltered.
The analyses presented in the pages that follow examine the modeled EFCs in
relation to the actual EFCs to illuminate the effects of the excluded information. The
information in the tables below presents the findings of these analyses. Findings are
reported for each of the aid populations treated separately in need analysis:
dependent students, independent students without dependents, and independent
students with children.
Table 2 presents results from regression analyses which illuminate the extent
to which various types of income and asset information contribute to the EFC
calculation.²² Not surprisingly, when all of the major categories of financial
information are used as independent variables in a regression model, virtually all
variance in EFCs is explained. Explanatory percentages go down when financial
information is eliminated (i.e., when modeled EFCs from estimation models 1, 2, and
3 are used as independent variables). The results from regression analysis presented
below provide a relative sense of the importance of categories of financial
information, which varies across need analysis populations.
The data presented in Table 2 reflect the amount of variation explained when
EFCs produced by the estimation models using reduced information are examined
in relation to actual EFCs. These data suggest that the “additional” worksheet
income information used in need analysis accounts for roughly 8% of the variation
in dependent students’ EFCs (i.e., 92.35% of the variation in EFCs is captured when
the worksheet income information is excluded from need analysis under model 1).
The worksheet income information accounts for roughly 7% and 11% of the variation
in the EFCs of independents without dependents and independents with children
respectively.
The data presented in Table 2 also suggest the asset information used in need
analysis accounts for roughly 14% of the variation in dependent students’ EFCs and
10% and 3% of the variation in the EFCs of independents without dependents and
independents with children respectively. Additionally, Table 2 suggests that taken
together, the asset information and the “additional” income information account for
roughly 15%-19% of the variation in EFCs across the populations.

²² Regression analysis is a method of explaining or predicting the variability of a “dependent
variable” using information about one or more “independent variables.” It attempts to
answer the question “what values in the dependent variable can we expect given certain
values in the independent variable(s)?” In the regression analyses presented in this report,
students’ actual EFCs were used as the dependent variables. The independent variables are
the modeled EFCs generated through estimation models 1, 2, and 3 for each student.
Students’ actual EFCs are “regressed” against the modeled EFCs (which reflect the EFCs
students would receive if less information were used in need analysis calculations). The
figure reported on is the “R-squared” which shows how much of the variability of the actual
EFC is accounted for or “explained” by the modeled EFC.

Table 2. Amount of Variation in EFCs For Different Types of
Students Explained by Selected Income and Asset Information
Independents
w i thout Independent s
ModelsDependentsdependentswith children
Model 1
Substitutes AGI for.9235.9270.8903
total income
Model 2
Eliminates asset.8616.8954.9680
contributions
Model 3
Substitutes AGI for
total income and.8085.8210.8519
eliminates asset
contributions
^Source:^C^R^S^an^al^y^sⁱ^s^of^1999-^{2000 N}^a^tⁱ^oⁿ^a^l^Pos^t^s^econ^d^ary^S^t^u^d^en^t^Aⁱ^d^S^t^u^d^y^(N^PS^A^S^{2000) dat}^a^.
Table 3 presents data on the estimated EFCs produced for each need analysis
population under each of the models. This table provides information showing the
direction in which EFCs move when need analysis calculations rely on reduced
information. This information is provided to further delineate how the broad
categories of EFC financial data affect EFCs. For purposes of the analyses presented
in Tables 3 and 4, modeled EFCs with values within $100 of actual EFCs were
considered to be the same.
The data presented in Table 3 indicate that for the great majority of aid
applicants’ EFCs are reduced or remain the same when the additional FAFSA
worksheet income information is eliminated from need analysis. Nonetheless, a
notable subset of students (ranging from 5%-11%) in each need analysis population
is adversely affected — having their EFCs rise when additional income information²³
is excluded from calculations (i.e., they will have less need for aid). The same
general pattern is evident when the additional income information and asset
contributions are collectively eliminated from need analysis. When asset information
is eliminated from need analysis, and need analysis calculations are based exclusively
on income information (including worksheet data), EFCs either remain the same or
are lowered, no students would be adversely affected.²⁴

²³ This outcome — some applicants being unaffected or benefitting (EFC falling), while
others are adversely affected (EFC rising) — is not unexpected given that the additional
income information from FAFSA worksheets is comprised of untaxed income which is
added to aid applicants’ AGI, and protected income which is subtracted.
²⁴ This outcome is also not surprising. EFCs cannot actually increase when asset
information is excluded from need analysis. This is because asset information is added to
income information and can only serve to elevate an EFC or leave it unaltered.

Table 3. Estimated Change in EFC for Different Types of
Students Upon Elimination of Selected Income
and Asset Information
Model 3:
Substitutes AGI for
Model 1:Model 2:total income and
Substitutes AGI forEliminates asseteliminates asset
total incomecontributionscontributions
Dependent Percent Median Percent Median Percent Median
students of change of change of change
studentsin EFCstudentsin EFCstudentsin EFC
inininininin
category category category category category category
Lower EFC40%-$1,06534%-$65754%-$1,232
Same EFC49%$066%$038%$0
Higher EFC11%$3640%NA8%$374
Independent Percent Median Percent Median Percent Median
students of change of change of change
withoutstudentsin EFCstudentsin EFCstudentsin EFC
dependents in in in in in in
category category category category category category
Lower EFC19%-$9516%-$69423%-$940
Same EFC71%$094%$068%$0
Higher EFC10%$4000%NA9%$428
Independent Percent Median Percent Median Percent Median
students withofchangeofchangeofchange
childrenstudentsin EFCstudentsin EFCstudentsin EFC
inininininin
category category category category category category
Lower EFC23%-$5092%-$1,09924%-$524
Same EFC72%$098%$072%$0
Higher EFC5%$3530%NA5%$352
^Source:^C^R^S^an^al^y^sⁱ^s^of^1999-^{2000 N}^a^tⁱ^oⁿ^a^l^Pos^t^s^econ^d^ary^S^t^u^d^en^t^Aⁱ^d^S^t^u^d^y^(N^PS^A^S^{2000) dat}^a^.

Another noteworthy trend evident in the data displayed in Table 3 pertains to
the change in EFC amounts. As has been discussed, consistently, across each of the
need analysis populations, much larger percentages of aid applicants have EFCs
lowered as opposed to increased under each of the modeled scenarios. The median
shift in EFC amounts also is consistently larger for those whose EFCs are reduced
as opposed to those facing larger EFCs.²⁵ This suggests that broad reductions in the
additional worksheet income information and asset information would likely have the
net effect of increasing the receipt and cost of need-based aid.
Table 4 presents information on aid applicants with incomes under $50,000.
This sub-population is already treated as a group whose need can be assessed using
a simplified formula. It is also a population for whom some suggest need analysis
should be further simplified. Table 4 illustrates shifts in the directionality of EFCs
for this population when need analysis calculations rely on reduced information.
Table 4 presents data on the estimated EFCs produced for each need analysis
population within this income category, under each of the models. Table 4 reveals
that across the need analysis populations within this income category EFCs are
lowered or remain the same for the great majority of students when the additional
worksheet income information is removed from consideration. Nonetheless, a subset
of students (ranging from 4%-9%) in each need analysis population is adversely
affected — having their EFCs rise when additional income information is excluded
from calculations. The same pattern is evident when the additional income
information and asset contributions are collectively eliminated from need analysis.
When asset information is eliminated, EFCs remain the same or are lowered.

²⁵ The median is that value where 50% of applicants in a category had a higher change in
value and 50% had a lower change.

Table 4. Estimated Change in EFC With Elimination of
Selected Income and Asset Information
for Students with Incomes Under $50,000
Model 3:
Substitutes AGI for
Model 1:Model 2:total income and
Substitutes AGI forEliminates asseteliminates asset
total incomecontributionscontributions
Dependent Percent Median Percent Median Percent Median
students of change of change of change
studentsin EFCstudentsin EFCstudentsin EFC
inininininin
category category category category category category
Lower EFC31%-$62120%-$42041%-$656
Same EFC60%$080%$052%$0
Higher EFC9%$3300%$07%$328
Independent Percent Median Percent Median Percent Median
students of change of change of change
withoutstudentsin EFCstudentsin EFCstudentsin EFC
dependents in in in in in in
category category category category category category
Lower EFC18%-$9405%-$51622%-$887
Same EFC72%$095%$070%$0
Higher EFC10%$4000%NA8%$430
Independent Percent Median Percent Median Percent Median
students withofchangeofchangeofchange
childrenstudentsin EFCstudentsin EFCstudentsin EFC
inininininin
category category category category category category
Lower EFC20%-$4211%-$58021%-$440
Same EFC76%$099%$076%$0
Higher EFC4%$3510%NA4%$351
^Source:^C^R^S^an^al^y^sⁱ^s^of^1999-^{2000 N}^a^tⁱ^oⁿ^a^l^Pos^t^s^econ^d^ary^S^t^u^d^en^t^Aⁱ^d^S^t^u^d^y^(N^PS^A^S^{2000) dat}^a^.
Table 4 also shows that across the need analysis populations within this income
category changes in EFC amounts are consistently larger for those whose EFCs are
lowered than for those whose EFCs increase. For this sub-population (similar to the
full population of aid applicants) the net effect of the broad reductions in EFC
financial data considered here would be increases in the receipt and cost of need-
based aid.

It is important to note that examining the effects of excluding this information
from need analysis, at relatively broad levels of aggregation, potentially masks how
its exclusion affects smaller sub-populations (some of whom see their EFCs rise
when supplemental income information is excluded). This is an important point
because parties interested in considering simplification of need analysis are generally
concerned about the effects simplification proposals will have on aid recipients. To
fully analyze this, it is necessary to study the changes in EFC values for all sub-
populations of interest — particularly those who may end up adversely affected by
simplifications. This point is illustrated in Table 5 which examines in greater detail
changes in EFCs of dependent students with incomes under $50,000 whose EFCs
would increase by $500 or more under models 1 and 3.
Table 5. Dependent Students With Incomes Under $50,000
Whose Estimated EFCs Increase by $500 or More
When Selected Income and Asset Information
is Eliminated from Need Analysis
Percent of dependent
students with incomes underMedian increase in EFC
$50,000 whose EFCs increasefor those whose EFC
by $500 or moreincreases by $500 or more
Model 1
Substitutes AGI for3%$809
total income
Model 3
Substitutes AGI for
total income and2%$905
eliminates asset
contributions
^Source:^C^R^S^an^al^y^sⁱ^s^of^1999-^{2000 N}^a^tⁱ^oⁿ^a^l^Pos^t^s^econ^d^ary^S^t^u^d^en^t^Aⁱ^d^S^t^u^d^y^(N^PS^A^S^{2000) dat}^a^.
As Table 5 shows, roughly 3% of dependent students with incomes under
$50,000 fare considerably worse under the simplifications embodied in model 1, and
2% do so under model 3. Put in different terms, approximately 63,000 dependent
applicants in this income category would have their EFCs increase by $500 or more
under model 1, and roughly 50,000 would under model 3. This adverse effect would
be unacceptable to some, while others might feel the benefits yielded by those whose
EFCs are reduced under these scenarios outweigh the costs associated with these
simplifications. Under model 1, one-third of the students in this income category
(roughly 735,000) have their EFCs reduced and approximately 40% (roughly

973,000) have their EFCs reduced under model 3.

This is just one illustration — many could have been considered — but it shows
the value of examining in some detail the effects of categories of information
collected by the FAFSA — particularly if one is contemplating changes in need
analysis. Of particular importance, this example reveals the contribution of
categories of information used in need analysis differs within sub-populations. This
also shows the type of tradeoffs likely to face decision-makers.

Summary Comments
In general, the analyses presented in this section of the report show that the base
income data (i.e., AGI) play the lead role in determining EFCs. The contributions of
the additional income information and asset information vary by population.
Categorical reductions in information (i.e., simplifications) considered here primarily
result in reduced or unaltered EFCs, which suggests that such changes could increase
program costs. But, some changes could increase EFCs, meaning that some
stakeholders could fare worse (especially if income protections are eliminated).
The analysis presented here establishes basic parameters — illuminating what
broad categories of information collected by the FAFSA contribute to need analysis
calculations. Simplification proposals often suggest smaller scale reductions in
information (e.g., the elimination of a few items as opposed to whole categories of
information). To understand the effects of such proposals, other analyses would be
required.
Conclusion
Roughly 12 years ago, the Congress revamped the federal need analysis system
by creating a single “simplified” system, featuring a common application form and
a single methodology for determining the EFC. The Congress sought to ensure that
the federal need analysis would be used to the greatest extent possible for the
determination of need for federal, state, and institutional aid. Questions regularly
arise about whether the system can be further simplified. This report considered two
of the primary issues that surface with some regularity: How much of the
information currently collected by the FAFSA is actually used to determine the EFC
and eligibility for federal aid? Can the EFC be calculated using fewer data than at
present?
The findings presented in this report suggest that nearly all of the financial
information gathered through the FAFSA form are used to calculate EFCs and
determine federal aid eligibility. Nevertheless, some aid applicants who use the
paper FAFSA are required to file some financial data unnecessary for federal aid
purposes.
At the same time, the modeling presented in this report suggests that from a
technical (i.e., mathematical) standpoint it is probably feasible to explore ways in
which the financial information utilized for federal need analysis and aid eligibility
determinations could be streamlined, without deviating dramatically from the EFC
values generated under the current system.
Deliberation by education policymakers of the analysis presented here is likely
to be influenced by several tensions inherent in the federal need analysis system.
Among these tensions are the following:
^!For most students, the FAFSA seeks to gather sufficient information
to make relatively fine distinctions among families in terms of their

ability to pay for college. Simplifying the process and rendering it
more transparent (i.e., allowing families, without much trouble, to
make reasonably accurate estimates of the amount of aid they will
receive) may make it harder to draw those distinctions.
^!The process is intended not only to serve in the awarding of federal
aid, but, to the greatest extent possible, be the single system used for
state and institutional aid allocation as well. As a result, changes
must be assessed in terms of how they affect the system’s ability to
serve these multiple sources of aid.
^!Changes that lead to an expansion of eligibility for aid will raise
program costs; changes that reduce program costs are likely to
adversely affect eligibility.
^!Given the magnitude of the amount of aid being awarded under this
process and the number of students involved, changes that may have
proportionately only minor negative consequences for eligibility may
affect significant numbers of students, while proportionately minor
effects on program costs may be worth hundreds of millions of
dollars.