tc columbia

The Mixed Methods Blog
The Mixed Methods Blog

Financial Aid Simplification: Why It Matters and Which Aspects Matter Most

Judith Scott-Clayton testifying before the Senate HELP Committee

This blog post was adapted from written testimony submitted to the U.S. Senate Committee on Health, Education, Labor and Pensions on November 28, 2017, for a hearing on reauthorizing the Higher Education Act and simplifying the Free Application for Federal Student Aid (FAFSA). A video of the hearing is available on the committee's website.

Over half a century ago, upon signing the Higher Education Act of 1965, President Lyndon Johnson stated his intent that the act ensure that “the path of knowledge is open to all that have the determination to walk it.” Since then, college enrollment rates have increased substantially for qualified students across the income spectrum. Yet significant inequities remain, and while the levels of college enrollment are higher across the board, the gaps in enrollment between high- and low-income families are actually increasing fraction of family resources for recent cohorts than for those born in the early 1960s. Socioeconomic gaps in degree completion are even higher than for college entry, and these gaps cannot be fully explained by differences in preparation.

These gaps are troubling because the return to postsecondary education is near historically high levels. Full-time workers with a bachelor’s degree currently earn $24,600 more annually than workers with only a high school diploma. And while bachelor’s degrees offer the most substantial payoff, associate degrees also confer earnings gains of around $10,000 annually relative to workers with only a high school credential.

More students should be taking advantage of these high returns to college, but costs remain a significant barrier. As college tuition has risen over time and family incomes at the bottom of the income distribution have declined (in real terms), college costs represent an increasing fraction of family resources. Our ability to ensure that “the path of knowledge remains open to all that have the determination to walk it” thus rests heavily on ensuring access to financial aid—particularly the federal Pell Grant, which is the nation’s single largest grant program, used at over 7,000 eligible institutions nationwide, and providing up to $5,815 per student, per year for up to six years of undergraduate study.

Evidence on the Benefits of Financial Aid and Financial Aid Simplification

Thirty years of research convincingly demonstrates that financial aid can influence college enrollment, persistence, and completion. The latest research indicates that financial aid influences not just college enrollment and completion but also important post-college outcomes like earnings and homeownership. Accessing federal financial aid requires students to submit a Free Application for Federal Student Aid (FAFSA), the complexity of which has been well documented. With over 100 questions about income, assets, and expenses, the FAFSA approaches the IRS Form 1040 in length and is longer and more complicated than the 1040A and 1040EZ, the tax forms filed by a majority of taxpayers. 

The FAFSA isn’t just an annoyance. Its complexity and lack of transparency undermine the effectiveness of financial aid, making it harder to reach students who need aid most. Many students never receive the federal aid for which they would qualify: Of the 30 percent of undergraduates who fail to file a FAFSA, one third would have qualified for a Pell Grant. Some of those who do successfully file may submit the form too late to qualify for state and institutional aid they otherwise could have received. And even those who submit in one year may fail to reapply the next year, increasing the risk of dropout.

Of even greater concern are those who never show up in college because they never knew they would qualify for aid. Misperceptions about college costs and financial aid are widespread and are most prevalent among students from the lowest income backgrounds. We don’t have to speculate about the importance of simplification: Two influential experiments show that reducing application hurdles is a highly cost-effective strategy for reducing inequality in college access. In one, researchers randomly selected a subset of low-income families who visited tax-preparation centers and were offered personal assistance with completing and submitting the FAFSA. The intervention increased immediate college entry rates by 8 percentage points (24 percent) for high school seniors and 1.5 percentage points (16 percent) for older participants with no prior college experience. After three years, participants in the full treatment group had accumulated significantly more time in college than the control group. 

In a second experiment, researchers randomly selected high-achieving, low-income students from a College Board database and mailed them packets of information on net costs and application procedures at different types of institutions, along with vouchers for automatic application fee waivers. The intervention significantly increased enrollment rates at highly selective colleges and universities. 

Why Simplification Is Feasible and Which Aspects Are Most Important

The research discussed above demonstrates the benefits of providing students with extra support to navigate a complicated system. Simplifying the FAFSA at its source might prove even more effective. But an oft-expressed concern is that simplification would reduce the ability for policymakers to accurately target aid. 

A separate body of research definitively shows that this is not the case: Most of the financial information collected on the FAFSA contributes very little to aid eligibility determination. Pell eligibility and even the Expected Family Contribution (EFC) itself can be approximated with a high level of precision using just a handful of elements from the form, primarily relying upon adjusted gross income and family size. Thus, while the benefits of simplification are substantial, the tradeoff in terms of less accurate targeting is surprisingly minimal. 

This holds true even when considering state aid programs, which often piggyback their own eligibility determination on the federal EFC. One study that used detailed financial aid application data to examine the consequences of formula simplification for state aid programs in five states found that no more than 2 percent of applicants would become newly eligible for state aid as a result, and that overall increases in grant amounts would be minimal. 

To be effective, a simplification strategy needs to address two related but distinct problems. First is the burden of completing the application itself, which imposes compliance costs, stress, and may deter even some applicants who intend to apply. Second is the overall lack of transparency, which makes aid eligibility difficult to predict and communicate. Thus, in evaluating “how much simplification is enough,” the critical criteria should be: Will the reform both substantially reduce application hassle and substantially improve transparency?

Since the main determinants of Title IV aid eligibility are already collected via the IRS Form 1040, some (including myself) have proposed eliminating the FAFSA completely and instead determining eligibility automatically, using income and other data from tax forms. Beyond the time saved, reducing the “hassle factor” of application will reduce the likelihood that applicants will walk away before they finish the process, or even before they start. And the precious time and expertise of guidance counselors and college advisors nationwide could be reallocated to helping students navigate other key aspects of the college transition, like choosing the right school and major. 

Simplifying the Pell eligibility formula to the point it could be expressed on a postcard would also substantially improve transparency. Under the current system, describing how the EFC is calculated, and how Pell Grant awards are calculated from that, is difficult to explain in simple terms. To promote early awareness of Pell eligibility will require clear communication tools and proactive outreach, both of which would be much easier with a more transparent formula. 

Responding to Common Concerns 

In the debate around various simplification proposals, two concerns are commonly raised that I believe are fully surmountable.

One common concern is that if the formula doesn’t include asset information, then wealthy families with low incomes will claim aid that they don’t really need. But surprisingly, although the FAFSA questions about net worth are arguably among the most challenging to answer, the answer is basically ignored for the vast majority of applicants. Why? Retirement accounts and home equity are excluded, and this is where most families hold their assets. The number of households with incomes low enough to qualify for Pell, but assets high enough to disqualify them, is thus exceedingly small. The benefit of preventing these few “mistakes” is not sufficient to outweigh the cost levied on all other applicants in the form of unnecessary stress and complication.

A second common concern is that while a simplified formula might work fine for federal student aid, states and institutions may need more detailed information for their own programs. By far the most common financial element used for state aid eligibility is the EFC—which is explicitly preserved under some simplification proposals, and could be easily estimated under others. As discussed above, EFCs can be closely approximated using only a fraction of the information currently collected on the FAFSA.

Adjusted gross income is another element that could easily be preserved and passed to states under even the most radical proposals for simplification. Finally, if aid eligibility were determined automatically via the tax system, information on demographics, institutions, and application date could easily be collected via a supplementary nonfinancial form. Once students know what they qualify for, they may be much more likely to fill out a simple form that doesn’t require complex information on income and assets.

Institutional aid presents a somewhat different challenge. Changes in EFC that have little implication for federal or state need-based aid may matter more for institutional aid that often extends to much higher income households. However, schools with substantial institutional aid typically already use an additional financial aid form, the CSS Profile, and would continue to do so even if the FAFSA were dramatically simplified. The federal aid process need not burden all applicants with questions required for only a fraction of institutions.

Concluding Recommendations

I don’t believe there is one single path to meaningful FAFSA simplification (and indeed, over the past decade I have proposed more than one alternative). But my general recommendations for FAFSA simplification are as follows:

  • Base Pell awards on a limited number of data elements that are available from the IRS so that eligibility is transparent and no separate financial application is needed.
  • Continue to provide states and institutions with an EFC, or simulated EFC, as well as basic demographic and institutional information, to use in distributing other financial aid.
  • Fix eligibility for several years, allowing students to securely plan for a multiyear course of study without the need to reapply.
  • Summarize Pell eligibility by family income on a postcard—even if some fine print is required—that schools, counselors, and community organizations can post and distribute.
  • Use IRS information to proactively communicate to prospective students and their families about their likely Pell eligibility.

As the United States falls behind other countries on measures of educational attainment and social mobility and leaps ahead on measures of inequality, now is the time to reinvest in education and to ensure that every dollar spent has the maximum impact. And research suggests that FAFSA simplification has the potential to substantially improve the effectiveness of federal investments in postsecondary education.

High School-to-College Transition Courses on the R...
Does Guided Pathways Lead Colleges to Cut Programs...