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Student Aid Formula Seriously Flawed, Report Finds

Student Aid Formula Seriously Flawed, Report Finds
By Charles Pekow

Congressional Democrats, already steamed about cuts in federal student aid, are now bristling at a recent discovery that the U.S. Department of Education has been distributing billions of dollars of student aid under a misguided formula.

The General Accounting Office’s (GAO) findings showed that the U.S. Department of Education had been using outdated and irrelevant information to distribute hundreds of billions of dollars in financial aid for 10 years and had made inadequate attempts to get updates. The formula for determining eligibility rests largely on students’ and families’ abilities to pay, which the department bases on individual state and local tax payments.

The Education Department “could not provide us with written procedures guiding staff on the routine steps necessary to update the tax allowance, nor did it maintain detailed records of its efforts to obtain data,” the GAO reported in “Student Financial Aid: Need Determination Could Be Enhanced Through Improvements in Education’s Estimate of Applicants’ State Tax Payments.”

Until its controversial update announced last December, the Education Department had been using 1988 state tax table data since 1993 (when it was already five years outdated). The department announced that it hadn’t updated the formula because the Internal Revenue Service hadn’t updated its Statistics of Income, or SOI, database annually. But the GAO said it could document Education Department requests to the IRS for new data only six times in the past 11 years, and often only through undocumented phone calls instead of formal written requests. Also, the IRS doesn’t publish SOI data for two years after a tax year, so the formula always relies on outdated figures.

SOI data contain two other fundamental flaws for calculating expected family contributions. First, they include all taxpayers and don’t distinguish between those paying for education and those who don’t. Second, they don’t include all taxes paid: IRS bases the tables on taxpayers who itemize deductions, who tend to earn more than those who don’t itemize, the GAO presumed. And student-aid applicants tend to earn less than average.

To make the data even less relevant, when Congress originally allowed for a tax allowance for student aid in 1986, filers could deduct state and local sales taxes. But subsequent tax legislation ended this deduction, so the IRS no longer keeps statistics on these taxes, and its tables don’t fully reflect state and local taxes paid.

The GAO figured that in 2001, taxpayers with incomes above $20,000 paid about 5 percent of their income in state and local taxes, while those with lower incomes paid only about 3 percent: this indicates an added skew in the financial aid formula due to another instance of underrepresentation of taxpayers in the lower-income range.

The IRS said that the SOI data is compiled at a fee for requesting agencies, but the Education Department didn’t want to pay it. The IRS compiled the 1988 SOI data on a one-time basis to show what it could do should parties such as state governments want to buy it in the future. According to the report, the tax agency told the GAO that the fact that the data was useful for the Education Department was coincidental.

Education Department officials told the GAO they didn’t think the law allowed them to update tax tables based on any other data: the department didn’t look for other available data to update the tables or want to spend money to get the data itself, according to the GAO. In fact, the IRS started putting the data on its Web site in 2000, but the Education Department didn’t know it until 2003.

The department based its December 2004 update on 2002 data, the latest available. It might have trouble updating the financial aid formula next year: the IRS has reported technical problems with its 2003 master files and hasn’t been able to sort out the data.

When the Education Department discovered the data on the IRS Web site in 2003, it tried updating the formula, but Congress blocked changes for a year. The GAO estimated that if the department had updated the formula a year ago, 38 percent of Pell Grant recipients would have become ineligible or received a smaller grant, though results would vary by state and school. The GAO estimated an average reduction of $144 and that 92,000 applicants would have lost all funding, mainly those at the top of the income scale who would have received the minimum $400 grant. Overall, funding would have dropped about $290 million.Other repercussions would be less drastic, with fewer than 15 percent of Work-Study and Supplemental Educational Opportunity Grants students getting smaller awards, the GAO said.

 The Education Department could rectify the formula’s failure to consider different taxes paid by different income groups and the outdated data problem by collecting information from applicants about what they paid in taxes in the current year, the GAO said.

The GAO recommended four methods to get a better picture of the tax liability of families seeking financial assistance:

• Revise the method for calculating the formula. For instance, sort out data for different income groups and calculate the formula for each applicant rather than using an aggregate. But finding a better way to get updated data is critical.

• Use an alternative data source. Find information from other publicly available databases, such as the Bureau of Economic Analysis’ annual Personal Income tables or the Census Bureau’s State Government Tax Collections tables. The information is more complete than the SOI numbers and available much sooner.

• Use the same formula without regard to state of residence. This would simplify matters but not take into account differences in state tax rates.

• Collect information directly from students on their applications. The drawback: Applicants could easily document income and property taxes, but not sales taxes.

• The GAO also suggested that as long as the Education Department continues to use SOI data it should make annual written requests to the IRS for the data and strive to get updated numbers as soon as possible.

The Education Department generally agreed with the GAO and said it would review the suggestions.

Sen. Edward Kennedy, D-Mass., urged the Education Department to consider the GAO’s suggestions.

“The GAO report confirms what we have all feared — the $300 million savings that we saw last year was a real cut to real students in the Pell program. At a time when our nation critically needs an educated work force, and families are struggling to meet the cost of college for themselves and their children, the Department of Education reduces Pell aid, and (pushes) needy students out of the Pell program,” he said. 

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