Ideas. Action. Results.

Improving the FAFSA for Low-Income Families

By Kenneth Megan,

Wednesday, April 10, 2019

With reauthorization of the Higher Education Act picking up steam, lawmakers have shown a renewed interest in simplifying the Free Application for Federal Student Aid, or FAFSA. Students are currently required to complete the FAFSA in order to be eligible for financial aid from the federal government, including student loans and Pell grants. Unfortunately, the form is unnecessarily complex, especially for low-income families.

The Current System

The FAFSA asks 108 questions about demographic and financial information, the latter of which includes income, untaxed earnings like child support and 401(k) contributions, and other assets. These questions are used to determine the student’s Expected Family Contribution (EFC), which is the number used to calculate the student’s financial aid award.

For many families, the FAFSA process is made simpler through the Internal Revenue Service’s (IRS) Data Retrieval Tool (DRT), which automatically populates the FAFSA by pulling data from IRS Form 1040. Unfortunately, families who do not files taxes, typically those with very low incomes and in most need of assistance, must answer all financial questions manually, as the DRT cannot verify non-filer status or populate directly from the W-2.

Up to one-third of all FAFSA applicants—and approximately half of those with low incomes—are also selected for “verification,” which is similar to a tax audit, and requires supplemental information to corroborate FAFSA submissions. This is a confusing process that places additional burdens on vulnerable families, who must submit documents ranging from tax transcripts to proof of means-tested benefits receipt. Non-tax filers face even more hurdles during this process; because they cannot use the DRT to verify income or tax-filing status, they must request a Verification of Non-filing letter from the IRS, which is a lengthy and confusing ordeal.

these challenges—lengthy forms, burdensome verification, and annual renewals—create barriers for the students with the greatest financial need

In addition, the FAFSA must be completed every year the student is enrolled. This is not only burdensome for families, but also increases the likelihood that students will be made ineligible for aid by missing renewal deadlines.

Taken together, these challenges—lengthy forms, burdensome verification, and annual renewals—create barriers for the students with the greatest financial need.

A Simplified FAFSA

 Below are three options that could streamline the FAFSA process, particularly for low-income families.

  1. Link Pell Eligibility to Means-Tested Benefits: One way to reduce the application burden for low-income families is to link Pell eligibility to other federal means-tested benefits. Under this model, families that participate in programs like the Supplemental Nutrition Assistance Program or Supplemental Security Income would automatically qualify for a zero EFC—indicating they have the highest level of financial need—and be eligible for the full Pell grant amount. Depending on which means-tested benefits are linked with an automatic-zero EFC, such a reform could entail an increase in the maximum Pell award. Estimating costs is also challenging; although researchers have modeled the predicted costs of different means-tested proposals, these estimates fail to account for the likely increase in the number of FAFSA filers that would result from a simplified approach.
  2. Institute a One-Time FAFSA: Under this model, proposed by the Center for American Progress (CAP), students would complete the FAFSA just once, upon initially enrolling in college. Students would be prompted to submit an updated FAFSA if they experience a qualifying financial event or enroll at a different institution. This would reduce the time and information requirements of the FAFSA for low-income students, who typically don’t experience much year-to-year variation in federal financial aid eligibility. Seventy percent of Pell grant recipients in CAP’s study experienced a change in EFC of just $500 or less, suggesting that a one-time FAFSA would make aid more accessible for low-income families without sacrificing the accuracy of financial aid awards. If a one-time FAFSA is implemented, however, provisions would be necessary to ensure that families with large year-to-year income fluctuations receive a revised EFC.
  1. Allow Data-Sharing Between the IRS and Department of Education: Data practices could be improved in ways that expand the accessibility and effectiveness of the DRT, such as by allowing other IRS forms besides the 1040, like the W-2, to be transferred to the FAFSA. Expanding the data that the IRS can verify through the DRT would substantially reduce the application and verification burdens on low-income households, particularly for non-tax filers without sufficient income to fill out a 1040. The DRT could also be expanded to verify a household’s tax filing status, allowing non-filers to avoid the current Verification of Non-filing process.

Allowing data-sharing directly between the IRS and the Department of Education would accomplish all of these outcomes with even lower time inputs from students and families. This idea has already garnered bipartisan support in Congress: the Faster Access to Federal Student Aid (FAFSA) Act of 2018 would amend both the Internal Revenue Code and the Higher Education Act to permit such data-sharing. Specifically, the FAFSA Act would streamline the sharing of information currently transferred through the DRT with a simplified “one-click” transfer process and would also share tax-filing status. This change would not only simplify the FAFSA process for students, but would also reduce the likelihood of user error by automating more of the process, producing more accurate financial aid calculations for applicants.

Conclusion

The current FAFSA system is unduly complex and places disproportionate burdens on low-income families. Bipartisan solutions are needed in order to ensure that vulnerable students and traditionally under-served populations have the supports necessary to access and succeed in the U.S. higher education system.

KEYWORDS: DEPARTMENT OF EDUCATION, FINANCIAL AID, HIGHER EDUCATION, STUDENT LOANS