The Cost of Complexity in Federal Student Aid Susan Dynarski & Judith Scott-Clayton Harvard University

Consider the FAFSA

More FAFSA

Yet More FAFSA

Complexity of financial aid rivals that of taxes Table 1. Complexity of the FAFSA Versus IRS 1040 1040 2005

1040A 2005

1040EZ 2005

FAFSA 2006-2007

2

2

1

5

Total number of questions

118

83

37

127

Non-financial items

27

27

21

65

Financial items

91

56

16

62

71

43

8

72

Length of signing statement

49 words

64 words

59 words

232 words

Official estimate of time to prepare**

16 hours

13 hours

8 hours

1 hour

Measure Number of pages (excluding instructions)

Number of items required for computation of tax/refund or aid amt.*

Costs of Complexity ‡

For low-income families, aid forms more complex than typical income tax return. „

‡

85% of families with income <$50K use 1040A

FAFSA daunting for anyone, but especially for „ „

First generation college students Non-English speakers

Cost of complexity: information about aid arrives late Aid information is back-loaded ‡ Fill out FAFSA Jan 1 ‡ Hear from schools in mid-spring of senior year ‡ Too late to affect decision to prepare for and attend college ‡

Figure 1. The Student Aid Application Process Fall - Spring of Senior Year

January-March of Senior Year

Student Applies to Colleges Student assembles and submits college applications, including test scores, transcripts, recommendations and essays.

Student Submits FAFSA to Government Student and family provide detailed demographic and financial data, and list up to six schools to receive FAFSA data.

4-6 Weeks After Submitting FAFSA (2-3 weeks for on-line submissions) Student Receives SAR The SAR provides the student's EFC and states whether he is eligible for a Pell Grant, but provides no dollar amount.

Government Processes FAFSA Processing service calculates the family's expected contribution (EFC) and sends a Student Aid Report (SAR) to the student and schools.

Colleges Receive Applications and Admit Students

Schools Receive SAR and Assemble Aid Package Financial aid offices use the EFC, the school's cost of attendance, and other information to design a package of federal, state, and institutional aid, which is then sent to accepted students.

March-April of Senior Year Student Learns Aid Eligibility Student learns about amount of federal aid (Pell Grant, Stafford Loans, work-study) and schoolspecific aid (scholarships and loans).

Benefit of complexity: Improves targeting. How much? ‡ ‡

Examine empirically how each question asked on FAFSA affects distribution of aid National Postsecondary Student Aid Survey 200304 „ „

Nationally representative sample of college students Extract data on ‡ ‡ ‡

‡

Student aid All information in FAFSA Expected family contribution

Measure marginal contribution of each question to distribution of aid

What happens to the Pell if we throw out 80% of the FAFSA?

Use income and family size to distribute Pell

Throw out 90% of FAFSA: determine aid using six questions.

Key advantage of the last approach ‡

It can be run through the tax code „

‡

No separate application required „ „

‡

All information required (AGI & household structure) is already gathered by IRS

Check off a box on 1040 to indicate family member will be going to college Grant delivered to colleges at time of enrollment, as is the case with aid now

Aid can be forecast and communicated to families early, based on AGI alone

Aid eligibility on a postcard: combine Pell & tax credits

Combine tax credits and Pell

Simplifying the FAFSA is not enough ‡ ‡ ‡

To be effective, aid needs to be simple and certain Information about simple and certain aid can be communicated to families early Early information maximizes the impact of aid „ „ „

Academic preparation for college starts in elementary and secondary school Knowing college is affordable makes it more likely family and student will prepare Examples: ‡

‡

state merit aid programs (Georgia HOPE, Arkansas Challenge) Social Security student benefit program

Conclusion ‡

Federal student aid may be an effective poverty relief program, but is not an efficient college incentive program

‡

Applying economic theory to student aid design highlights potential costs of complexity

‡

Empirical analysis suggests little benefit to this complexity

‡

By reducing complexity we can deliver information about aid early, when it can make a difference

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