Nuts and Bolts of Need Analysis
A webinar
sponsored by
the North
Carolina
Association of
Student
Financial Aid
Administrators
and the NC
State Education
Assistance
Authority
Presented by
Steve Brooks,
Executive
Director,
North Carolina
State Education
Assistance
Authority,
October 2009
Need Analysis and Professional Judgment
• First in a series of webinars on need analysis nuts
and bolts
• Focus today is on principles of need analysis and why
they are vital to making good professional judgment
decisions
• We will discuss federal methodology and its rules yet
also consider the broader context of meeting needs
fairly, both complying with FM rules and ALSO
appropriately allocating discretionary campus dollars
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Need Analysis and Professional Judgment
• Some significant themes of this series:
– Decision of whether to do a professional judgment is
dependent on understanding both need analysis and
federal eligibility determination
– How you make a professional judgment matters
– FM limitations – change data elements only
– “Ripple effects” by changing the “wrong” data element
– Understand origin and derivation of methodology
tables to ensure equitable results
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College Costs
Who Benefits? Who Pays?
• No one pays full costs of education
• State and private donors subsidize heavily
• Of the costs that are left, who should pay?
• Society benefits – so it subsidizes for all AND
provides aid for those who cannot pay net
costs
• Student benefits – so student and family must
have an obligation to pay if they can
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Need Analysis Principles
• First principle of need based financial aid:
– Parents and students have primary responsibility for
financing and
– To the extent that they are able to pay, they should
pay the costs of college education
• So we have to have a system to measure the
extent to which they are able to pay
We all Need Analysis!
-- Sigmund Freud
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A system of “need analysis”
• Three ways to pay for college
– Saving in advance
– Using current income
– Borrowing and paying with future income
• Our system looks one year at a time - a snapshot
– and uses that to imagine a video over time
• That is, we look at current data and extrapolate
the family’s ability to pay college costs
• An art as well as a science
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The artist’s tools
• Income and assets used to measure financial
strength
– Families with assets have financing options
– Families with assets experience less pressure on
current-year income
• Some argue this penalizes families for saving
• But in fact assets play only a small part, and
those who did not save almost always have to
do more borrowing in the end
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EFC as Measure of Family’s
Responsibility (Share)
• The result of our analysis is the “expected
family contribution,” or EFC
• We use that, along with reasonable costs of
attendance, to calculate the student’s
demonstrated need for aid
• Concepts that must be a part of any measure
• Relative sacrifice
• Face validity
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How did all of this begin?
As the competition for enrollment and talent gets
tighter, as it will, we may undercut the old-fashioned
idea that [financial aid] is intended to help the needy
and deserving scholar, and that well-off families
should help themselves. We will do ourselves and the
country no good if we diminish the force of this fine
old idea.
May 1953
John H. Monro
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A brief history lesson
• 1954- CSS founded to support awarding of needbased aid
• 1965- Higher Education Act
– Federal legislative umbrella; Title IV Programs
– Federal aid was distributed according to the formula
developed by financial aid professionals
• 1972- HEA started “federalization”
– Basic Educational Opportunity Grant (now Pell Grant)
– Introduced separate federal application and eligibility
formula (for BEOG only; other aid still up to aid
community)
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Where We’ve Been . . .
• 1974- Keppel Task Force
– The situation
• Federal, state & institutional forms
• Need analysis & Federal eligibility
• No community standards
– The recommendations
• Common application - “multiple data entry”
• Uniform Methodology (UM) same result despite which
form might be used
• BEOG still had a separate eligibility formula to ration
funds
• Community standards - National Coalition of aid
community to develop and maintain the UM
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Where We’ve Been . . .
• 1978- Multiple data entry began
• 1986- HEA “federalization”
– Congressional Methodology (CM)
• CM replaced UM in 1988-99
• No longer a community standard; now took Act of
Congress to change methodology
– Continued Pell Grant formula as a separate eligibility
calculation (BEOG renamed Pell Grant in 1980)
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To The Present…
• 1992- HEA consolidated CM and Pell
– Federal Methodology (FM)
– Federal application only
– Merger of formulas for Pell Grant and CM into
FM presented some interesting political (not
philosophical) outcomes
– Professional judgment authority explicitly given
to aid administrators
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What is “Financial Need?”
This is the one aspect that has remained constant since 1954
Total College Costs
- Family Contribution
= Need/Aid Eligibility
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Need Analysis Principles
• Some principles remain…
… but they are often lost in the rush to comply
with ever-changing federal rules
• Question is how to make the system FAIR
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Need Analysis Principles
–Horizontal equity – lining them up
in order of discretionary income
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Need Analysis Principles
• Vertical equity – assessing ability to
pay in a progressive manner
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So, What IS
Professional Judgment?
I exercise
professional judgment,
therefore I am!
-- Descartes
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Professional Judgment
• Need analysis is a guide for judgment, not a
substitute
– Step Back – “is this the right answer?”
– Easy to “hide behind the rules”
• Aid Administrator is final authority
• Effective PJ impossible without understanding the
“why’s” of need analysis
• Good professional judgment includes
understanding FM rules AND understanding need
analysis principles and practices
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Federal Methodology (FM)
• Established by the Higher Education
Amendments of 1992 (1993-94)
• Hybrid of CM and Pell formulas
• Official U.S.E.D. calculation required
– Student must complete FAFSA
– CSS estimates FM results on PROFILE
– INAS FM results match ED results
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Federal Methodology
• Distribution formula--not traditional need
analysis
• Developed by U.S. Congress
– the result of merging UM and Pell Grant
– subject to politics/budgetary limits
– no commitment to keeping formula economicallysound – politics, not economics
• Good professional judgment includes
understanding FM rules AND understanding
need analysis principles and practices
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Federal Methodology
Used to determine eligibility for:
• All Title IV student aid programs
• Some state grant programs *
• Some private scholarships
• Some institutional aid
*All our North Carolina programs use FAFSA
data but not all use the federal methodology – a crucial
distinction to understand in doing professional judgment
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Whose income & asset information is required in FM
and whose is excluded but may deserve consideration
when doing professional judgment ?
• Custodial parent(s) – always used in FM unless
professional judgment to make student independent
• Stepparents – normally used in FM but might be
excluded in professional judgment under some
circumstances
• Non-custodial parent(s) – never used in FM, but
might be factor in deciding if a professional
judgment is appropriate
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What is income?
• Income subject to taxation
– Wages, salaries and tips
– Net income from business/rental/farm
– Interest and dividends
– Capital gains/losses????
• Income not subject to taxation
– Interest on tax free bonds
– Tax deferred payments (401K, for example)
– Other
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What income counts in FM?
Some Taxable income
• Adjusted gross income (exclude combat pay)
• Income earned from work
+ Some Untaxed income
- Excluded Income
===========================
= Total income used in FM
Should be aware of other income as well before professional judgment
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FM untaxed income includes
•
•
•
•
•
•
•
•
•
•
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Payments to tax-deferred pension & savings plans
IRA deductions & payments to a SEP/KEOGH/similar plans
Child support received
Tax exempt interest
Untaxed portion of IRA distributions (not rollovers)
Untaxed portions of pensions
Housing, food and other living allowances paid to military,
clergy, and others
Veterans non-education benefits
VA Work Study Allowances
Other untaxed income not reported elsewhere
Money received or paid on your behalf
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No Longer Untaxed Income for FM
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•
•
•
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Earned Income Credit
Welfare benefits including TANF
Credit for federal tax on special fuels
Foreign income exclusion
Untaxed Social Security benefits (SSI)
Additional Child Tax Credits (IRS 1040 Line 66)
Combat Pay not included in AGI
Earnings from work under a cooperative education program
not counted in AGI
Should any of these be considered before professional
judgment decision is made?
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Discretionary Income
• The goal of need analysis is to count all
legitimate income, and to exclude income that
is not representative of real situation (using
snapshot to see a video)
• Horizontal equity – get them all to the right
place in line and know that each is in order of
discretionary income
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Discretionary income is total income
minus certain allowances
Idea is that there is some income that is not available
for any discretionary use
• Taxes Paid:
– Federal Income Tax; State and Local estimated taxes; FICA taxes
• Employment Expense Allowance
• Income Protection Allowance
– NOT a “living expense allowance” (“how can we live on that?”)
– Represents an amount below which a family has absolutely
no discretion as to how to spend a dollar and above which
SOME discretion begins
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Horizontal and Vertical Equity
• Now we have all families lined up in order of amount of
discretionary income (horizontal equity)
• We next have to determine what portion of that
discretionary income should go to college education
– Vertical equity (progressive assessment) versus flat tax –
the more discretionary dollars a family has, the greater
portion of those dollars it can afford to use for a given purpose
– So system assesses from 22% up to 47% depending on
amount of discretionary income
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The role of assets in
measuring ability to pay
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What assets count and don’t count in FM?
Do count:
Cash, Savings & Checking
Net Worth of Investments
Net Worth of Some Business/Farm
529 college savings assets
Don’t count:
Home equity
Some business and farm assets
Retirement and life insurance
Should be aware of actual total net worth before doing professional
judgment! You can - but do not have to - do a PJ!
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(Education Savings and)
Asset Protection Allowance
• Derivation – for retirement
Money required to purchase an annuity today that, at
retirement age, would provide a moderate standard of living
when combined with social security
• Unclear purpose today
We don’t assess retirement assets – a disconnected table with
no real economic rationale (but a political rationale for sure!)
• Be aware before doing professional judgment
Generous protection is built into the FM formula and must be
taken into consideration
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Contribution from Assets
Total Net Worth (of countable assets)
- Education Savings & Asset Protection Allowance
= Discretionary Net Worth
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Contribution from Assets
•
•
Discretionary Net Worth
Multiplied by Asset Conversion Rate – 12%, and
added to available income
• Assessed at 22% to 47%
– Thus 5.6% net is maximum from parental assets
(that is, 47% * 12% = 5.64%)
– Putative Income from assets is one way to look at
it – a tie breaker in the formula
– Two families, identical incomes, different assets –
which has more long term capacity to pay?
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In conclusion
• Hope this has been a good introductory
discussion of need analysis principles and
theory and how they interact with FM
• Next steps – future webinars this fall:
1. Income items and professional judgment
2. Asset items and professional judgment
3. Extraordinary expenses and professional judgment
• Case studies and discussion, even hand
calculations!
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Questions and Comments
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