On July 30, the National Association of Student Financial Aid Administrators (NASFAA) joined the many organizations and policymakers calling for reforming the Free Application for Federal Student Aid (FAFSA). NASFAA’s four point proposal calls for a few familiar changes, but innovates in other ways. In this post, we’ll break down the details of how NASFAA proposes collecting and using data for the FAFSA and compare it to the current form and other proposals circulating.
As of right now, the FAFSA requires applicants to enter tax data from the previous year to determine their aid eligibility. NASFAA’s first recommendation is that this needs to change. Instead of using prior year data, they call for using two year old tax data, often called prior-prior-year data. NASFAA’s stance on using prior-prior-year data puts them in good company with the Gates Foundation and Senator Alexander’s Financial Aid Simplification and Transparency Act of 2014, all of which made the same suggestion.
NASFAA explains that using prior-prior-year data offers a way to balance simplicity and accuracy and could also solve FAFSA timing issues. The FAFSA currently allows applicants to pull tax data from the IRS’ Data Retrieval Tool (DRT) to automatically fill in answers to income and tax questions, which makes things much simpler for applicants who use it. The problem is that tax data don’t become available for retrieval immediately after filing. That process takes a few weeks at best. With some FAFSA deadlines creeping up in April, that means families need to file their taxes very early and hope their returns are processed quickly enough to pull data from the DRT. If the information needed from the DRT isn’t available, students can still fill out the FAFSA, but they will have to answer many questions by hand, making the process burdensome.
Since prior-prior-year tax data are older, they’re much more likely to be available in the DRT, meaning tax filers could reasonably expect to use this tool to make FAFSA completion simpler. As NASFAA explains in their proposal, the more tax data pulled using the DRT, the more accurate FAFSA applications become. The less applicants have to fill out manually, the simpler, faster and less prone to error the process becomes. And that, NASFAA says, is a win for everyone.
Seeing that the use of prior-prior-year data would make it easier to automatically retrieve tax information, NASFAA calls for further expanding the tax information available to pull from the DRT. Like the Gates Foundation, NASFAA’s proposal suggests making it possible to retrieve all data from applicants’ W-2 and 1040 tax forms. However, NASFAA and Gates disagree on where DRT expansion should stop. Gates’ proposal called for making it possible to retrieve applicants’ tax schedules, forms used to declare gains and losses from business, farms, or investments. NASFAA doesn’t think that’s necessary. Instead, their proposal recommends (albeit hesitantly) that colleges should be the ones dealing with tax schedules.
Applicants with more complex financial situations would automatically be directed to fill out additional questions about assets based on information from their 1040. For example, if they reported investment income or loss on the 1040, FAFSA’s skip logic would present them with a question about the net worth of their investments. No information about business gains or losses on the 1040? No questions about business assets on the FAFSA. Gates’ proposal handles this a little differently by saying that if an applicant filled out any tax schedule at all, they would answer two additional questions about the total net worth of their investments and total net worth of their businesses. NASFAA’s questions would be more targeted than that but would still incorporate important information about applicants’ resources to pay for college outside of their income.