Work-study is awarded based on the difference between a  student’s need less other aid awarded. While  Education has been required to revise the allowance tables annually since  1993, prior to 2004 it had attempted to update the allowance twice—once  in 1993 and once in 2003—but the latter update was suspended. As a  result, the 1988 tax data used for the 1993 update are still in effect. The  lack of updates is primarily because Education did not annually seek data  needed to update the allowance and did not establish effective internal  control to guide the updating process. In addition, Education did not  consider alternatives when data were not readily available. Education’s Proposed Update Would Have Increased Expected Family Contributions, Thereby Affecting the Allocation of Federal Aid and Potentially State and Institutional Aid as Well

Under the proposed update, the state and other tax allowance would have  decreased for most states; the change in the allowance, in turn, would  have increased the amount that families are expected to contribute by  about $500 on average for a majority of student aid applicants. Of those aid  applicants with an increase in their EFC, some would have received lower  Pell Grant awards or would have become ineligible for Pell Grants. As a result, the proposed update would have decreased overall  federal Pell Grant expenditures by $290 million. The effect of the update on state and institutional need- based aid would also have varied based on differences in state and  institutional aid awarding policies and on how much the tax allowance  would have changed for each state. The Current Allowance May Not Capture the Taxes Paid Due to the Type of Data and Methodology in Use

As a result of certain limitations of the SOI dataset for the purpose of  calculating the allowance and problems with how Education uses this  dataset, the current state and other tax allowance may not reflect the  amount of taxes paid by students and families. The dataset is limited for  this purpose because the taxpayers included in it are generally not  representative of financial aid applicants, the tax data it provides do not  include all state and other taxes paid by students and families, and the tax  data are several years older than the income information reported by  students and families on the FAFSA. In addition to the limitations of the  SOI dataset, Education does not make full use of the dataset to account for  the varying tax rates paid by taxpayers in different income groups. Four Strategies Might Address Some of the Limitations Associated with the Tax Allowance and Would Yield a Variety of Effects on Federal Spending and Aid Recipients

We have identified four strategies for addressing the limitations of the tax  allowance that range from modest to more substantial changes to the  process: (1) continue to use SOI data but with a revised method for  calculating the allowance, (2) substitute SOI data with one of several  alternative data sources, (3) use the same allowance for all aid applicants  without regard to state of residence, or (4) collect information directly  from the aid applicants themselves. Also, these four  strategies differ in their impacts on federal costs and on aid applicants. Appendix I: Scope and Methodology

	Overview

The objectives of this study were to determine (1) what tax data form the  basis of the current tax allowance and what factors have affected regular  updates, (2) the effect the Department of Education’s (Education)  proposed update would have had in award year 2004–2005 on financial  assistance for students and families, (3) the extent to which current  methods for determining the allowance accurately measure how much  students and families have paid in state and other taxes, and (4) the  strategies available to address any problems in deriving the allowance.
Why GAO Did This Study

In 2003, the Department of Education (Education) proposed an update to the state and other tax allowance, a part of the federal need analysis for student financial aid. Most federal aid as well as some state and institutional aid is awarded based on the student's cost of attendance less the student's and/or family's ability to pay these costs--known as the expected family contribution (EFC). The allowance, which accounts for the amount of state and other taxes paid by students and families, effectively reduces the EFC. Given the potential impact of the allowance on the awarding of aid, we determined what factors have affected the updating of the tax data on which it is based, the effects the proposed 2003 update would have had on financial assistance for aid applicants, any limitations in the method for deriving the allowance, and strategies available to address them.

What GAO Found

While Education has been required to revise the allowance annually since 1993, prior to 2004 it attempted to update the allowance only twice--in 1993 and again in 2003--but the latter update was suspended. As a result, the 1988 IRS tax data used for the 1993 update remained in effect. The lack of updates is primarily because Education did not annually seek data needed to update the allowance or establish effective internal control to guide the updating process. Also, Education did not consider alternatives when data were not readily available. Had the update been implemented in 2004-2005, the allowance would have decreased for most states; as a result, the EFC would have increased by about $500, on average, for a majority of aid applicants. Of those with an EFC increase, 38 percent would either have received less in Pell Grants ($144 less on average) or would have become ineligible for them; the percentage of recipients affected would have varied by income. Overall Pell Grant expenditures would have decreased by $290 million. Increases in EFCs could also have affected other forms of aid, including state aid; these effects in turn could have affected Stafford loans and Parent Loans for Undergraduate Students. The impact of the proposed update on Campus-Based, state, and institutional need-based aid would likely have varied based on state and institutional aid awarding policies and changes in state allowances. Due to certain limitations of the IRS dataset with respect to calculating the allowance, and problems with how Education uses this dataset, the current allowance may not reflect the amount of taxes paid by students and families. The dataset is limited because the taxpayers included in it are generally not representative of aid applicants, it does not include all state and other taxes paid by students and families, and the tax data are several years older than the income information reported by applicants on aid applications. In addition to these limitations, Education does not make full use of the dataset to better reflect the varying tax rates paid by taxpayers in different income groups. Strategies we identified for addressing the limitations of the tax allowance include (1) using IRS data with revisions to the method for calculating the allowance, (2) substituting IRS data with one of several alternative data sources, (3) using a standard allowance for all aid applicants irrespective of state of residence, or (4) collecting tax information directly from aid applicants. These could require modest to substantial changes, would differ in their impact on applicants and federal costs, and could require legislative changes