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entitled 'Student Financial Aid: Need Determination Could Be Enhanced 
through Improvements in Education's Estimate of Applicants' State Tax 
Payments' which was released on January 28, 2005.

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GAO:

January 2005:

Student Financial Aid:

Need Determination Could Be Enhanced through Improvements in 
Education's Estimate of Applicants' State Tax Payments:

GAO-05-105:

GAO Highlights:

Highlights of GAO-05-105, a report to congressional requesters: 

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 students cost of attendance 
less the students and/or familys 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.

Percentage of Recipients Who Would Have Seen a Pell Grant Reduction 
with the Proposed Update, by Household Income: 

[See PDF for image]

[End of figure]

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.

What GAO Recommends:

GAO recommends that the Secretary of Education, in the short run, (1) 
formalize procedures to ensure that Education annually requests and 
obtains the most current tax data from the Internal Revenue Service 
(IRS) and (2) revise the methodology for calculating the allowance to 
better reflect the varying tax rates paid by students and families in 
different income groups. In the longer run, GAO recommends that 
Education (3) determine whether more effective data sources or 
methodologies exist for deriving the allowance.

www.gao.gov/cgi-bin/getrpt?GAO-05-105 

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Cornelia Ashby at 
(202) 512-8403 or AshbyC@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

The Current Tax Allowance Is Based on 1988 Data Due In Part to 
Education's Limited Efforts in Updating the Allowance:

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:

The Current Allowance May Not Capture the Taxes Paid Due to the Type of 
Data and Methodology in Use:

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:

Conclusions:

Recommendations for Executive Action:

Agency Comments:

Appendix I: Scope and Methodology:

Overview:

Datasets:

Estimation Methodology:

Calculation of Estimated Tax Rates from Alternative Data Sources:

Sampling Error:

Appendix II: State Selection Matrix--Ranking of Potential Impact of 
Proposed Allowance, Listed by Category:

Appendix III: Average Tax Rates on Adjusted Gross Income, by State and 
Income Level:

Appendix IV: Simulation of Tax Allowance Percentages under Various 
Options, by State--Families with Adjusted Gross Income of $15,000 or 
More:

Appendix V: Comments from the Department of Education:

Appendix VI: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Staff Acknowledgments:

Tables:

Table 1: State and Other Tax Allowance Established for Parents of 
Dependents and for Independents with Children, Published in 1993:

Table 2: State and Other Tax Allowance Established for Dependents and 
Independents without Children, Published in 1993:

Table 3: Proposed Allowance Changes and Estimated EFC Impacts by State:

Table 4: Percentage with a Pell Grant Decrease and Average Decrease by 
State, Including Those No Longer Eligible for the Award:

Table 5: Estimated Impacts in Campus-Based Aid for Case Study Schools:

Table 6: Estimated Impacts in State Need-Based Aid for Two States:

Table 7: Publication Dates of SOI State and Local Tax Data:

Table 8: Comparison of Income Distribution in 2001 of FAFSA Applicants 
and Federal Income Tax Itemizers:

Table 9: Framework for Evaluating Options Identified to Change the 
State and Other Tax Allowance Relative to the Current Allowance in Use:

Figures:

Figure 1: Federal Student Need Analysis Methodology:

Figure 2: Estimated Amount of Student Aid Awarded in 2003-2004, by 
Source of Aid:

Figure 3: Percentage of Recipients with a Decrease in Pell Award:

Figure 4: Median Percentage Change in Amount of Pell Award for Those 
with a Decrease:

Figure 5: Percentage of Students Likely to Have Had a Change in 
Subsidized Stafford Loans:

Figure 6: Framework for Evaluating the Alternative Datasets Identified 
Relative to SOI Data:

Abbreviations:

ACSFA: Advisory Committee on Student Financial Assistance:

AGI: adjusted gross income:

ASEC: Annual Social and Economic Supplement:

AY: award year:

BEA: Bureau of Economic Analysis: 

CEAD STAB: Cost Estimation and Analysis Division Statistical Abstract:

COA: cost of attendance: 

CPS: Current Population Survey: 

EFC: expected family contribution: 

FAFSA: Free Application for Federal Student Aid: 

FY: fiscal year: 

HEA: Higher Education Act:

IM: Institutional Methodology: 

IRS: Internal Revenue Service:

ITEP: Institute on Taxation and Economic Policy: 

NSLDS: National Student Loan Data System: 

PLUS: Parent Loans for Undergraduate Students: 
 
SEOG: Supplemental Educational Opportunity Grant: 

SOI: Statistics of Income:

United States Government Accountability Office:

Washington, DC 20548:

January 21, 2005:

Congressional Requesters:

In 2003-2004, an estimated $98 billion in financial aid was awarded to 
students for postsecondary education through the Title IV federal 
student aid programs, as well as state and institutional grant 
programs.[Footnote 1] Title IV aid is currently awarded based on a 
formula specified in the Higher Education Act (HEA); many states and 
postsecondary institutions also use this formula to award their own 
student aid. A substantial portion of this aid is awarded based on the 
difference between a student's cost of attendance and an estimate of 
the student's and/or family's ability to pay these costs--called the 
expected family contribution (EFC)--determined by this formula. To 
apply for Title IV aid, students submit a Free Application for Federal 
Student Aid (FAFSA) on which they report their own and/or their 
families' income, assets, and federal income tax expenses. State and 
other tax expenses, on the other hand, are not collected on the FAFSA 
form. Rather, Education uses a rate specified in law, subject to 
revision by Education--called the state and other tax allowance--to 
estimate such taxes.

Congress incorporated the state and other tax allowance as a part of 
the formula by including in the Higher Education Act a series of tables 
listing the applicable allowance for students and families by state. 
The tables list specific percentage values, or rates, that are used to 
exclude a portion of students' and families' incomes in determining 
their EFC. Thus, under the formula, the state and other tax allowance 
effectively reduces the EFC for students and families. The allowances 
were originally developed based on information compiled by the 
Department of Treasury's Internal Revenue Service's (IRS)-Statistics of 
Income (SOI) Division, specifically state and other taxes paid by 
taxpayers and reported on their federal income tax returns.

While the Department of Education (Education) is required by law to 
update the state and other tax allowance, its proposal to do so in 2003 
was met with substantial concern because it was the first update in a 
number of years and because the update would likely affect the EFC for 
students and families and the amount of student aid received. In view 
of the uncertainty and controversy that followed Education's proposed 
update and Congress' decision to suspend the update for 1 year, you 
asked us to shed light on issues associated with the tax allowance 
question and the department's proposed 2003 update. This report 
examines (1) what tax data form the basis of the current tax allowance 
and what factors have affected regular updates, (2) the effect 
Education's proposed 2003 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.

To do our work, we reviewed federal laws governing how Education is to 
update the state and other tax allowance and examined documents 
pertaining to this process. We used Education's aid applicant sample 
file from the 2002-2003 award year to estimate changes to the expected 
family contribution and Pell Grant awards nationally that would have 
resulted from Education's proposed update. We analyzed Education's Cost 
Estimation and Analysis Division's Statistical Abstract (CEAD STAB) 
data to estimate the proportion of financial aid recipients who could 
have experienced a change in their federal loans as a result of the 
proposed update. We assessed the reliability of the aid applicant and 
CEAD STAB data and determined that they were sufficiently reliable for 
our review. To obtain estimates on changes in state-provided need-based 
aid programs, we contacted two states, one with a likely high level of 
impact (Wisconsin) and the other with a likely low level of impact 
(Tennessee). To illustrate changes in students' receipt of Title IV aid 
and need-based aid provided by schools, we relied on estimates from 
four schools--two public institutions (University of Wisconsin-Madison 
and Middle Tennessee State University) and two private nonprofit 
institutions (Marian College of Fond du Lac and Carson-Newman College). 
To develop strategies to address the allowance's limitations in 
measuring students' and parents' state and other tax payments, we 
identified and analyzed alternative data sources that have state and 
local tax information. Finally, to gain further perspective on our 
objectives, we interviewed officials from the Advisory Committee on 
Student Financial Assistance (ACSFA)[Footnote 2] and other federal 
officials, along with state, school, and national association officials 
as well as other student financial aid experts.

We conducted our review from October 2003 through November 2004 in 
accordance with generally accepted government auditing standards. For a 
more detailed explanation of our methodology, see appendix I.

Results in Brief:

The current tax allowance is based on 1988 tax data due in part to 
Education's limited efforts to update the allowance. Congress 
incorporated the allowance into law in 1986 but did not establish a 
mechanism for updating the allowance until 1992. In amending the Higher 
Education Act in 1992, Congress directed Education to annually revise 
the allowance tables after reviewing the IRS' Statistics of Income file 
and determining the percentage of income that each state's taxes 
represent for those residents. While Education has published allowance 
tables annually since 1993, prior to 2004, it attempted to update the 
allowance tables twice--once in 1993 and once in 2003--but the latter 
update was suspended. As a result, the allowance--based on 1988 data 
that was first incorporated into the allowance tables in 1993--
continued to be based on 1988 data. One reason the allowance was not 
updated more frequently was because Education did not annually seek 
data needed to update the allowance. For example, Education records 
indicate that it only sought data to update the allowance for 6 years 
of the 11-year period from 1993 to 2003. Another reason is that 
Education was unwilling to incur costs to acquire data and therefore 
did not consider alternatives when data were unavailable cost-free. 
Further, when the IRS did make more current tax data freely available 
via the Internet, starting in 2000, Education did not become aware of 
this fact and did not take steps to make use of the data until 2003. In 
addition, Education could not provide us with written procedures 
guiding staff on the routine steps necessary to update the tax 
allowance, nor did it maintain detailed records of its efforts to 
obtain data.

Education's proposed update would have decreased the state and other 
tax allowance for most states, which, in turn, would have increased the 
expected family contribution for a majority of student aid applicants; 
the increase in expected family contribution would have, in turn, 
affected the allocation of federal aid and potentially state and 
institutional aid as well. We estimate that the update to the state and 
other tax allowance would have affected over half of the students 
applying for aid by increasing their EFC by about $500 on average (or 
from an average of about $9,620 to about $10,115) for those who would 
have had an EFC increase. The amount of the EFC increase generally 
would have been larger for students from states with a larger decrease 
in their state and other tax allowance. For example, residents of 
Delaware, which would have had a 4 percentage point decrease in its 
allowance for families--the largest decrease among the states--would 
have experienced an EFC increase of about $830 on average. With respect 
to Pell Grants, our national analysis shows that EFC increases from the 
update would have likely resulted in a decrease in Pell Grant awards 
for about 36 percent of students, and an additional 92,000 applicants 
(2 percent) would no longer have been eligible for the grant. Because 
these EFC changes would have affected Pell and other grant aid, 
Stafford and PLUS loan award amounts would in turn have been affected 
as well. Our case studies show that as EFC would have increased, 
subsidized Stafford loan awards would have decreased while unsubsidized 
Stafford loan awards would have increased. However, these case studies 
also show that most federal Campus-Based aid awards would have largely 
been unaffected by changes in the EFC. The effect of EFC changes on 
state and institutional grants would have varied because the EFC would 
have decreased in some states more than in others and because aid 
policies vary across states and institutions.

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 fully 
reflect the amount of taxes paid by students and families. The dataset 
itself is not ideally suited for calculating the allowance because it 
is limited to financial data from those who itemize their taxes, does 
not include state and local sales taxes, and is several years older 
than the income information reported by students and families on the 
FAFSA. SOI tax information may not be representative of families 
applying for financial aid because SOI compiles state and local tax 
data only for those who itemize their deductions, and itemizers may pay 
different effective tax rates for a given level of income than 
nonitemizers. Also, while state and local sales taxes were reflected in 
SOI data when Congress first incorporated the tax allowance, subsequent 
tax reform legislation eliminated the deductibility of sales taxes, 
effectively removing this information from the SOI dataset. Although 
more recent legislation provides taxpayers who itemize the choice of 
deducting either sales or income taxes, the law allows this only for 
the 2004 and 2005 tax years. Moreover, SOI tax data are generally 
released about 2 years after each tax year, so it is not possible to 
match this information with the income information that applicants 
report on the aid application. In addition to the limitations of the 
SOI dataset, Education's calculation of the allowance does not 
accurately consider the varying taxes paid by different income groups. 
As a result, Education's calculation of the allowance is overestimated 
for lower-income groups and underestimated for higher-income groups.

We identified four strategies to address some of the limitations 
associated with the tax allowance. While not exhaustive, these 
strategies include (1) continuing to use SOI data but with a revised 
method for calculating the allowance, (2) substituting SOI data with 
data from one of several alternative sources, (3) using the same 
allowance for all aid applicants without regard to state of residence, 
and (4) collecting information directly from the aid applicants 
themselves. The calculation, for example, might be modified to better 
reflect the taxes paid by different income groups than the current 
methodology. An option that would not require calculating an allowance 
would be to collect information about actual taxes paid directly from 
aid applicants by adding questions to the aid application, making it 
possible to collect income, asset, and tax information for the same 
year. Selecting among these strategies would require a number of 
considerations: the effect on federal expenditures, the impact on aid 
applicants, and the availability and reliability of tax data from 
alternative sources. These options could range in their impact on 
federal expenditures for the Pell Grant and other federal programs. For 
example, depending on the option chosen, the effect would range from a 
$200 million decrease in Pell Grant expenditures to an increase of 
$400 million in the 2004-2005 award year.

* In this report, we recommend that the Secretary of Education improve 
the department's process for updating the state and other tax allowance 
by formalizing procedures, and documenting them in writing, to ensure 
that the Department of Education annually requests and obtains the most 
current tax data from SOI and revise the methodology for calculating 
the state and other tax allowance to more accurately consider the 
varying taxes paid by students and families. In addition, we recommend 
that the Secretary determine whether alternative methodologies and/or 
data--including those identified in this report--would allow the 
department in the future to more effectively calculate and update an 
allowance for state and other taxes.

Background:

The Higher Education Act specifies a formula, known as the federal need 
analysis methodology, that is used to determine students' eligibility 
for federal student aid. A variety of federal grants and loans are 
available to assist students pay postsecondary expenses. While some 
federal aid is allocated based on a student's need for financial aid 
that is determined by the formula, other federal aid is allocated 
regardless of need. Many states and institutions have their own student 
aid programs, providing students an additional source of aid to help 
pay for postsecondary expenses.

Federal Need Analysis Methodology:

The federal need analysis methodology is used to determine a student's 
need for financial aid by comparing a student's and/or family's 
expected family contribution to the student's cost of attendance (COA). 
The EFC is defined as the household financial resources that are 
considered available to help pay for the student's postsecondary 
education expenses and is calculated by reducing the household 
financial resources reported by aid applicants on the Free Application 
for Federal Student Aid by certain expenses and allowances, including a 
state and other tax allowance. A student is classified as either 
financially dependent on his or her parents or independent in the 
financial aid process. This classification is important because it 
affects the factors used to determine a student's EFC. For dependent 
students, the EFC is based on both the students and parents' income and 
assets, as well as whether the family has other children enrolled in 
college. For independent students, the EFC is based on the student's 
and, if married, spouse's income and assets and whether the student has 
any dependents other than a spouse, and the number of family members 
enrolled in college.

To capture and reflect changes in students' and families' state and 
other tax liabilities, Education is responsible for annually updating 
the state and other tax allowance tables that were established in the 
HEA. Education determines the state and other tax allowance based on 
state and local tax information from federal tax returns filed with the 
Internal Revenue Service and compiled by its Statistics of Income 
Division. For dependent students and independent students without 
children, the allowance is composed of state and local income taxes. 
For parents of dependent students and independent students with 
children, personal property taxes and real estate taxes are added to 
the allowance.

The costs of attending a postsecondary institution that a student faces 
include tuition, fees, books, and living expenses. The student may be 
able to receive financial aid to help cover costs of attendance 
depending on where the student wants to enroll as well as the student's 
and family's financial resources. If the price of attendance is greater 
than the expected family contribution, the difference between the two 
represents the student's financial need. If the EFC is greater than the 
price of attendance, the student is not eligible for federal need-based 
aid but may still qualify for aid that is not based on need. (See fig. 
1.):

Figure 1: Federal Student Need Analysis Methodology:

[See PDF for image]

Note: Not all assets are considered under the federal student need 
analysis methodology. For example, the methodology does not include the 
principal place of residence.

[End of figure]

Postsecondary institutions are responsible for determining individual 
student's eligibility for specific sources of financial aid and 
compiling these sources to meet each student's need--a process known as 
packaging. Part of this process involves deciding which types or 
sources of aid should be awarded first--for example, grants or loans, 
federal or nonfederal aid, need-based or non-need-based aid. In 
awarding aid, institutions typically first package any grants for which 
the student is eligible and then offer loans. Another factor considered 
in packaging aid is whether to reduce aid from any source in a 
student's package to offset an aid award from another source.

Federal Aid Provided under Title IV of the Higher Education Act:

Title IV of the HEA, as amended, authorizes the following federal aid 
programs:

* Pell Grants--Pell Grants are grants to low-and middle-income 
undergraduate students who have federally defined financial need and 
who are enrolled in a degree or certificate program. In general, a 
student's Pell Grant award is determined by subtracting a student and 
family's EFC from either the maximum allowable Pell Grant award, 
currently $4,050, or the COA, whichever is less.

* Stafford and PLUS Loans--These loans may be made by private lenders 
and guaranteed by the federal government (guaranteed loans) or made 
directly by the federal government through a student's school (direct 
loans).

* Subsidized Stafford Loans--Subsidized loans are made to students 
enrolled at least half-time in an eligible program of study that have 
federally defined financial need. The federal government pays the 
interest costs on the loan while the student is in school. Subsidized 
loans are subject to certain maximum loan limits and are awarded based 
on the difference between a student's COA less EFC and other awards of 
student aid including Pell Grants, state or institutional grants, etc. 
A change in a student's EFC may--or may not--affect the amount of a 
subsidized loan award depending on its effect on other components of 
the student's financial aid package.

* Unsubsidized Stafford Loans--Unsubsidized Stafford loans are non-
need-based loans made to students enrolled at least half-time in an 
eligible program of study. Although the terms and conditions of the 
loan (e.g., interest rates) are the same as those for subsidized loans, 
students are responsible for paying all interest costs on the loan. 
While Stafford unsubsidized loans are not need-based aid, a change in a 
student's or family's EFC may nonetheless affect the amount a student 
may borrow. Unsubsidized loans are awarded based on the difference 
between a student's COA less other awards of student aid--including 
Pell Grants, state and institutional grants, and subsidized loans. 
These loans are subject to the combined maximum loan limits for 
subsidized and unsubsidized loan awards. A change in a student's EFC 
that affects Pell Grant, subsidized loan, or state or institutional 
grant awards may therefore affect the amount of an unsubsidized loan 
award.

* PLUS Loans--PLUS loans are non-need-based loans made to creditworthy 
parents of dependent undergraduate students enrolled at least half-time 
in an eligible program of study. Borrowers are responsible for paying 
all interest on the loan. Like unsubsidized loans, PLUS loans are 
generally awarded based on the difference between a student's COA less 
other awards of student aid including unsubsidized loan awards. As is 
the case with unsubsidized loans, a change in a student's or family's 
EFC can affect the amount of a PLUS loan that a parent may borrow.

Dependent students may borrow combined subsidized and unsubsidized 
Stafford loans up to $2,625 in their first year of college, $3,500 in 
their second year, and $5,500 in their third year and beyond. 
Independent students and dependent students without access to PLUS 
loans can borrow combined subsidized and unsubsidized Stafford loans up 
to $6,625 in their first year, $7,500 in their second year, and $10,500 
in their third year and beyond. There are aggregate limits for an 
entire undergraduate education of $23,000 for dependent students and 
$46,000 for independent students and dependent students without access 
to PLUS loans.

* Campus-Based Aid--Participating institutions receive separate 
allocations for three programs from Education. Funds are distributed to 
institutions in part on the basis of the institution's previous 
allocation levels and in part on the basis of the aggregate financial 
need of eligible students in attendance. The institutions then award 
the following aid to students:

* Supplemental Educational Opportunity Grants (SEOG)--SEOG grants are 
grants for undergraduate students with federally defined financial 
need. Priority for this aid is given to Pell Grant recipients. In 
general, an annual SEOG award may not be less than $100 and may not 
exceed $4,000.

* Perkins Loans--Perkins loans are low-interest (5 percent) loans to 
undergraduate and graduate students. Interest does not accrue while the 
students are enrolled at least half-time in an eligible program. 
Priority is given to students who have exceptional federally defined 
financial need. Students can borrow up to $4,000 for any year of 
undergraduate education with an aggregate limit of $20,000.

* Work-Study--Work-Study is employment in on-or off-campus jobs for 
which students who have federally defined need earn at least the 
current federal minimum wage. The institution or off-campus employer 
pays a portion of their wages, while the federal government pays the 
remainder. Work-study is awarded based on the difference between a 
student's need less other aid awarded.

Students Received about $98 Billion in Federal, State and Institutional 
Aid in 2003-2004.

Students received an estimated $98 billion in financial aid in award 
year 2003-2004 from the Title IV federal aid programs as well as state 
and institutional grants, of which the federal government provided more 
than two-thirds. Federal assistance is composed of both loans and 
grants, and most federal grant aid is need-based. States distributed 
about $6 billion in student aid.[Footnote 3] Institutions provided 
about $23 billion in the forms of need-based grant and merit-based aid. 
(See fig. 2.):

Figure 2: Estimated Amount of Student Aid Awarded in 2003-2004, by 
Source of Aid:

[See PDF for image]

Notes: Federal aid is based on fiscal year figures, and state and 
institutional aid is based on award year amounts. Because of rounding, 
the sum of aid awarded under the various programs in the figure above 
is less than the actual total of $97.9 billion.

[End of figure]

The Current Tax Allowance Is Based on 1988 Data Due In Part to 
Education's Limited Efforts in Updating the Allowance:

The current state and other tax allowance is based on 1988 tax data due 
in part to Education's limited efforts in updating the allowance. 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.

The Current Tax Allowance Is Based on 1988 Tax Data:

While Education has published the allowance tables used to award Title 
IV aid in the Federal Register annually since 1993, prior to 2003 these 
tables had been based on 1988 tax return information compiled by SOI. 
Congress incorporated the state and other tax allowance into the HEA in 
1986 on the basis of 1983 SOI data but did not establish a mechanism to 
update the basis of the allowance until 1992. Amending the Higher 
Education Act in that year, Congress directed Education to "publish in 
the Federal Registerrevised table[s] of State and other tax 
allowances" annually, and to "develop such revised table[s] after 
review of the Department of the Treasury's Statistics of Income file 
and determination of the percentage of income that each State's taxes 
represent" for those residents. Education published the first updated 
tables of the allowance in 1993 after reviewing SOI's 1988 tax data, 
the most recent data available at that time. Tables 1 and 2 present 
these revised tax allowances, by dependency status and state.

Table 1: State and Other Tax Allowance Established for Parents of 
Dependents and for Independents with Children, Published in 1993:

Source: 1993 Federal Register.

State of residence: Alaska, Nevada, Tennessee, Texas, Wyoming; 
Income level (percentage): Less than $15,000: 3; 
Income level (percentage): $15,000 or more: 2.

State of residence: Florida, Louisiana, South Dakota, Washington; 
Income level (percentage): Less than $15,000: 4; 
Income level (percentage): $15,000 or more: 3.

State of residence: Alabama, Mississippi; 
Income level (percentage): Less than $15,000: 5; 
Income level (percentage): $15,000 or more: 4.

State of residence: Arizona, Arkansas, Connecticut, Illinois, Indiana, 
Missouri, New Mexico, North Dakota, Oklahoma, West Virginia; 
Income level (percentage): Less than $15,000: 6; 
Income level (percentage): $15,000 or more: 5.

State of residence: Colorado, Georgia, Idaho, Kansas, Kentucky, New 
Hampshire, Pennsylvania; 
Income level (percentage): Less than $15,000: 7; 
Income level (percentage): $15,000 or more: 6.

State of residence: California, Delaware, Hawaii, Iowa, Montana, 
Nebraska, New Jersey, North Carolina, Ohio, South Carolina, Utah, 
Vermont, Virginia; 
Income level (percentage): Less than $15,000: 8; 
Income level (percentage): $15,000 or more: 7.

State of residence: Maine, Maryland, Massachusetts, Michigan, 
Minnesota, Rhode Island; 
Income level (percentage): Less than $15,000: 9; 
Income level (percentage): $15,000 or more: 8.

State of residence: District of Columbia, Oregon, Wisconsin; 
Income level (percentage): Less than $15,000: 10; 
Income level (percentage): $15,000 or more: 9.

State of residence: New York; 
Income level (percentage): Less than $15,000: 11; 
Income level (percentage): $15,000 or more: 10.

State of residence: Other areas; 
Income level (percentage): Less than $15,000: 4; 
Income level (percentage): $15,000 or more: 3.

[End of table]

Table 2: State and Other Tax Allowance Established for Dependents and 
Independents without Children, Published in 1993:

State of residence: Alaska, Nevada, South Dakota, Tennessee, Texas, 
Washington, Wyoming; 
Percentage: 0.

State of residence: Florida, New Hampshire; 
Percentage: 1.

State of residence: Connecticut, Illinois, Louisiana, North Dakota; 
Percentage: 2.

State of residence: Alabama, Arizona, Mississippi, Missouri, New 
Jersey, Pennsylvania; 
Percentage: 3.

State of residence: Arkansas, Colorado, Georgia, Indiana, Kansas, 
Michigan, Nebraska, New Mexico, Oklahoma, Rhode Island, Vermont, 
Virginia, West Virginia; 
Percentage: 4.

State of residence: California, Delaware, Idaho, Iowa, Kentucky, Maine, 
Massachusetts, Montana, North Carolina, Ohio, South Carolina, Utah, 
Wisconsin; 
Percentage: 5.

State of residence: Hawaii, Maryland, Minnesota, Oregon; 
Percentage: 6.

State of residence: District of Columbia, New York; 
Percentage: 7.

State of residence: Other areas; 
Percentage: 2.

Source: 1993 Federal Register.

[End of table]

Although Education has published allowance tables annually since 1993, 
the published allowances continued to be based on 1988 SOI data until 
2003, when new tables based on 2000 SOI tax data were published. 
Education intended to use the new tables to award student aid in 2004-
2005 but did not do so in light of legislation that prohibited it from 
doing so. As a result, the state and other tax allowance used to award 
financial aid continued to be based on 1988 tax data.[Footnote 4]

Education Did Not Annually Seek Data to Update the Allowance, Consider 
Alternatives when Such Data Were Not Readily Available, or Establish 
Effective Internal Control to Guide the Updating Process:

Prior to 2003, Education's efforts to update the allowance were 
limited: It neither annually sought data to update the allowance nor 
pursued alternatives when SOI data it had used previously were not 
readily available. According to Education's records, the department 
only sought data to update the allowance for 6 of the 11 years since it 
was first directed to annually update the tax allowance[Footnote 5]. 
SOI records also document that Education did not routinely request 
data. Even when Education did request data, it is difficult to 
determine exactly what data were requested because such requests were 
not made in writing. Rather, Education's documentation consists of 
informal file notes of telephone contacts with SOI officials that are 
minimal and do not describe the substance of what was discussed. 
Furthermore, as of the end of our audit work, Education could not 
provide us with written procedures guiding staff on the routine steps 
necessary to update the tax allowance or to identify what data would be 
needed to update the allowance.

After Education published the 1993 update to the allowance, on the 
basis of 1988 SOI tax data, Education sporadically sought data from SOI 
to develop subsequent updates. According to both Education and SOI 
officials, however, SOI would not have provided these data on a cost-
free basis. According to SOI officials, the 1988 tax data was produced 
to illustrate the type of information SOI could develop that clients, 
such as states, might find useful and be willing to purchase in the 
future. SOI never intended to produce the data as a regular series, and 
the fact that it was useful for Education's purposes was coincidental. 
Education's records do not indicate what actions the agency undertook 
when it first learned that SOI would not provide data cost-free, 
including the extent to which it considered paying for such data. 
Education officials told us, however, that they never sought a cost 
estimate from SOI because they did not wish to pay for the 
data.[Footnote 6] Moreover, Education officials told us that they did 
not consider using data other than SOI data because they believed 
Education did not have the discretion to do so under the law. Beginning 
in 2000, about 1 year after Education last contacted SOI, SOI began to 
annually publish on its Web site data that Education could have used to 
update the allowance.[Footnote 7] However, Education was unaware of 
these data because it did not contact SOI again until 2003 for the 
purpose of making its proposed update that year.

As we have pointed out in numerous reports, weak internal control can 
be a contributing factor to, or cause of, insufficient execution of 
agency responsibilities. Collectively, internal controls are an 
integral component of an organization's management intended to provide 
reasonable assurance that, among other things, operations are effective 
and efficient. Education's failure to fully document its attempts to 
update the allowance over the past several years and its lack of 
written procedures to guide staff efforts to ensure that they take the 
steps necessary to update the allowance, such as a checklist, are 
indicative of an ineffective system of internal control. Our Standards 
for Internal Control in the Federal Government provides guidance to 
agencies to help them assess, evaluate, and implement effective 
internal controls that can be helpful in improving their operational 
processes.[Footnote 8]

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. Increases in EFCs would not only have affected Pell Grants 
but possibly other forms of aid, and these effects in turn would have 
affected Stafford and PLUS loan awards. The extent to which the 
proposed update would have affected federal Campus-Based, state, and 
institutional aid would likely have varied according to factors such as 
aid awarding policies and changes in a state's allowance.

Under the Proposed Update, Expected Family Contributions Would Have 
Increased by about $500, on Average, for a Majority of Student Aid 
Applicants:

Education's tax allowance update would generally have increased the 
dollar amount that families would be expected to contribute to a 
student's education, but the percentage of student aid applicants 
affected would have varied by state and household income, and the size 
of the increase would have varied by state. EFCs would increase by 
about $500 on average for those with an increase (from an average of 
about $9,620 to about $10,115), but aid applicants from states with 
larger decreases in their tax allowance rates would have had a larger 
increase in their EFCs.[Footnote 9] Table 3 shows the proposed changes 
to the allowance and the estimated EFC impacts, by state. For example, 
Delaware would have had a 4 percentage point decrease in its tax 
allowance for families earning $15,000 or more[Footnote 10]--from 
7 percent to 3 percent--and a 2 percentage point decrease for 
individuals,[Footnote 11] resulting in an EFC increase of $834 on 
average, among applicants in Delaware with an increase. In contrast, 
Nevada would have had a 1 percentage point decrease in the allowance 
for families (and a 1 percentage point increase for individuals), and 
its residents would have had an expected contribution increase of $186 
on average. Similarly, the percentage of applicants affected would have 
varied from state to state. In Wisconsin, for example, the percentage 
of student aid applicants affected would have been slightly over 
80 percent, in contrast to Connecticut, where just under 1 percent of 
applicants would have been affected. With regard to household income, 
over 90 percent of families earning more than $25,000 would have been 
expected to contribute more under the update, while only about 
20 percent of families earning $25,000 or less would have been expected 
to contribute more. Across all states, we estimate that the update 
would have affected more than 60 percent of aid applicants and would 
have resulted in an EFC increase of $3.5 billion collectively in award 
year 2004-2005.

Table 3: Proposed Allowance Changes and Estimated EFC Impacts by State:

State: Alabama; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 59; 
Estimated average EFC dollar increase for those with an increase: 311.

State: Alaska; 
Percentage point change in the state and other tax allowance: 
Families: -1; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 62; 
Estimated average EFC dollar increase for those with an increase: 261.

State: Arizona; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 47; 
Estimated average EFC dollar increase for those with an increase: 385.

State: Arkansas; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 62; 
Estimated average EFC dollar increase for those with an increase: 410.

State: California; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 45; 
Estimated average EFC dollar increase for those with an increase: 406.

State: Colorado; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 75; 
Estimated average EFC dollar increase for those with an increase: 571.

State: Connecticut; 
Percentage point change in the state and other tax allowance: 
Families: 0; 
Percentage point change in the state and other tax allowance: 
Individuals: +2; 
Estimated percentage of students with an increase in their EFC: 1; 
Estimated average EFC dollar increase for those with an increase: 76.

State: Delaware; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 80; 
Estimated average EFC dollar increase for those with an increase: 834.

State: District of Columbia; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 60; 
Estimated average EFC dollar increase for those with an increase: 485.

State: Florida; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 64; 
Estimated average EFC dollar increase for those with an increase: 298.

State: Georgia; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 67; 
Estimated average EFC dollar increase for those with an increase: 384.

State: Hawaii; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 68; 
Estimated average EFC dollar increase for those with an increase: 746.

State: Idaho; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 69; 
Estimated average EFC dollar increase for those with an increase: 321.

State: Illinois; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 60; 
Estimated average EFC dollar increase for those with an increase: 459.

State: Indiana; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 75; 
Estimated average EFC dollar increase for those with an increase: 406.

State: Iowa; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 78; 
Estimated average EFC dollar increase for those with an increase: 781.

State: Kansas; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 77; 
Estimated average EFC dollar increase for those with an increase: 531.

State: Kentucky; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 66; 
Estimated average EFC dollar increase for those with an increase: 340.

State: Louisiana; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 61; 
Estimated average EFC dollar increase for those with an increase: 415.

State: Maine; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 78; 
Estimated average EFC dollar increase for those with an increase: 610.

State: Maryland; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 75; 
Estimated average EFC dollar increase for those with an increase: 462.

State: Massachusetts; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 79; 
Estimated average EFC dollar increase for those with an increase: 717.

State: Michigan; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 73; 
Estimated average EFC dollar increase for those with an increase: 746.

State: Minnesota; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 81; 
Estimated average EFC dollar increase for those with an increase: 673.

State: Mississippi; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 53; 
Estimated average EFC dollar increase for those with an increase: 283.

State: Missouri; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 60; 
Estimated average EFC dollar increase for those with an increase: 425.

State: Montana; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 69; 
Estimated average EFC dollar increase for those with an increase: 515.

State: Nebraska; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 79; 
Estimated average EFC dollar increase for those with an increase: 716.

State: Nevada; 
Percentage point change in the state and other tax allowance: 
Families: -1; 
Percentage point change in the state and other tax allowance: 
Individuals: +1; 
Estimated percentage of students with an increase in their EFC: 50; 
Estimated average EFC dollar increase for those with an increase: 186.

State: New Hampshire; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 73; 
Estimated average EFC dollar increase for those with an increase: 808.

State: New Jersey; 
Percentage point change in the state and other tax allowance: 
Families: -1; 
Percentage point change in the state and other tax allowance: 
Individuals: +1; 
Estimated percentage of students with an increase in their EFC: 63; 
Estimated average EFC dollar increase for those with an increase: 263.

State: New Mexico; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 62; 
Estimated average EFC dollar increase for those with an increase: 432.

State: New York; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 67; 
Estimated average EFC dollar increase for those with an increase: 639.

State: North Carolina; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 68; 
Estimated average EFC dollar increase for those with an increase: 493.

State: North Dakota; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 78; 
Estimated average EFC dollar increase for those with an increase: 736.

State: Ohio; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 73; 
Estimated average EFC dollar increase for those with an increase: 589.

State: Oklahoma; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 65; 
Estimated average EFC dollar increase for those with an increase: 308.

State: Oregon; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 69; 
Estimated average EFC dollar increase for those with an increase: 519.

State: Pennsylvania; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 67; 
Estimated average EFC dollar increase for those with an increase: 713.

State: Rhode Island; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 60; 
Estimated average EFC dollar increase for those with an increase: 697.

State: South Carolina; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 67; 
Estimated average EFC dollar increase for those with an increase: 718.

State: South Dakota; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 64; 
Estimated average EFC dollar increase for those with an increase: 589.

State: Tennessee; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 52; 
Estimated average EFC dollar increase for those with an increase: 371.

State: Texas; 
Percentage point change in the state and other tax allowance: 
Families: -1; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 51; 
Estimated average EFC dollar increase for those with an increase: 189.

State: Utah; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 73; 
Estimated average EFC dollar increase for those with an increase: 345.

State: Vermont; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 80; 
Estimated average EFC dollar increase for those with an increase: 614.

State: Virginia; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 73; 
Estimated average EFC dollar increase for those with an increase: 623.

State: Washington; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 53; 
Estimated average EFC dollar increase for those with an increase: 429.

State: West Virginia; 
Percentage point change in the state and other tax allowance: 
Families: -3; 
Percentage point change in the state and other tax allowance: 
Individuals: -2; 
Estimated percentage of students with an increase in their EFC: 68; 
Estimated average EFC dollar increase for those with an increase: 527.

State: Wisconsin; 
Percentage point change in the state and other tax allowance: 
Families: -4; 
Percentage point change in the state and other tax allowance: 
Individuals: -1; 
Estimated percentage of students with an increase in their EFC: 81; 
Estimated average EFC dollar increase for those with an increase: 802.

State: Wyoming; 
Percentage point change in the state and other tax allowance: 
Families: -2; 
Percentage point change in the state and other tax allowance: 
Individuals: 0; 
Estimated percentage of students with an increase in their EFC: 61; 
Estimated average EFC dollar increase for those with an increase: 408.

Source: GAO analysis.

Notes: Dependent students whose state of residence is different from 
that of their parents were counted as being from their parents' state. 
Since the EFC for a family is based upon both the parents' and the 
student's income, the EFC changes reported above for each state may 
reflect not only the change in the allowance for that state but also 
the change for the state of residence for students attending school in 
another state. For example, Connecticut, which has an increased 
allowance, may have families with an EFC increase because the children 
of those families may be attending school and residing in another state 
with a decreased allowance.

The sampling errors for the average EFC increase for Alaska, 
Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Maine, 
Montana, Nevada, New Mexico, North Dakota, Rhode Island, South Dakota, 
Vermont, and Wyoming vary from slightly over 5 percent (for Maine and 
New Mexico) to 34 percent (for Connecticut). All others have a sampling 
error at or below 5 percent.

[End of table]

If Expected Family Contributions Had Increased, Some Aid Applicants 
Would Have Received Lower Pell Grant Awards or Become Ineligible for 
Them:

Had Education's proposed update been adopted, thus raising the expected 
family contribution for aid applicants, 38 percent of recipients would 
have either seen a decrease in their Pell Grant award or would have 
become ineligible for the grant altogether; taken together, the average 
reduction among those with a decrease in their amount would have been 
$144. In particular, 36 percent of recipients would have seen a 
decrease of $133 on average in their Pell Grant award but would have 
remained eligible for the awards in award year 2004-2005. Another 
92,000 recipients, or 2 percent of those receiving Pell Grants, would 
no longer have been eligible and typically would no longer have 
received the minimum Pell Grant award of $400. As a result, the 
proposed update would have decreased overall federal Pell Grant 
expenditures by $290 million. Students residing in states with larger 
decreases in their allowances would have faced larger decreases in Pell 
Grant amounts and are more likely to have become ineligible for them. 
Table 4 shows the average decrease in Pell Grant awards for those who 
would have seen a decrease in their Pell Grant award or who would have 
become ineligible for them, by state.

Table 4: Percentage with a Pell Grant Decrease and Average Decrease by 
State, Including Those No Longer Eligible for the Award:

State: Alabama; 
Percentage with a decrease in Pell[A]: 38%; 
Average dollar decrease in Pell[B]: -$111.

State: Alaska; 
Percentage with a decrease in Pell[A]: 28%; 
Average dollar decrease in Pell[B]: -$83.

State: Arizona; 
Percentage with a decrease in Pell[A]: 34%; 
Average dollar decrease in Pell[B]: -$115.

State: Arkansas; 
Percentage with a decrease in Pell[A]: 42%; 
Average dollar decrease in Pell[B]: -$160.

State: California; 
Percentage with a decrease in Pell[A]: 29%; 
Average dollar decrease in Pell[B]: -$121.

State: Colorado; 
Percentage with a decrease in Pell[A]: 47%; 
Average dollar decrease in Pell[B]: -$156.

State: Connecticut; 
Percentage with a decrease in Pell[A]: 0% [C]; 
Average dollar decrease in Pell[B]: -$100.

State: Delaware; 
Percentage with a decrease in Pell[A]: 58%; 
Average dollar decrease in Pell[B]: -$194.

State: District of Columbia; 
Percentage with a decrease in Pell[A]: 39%; 
Average dollar decrease in Pell[B]: -$174.

State: Florida; 
Percentage with a decrease in Pell[A]: 40%; 
Average dollar decrease in Pell[B]: -$107.

State: Georgia; 
Percentage with a decrease in Pell[A]: 43%; 
Average dollar decrease in Pell[B]: -$104.

State: Hawaii; 
Percentage with a decrease in Pell[A]: 47%; 
Average dollar decrease in Pell[B]: -$216.

State: Idaho; 
Percentage with a decrease in Pell[A]: 42%; 
Average dollar decrease in Pell[B]: -$123.

State: Illinois; 
Percentage with a decrease in Pell[A]: 38%; 
Average dollar decrease in Pell[B]: -$118.

State: Indiana; 
Percentage with a decrease in Pell[A]: 46%; 
Average dollar decrease in Pell[B]: -$119.

State: Iowa; 
Percentage with a decrease in Pell[A]: 57%; 
Average dollar decrease in Pell[B]: -$224.

State: Kansas; 
Percentage with a decrease in Pell[A]: 53%; 
Average dollar decrease in Pell[B]: -$168.

State: Kentucky; 
Percentage with a decrease in Pell[A]: 41%; 
Average dollar decrease in Pell[B]: -$118.

State: Louisiana; 
Percentage with a decrease in Pell[A]: 35%; 
Average dollar decrease in Pell[B]: -$113.

State: Maine; 
Percentage with a decrease in Pell[A]: 54%; 
Average dollar decrease in Pell[B]: -$174.

State: Maryland; 
Percentage with a decrease in Pell[A]: 46%; 
Average dollar decrease in Pell[B]: -$112.

State: Massachusetts; 
Percentage with a decrease in Pell[A]: 48%; 
Average dollar decrease in Pell[B]: -$172.

State: Michigan; 
Percentage with a decrease in Pell[A]: 47%; 
Average dollar decrease in Pell[B]: -$199.

State: Minnesota; 
Percentage with a decrease in Pell[A]: 57%; 
Average dollar decrease in Pell[B]: -$181.

State: Mississippi; 
Percentage with a decrease in Pell[A]: 35%; 
Average dollar decrease in Pell[B]: -$120.

State: Missouri; 
Percentage with a decrease in Pell[A]: 40%; 
Average dollar decrease in Pell[B]: -$122.

State: Montana; 
Percentage with a decrease in Pell[A]: 48%; 
Average dollar decrease in Pell[B]: -$174.

State: Nebraska; 
Percentage with a decrease in Pell[A]: 54%; 
Average dollar decrease in Pell[B]: -$216.

State: Nevada; 
Percentage with a decrease in Pell[A]: 25%; 
Average dollar decrease in Pell[B]: -$80.

State: New Hampshire; 
Percentage with a decrease in Pell[A]: 51%; 
Average dollar decrease in Pell[B]: -$175.

State: New Jersey; 
Percentage with a decrease in Pell[A]: 26%; 
Average dollar decrease in Pell[B]: -$90.

State: New Mexico; 
Percentage with a decrease in Pell[A]: 42%; 
Average dollar decrease in Pell[B]: -$155.

State: New York; 
Percentage with a decrease in Pell[A]: 45%; 
Average dollar decrease in Pell[B]: -$175.

State: North Carolina; 
Percentage with a decrease in Pell[A]: 46%; 
Average dollar decrease in Pell[B]: -$162.

State: North Dakota; 
Percentage with a decrease in Pell[A]: 48%; 
Average dollar decrease in Pell[B]: -$229.

State: Ohio; 
Percentage with a decrease in Pell[A]: 46%; 
Average dollar decrease in Pell[B]: -$163.

State: Oklahoma; 
Percentage with a decrease in Pell[A]: 41%; 
Average dollar decrease in Pell[B]: -$115.

State: Oregon; 
Percentage with a decrease in Pell[A]: 44%; 
Average dollar decrease in Pell[B]: -$163.

State: Pennsylvania; 
Percentage with a decrease in Pell[A]: 46%; 
Average dollar decrease in Pell[B]: -$179.

State: Rhode Island; 
Percentage with a decrease in Pell[A]: 41%; 
Average dollar decrease in Pell[B]: -$162.

State: South Carolina; 
Percentage with a decrease in Pell[A]: 49%; 
Average dollar decrease in Pell[B]: -$194.

State: South Dakota; 
Percentage with a decrease in Pell[A]: 41%; 
Average dollar decrease in Pell[B]: -$176.

State: Tennessee; 
Percentage with a decrease in Pell[A]: 36%; 
Average dollar decrease in Pell[B]: -$110.

State: Texas; 
Percentage with a decrease in Pell[A]: 24%; 
Average dollar decrease in Pell[B]: -$83.

State: Utah; 
Percentage with a decrease in Pell[A]: 47%; 
Average dollar decrease in Pell[B]: -$148.

State: Vermont; 
Percentage with a decrease in Pell[A]: 49%; 
Average dollar decrease in Pell[B]: -$161.

State: Virginia; 
Percentage with a decrease in Pell[A]: 47%; 
Average dollar decrease in Pell[B]: -$170.

State: Washington; 
Percentage with a decrease in Pell[A]: 34%; 
Average dollar decrease in Pell[B]: -$115.

State: West Virginia; 
Percentage with a decrease in Pell[A]: 47%; 
Average dollar decrease in Pell[B]: -$168.

State: Wisconsin; 
Percentage with a decrease in Pell[A]: 54%; 
Average dollar decrease in Pell[B]: -$226.

State: Wyoming; 
Percentage with a decrease in Pell[A]: 40%; 
Average dollar decrease in Pell[B]: -$134.

Total USA; 
Percentage with a decrease in Pell[A]: 38%; 
Average dollar decrease in Pell[B]: -$144.

Source: GAO analysis.

[A] The sampling errors for Alaska, Delaware, District of Columbia, 
Vermont, and Wyoming vary from 5.2 percentage points (for Delaware) to 
5.6 percentage points (for Alaska). All others are at or below 5 
percentage points.

[B] The average reflects the reduction for those with a decrease as 
well as those who would have lost eligibility. The sampling errors for 
Alaska, Delaware, District of Columbia, Hawaii, Idaho, Maine, Montana, 
Nebraska, Nevada, North Dakota, New Hampshire, Rhode Island, South 
Dakota, Vermont, and Wyoming vary from slightly over 5 percent (for 
Nebraska) to 15 percent (for Alaska). All others are at or below 
5 percent.

[C] The actual figure for Connecticut is 0.1 percent, which rounds to 0 
percent for the purposes of this table.

[End of table]

Students with relatively higher household incomes would have been more 
likely to face a decrease and would have faced substantially greater 
decreases in their Pell Grant awards than those with lower household 
incomes.[Footnote 12] On the other hand, the impact of the proposed 
update would not seem to have varied much by whether students are 
financially independent of their families. Figures 3 and 4 show the 
proportion of those facing a decrease in Pell awards and the median 
amount of such decreases, by income group.

Figure 3: Percentage of Recipients with a Decrease in Pell Award:

[See PDF for image]

[End of figure]

Figure 4: Median Percentage Change in Amount of Pell Award for Those 
with a Decrease:

[See PDF for image]

Note: The sampling error for Independents earning $50,001 to $100,000 
is 7 percentage points. The error for all other categories is 5 
percentage points or less.

[End of figure]

Changes in EFCs Could Have Affected Stafford and PLUS Loan Awards:

Stafford and PLUS loans could have been affected due to EFC changes as 
well. Those applicants for whom a change in EFC would have resulted in 
a change in other aid received--including Pell, state, and 
institutional grants--would likely have seen a change in their federal 
loans. This is because federal loan amounts depend, in part, on the 
amount of other aid received. However, even if a change in EFC would 
not have changed other aid received,[Footnote 13] some students may 
still have seen a change in their subsidized Stafford loan 
amount.[Footnote 14] Among those currently receiving federal loans, we 
estimate that over 20 percent of subsidized and unsubsidized Stafford 
loan holders and about 85 percent of PLUS loan holders could have seen 
a change in their loan amount due to their EFC increase. (See app. I 
for an explanation of our estimation methodology.) Figure 5 shows the 
proportion of undergraduate Stafford loan recipients who could have had 
a change in their subsidized loan amounts, by income and dependency 
status. Our case studies of students at selected schools for whom a 
change in EFC would have resulted in a change in their federal loans 
show that as the EFC would have increased, subsidized loans would have 
decreased, and unsubsidized loans would have increased in response to 
the decreases in subsidized loans and other forms of financial aid. In 
addition, PLUS loans could have made up for these decreases as 
well.[Footnote 15]

Figure 5: Percentage of Students Likely to Have Had a Change in 
Subsidized Stafford Loans:

[See PDF for image]

[End of figure]

The Extent to Which the Proposed Update Would Have Affected the 
Allocation of Federal Campus-Based, State, and Institutional Need-Based 
Aid Would Likely Have Varied:

While changes in the EFC could have affected Campus-Based awards, 
institutions have some discretion in allocating federal Campus-Based 
aid; as a result, the effects of the proposed update would have likely 
varied across institutions. 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.

Institutions Have Discretion in Allocating Federal Campus-Based Aid, So 
the Effects of the Proposed Update Would Likely Have Varied:

Our case studies of students at the four selected schools show that 
even though the EFC for the majority of students would have changed, 
Campus-Based awards would tend not to have been affected by the 
proposed update. However, some students would have been affected, and 
the effect would have varied across schools, due in part to differences 
in award policies. Specifically, had the proposed allowance been 
implemented for 2004-2005, we estimate that less than 15 percent on 
average of case study students receiving Supplemental Educational 
Opportunity Grants and Work-Study aid would have faced a lower 
award.[Footnote 16] The effects would have varied significantly by 
school because of differences in schools' eligibility criteria for 
Campus-Based awards and the maximum awards provided. For example, 
eligibility for SEOG at one case study school is capped at an EFC of 
$3,850, whereas eligibility at another is at an EFC of $2,800, so a 
student whose EFC increased from $2,700 to $2,900 would have become 
ineligible for an SEOG at one school but not the other. As another 
example, one school offers $3,000 in Work-Study, and another limits the 
amount to $1,000, thereby demonstrating the different amounts involved. 
With regard to Perkins loans, we estimate that about 20 percent of 
students at the case study schools on average would have seen a 
decrease in their loan amount due to the proposed update. For students 
who see decreases in their Perkins loans, the decrease would have been 
about $1,200 on average but would have varied significantly by school 
due to differences in eligibility criteria. Table 5 shows the case 
study results of changes in these three school-administered federal 
programs.

Table 5: Estimated Impacts in Campus-Based Aid for Case Study Schools:

Form of Campus-Based aid: Supplemental Educational Opportunity Grants; 
Percentage with a decrease: 11%; 
Average dollar decrease for those affected: $500.

Form of Campus-Based aid: Work-Study; 
Percentage with a decrease: 14%; 
Average dollar decrease for those affected: $1,200.

Form of Campus-Based aid: Perkins Loans; 
Percentage with a decrease: 21%; 
Average dollar decrease for those affected: $1,200.

Source: GAO analysis of case study results.

Note: Dollar figures were rounded to the nearest $100. While an 
increase in EFC may result in decreases in Campus-Based awards for some 
recipients, the amount of such decreases would become available for 
redistribution to others.

[End of table]

The Effect of the Proposed Update on State Need-Based Aid Would Have 
Varied Based on State Policies and Changes in the Tax Allowance:

The majority of states use the federal need analysis methodology to 
allocate state need-based aid; as a result, the proposed update could 
have affected the amount of and the extent to which students receive 
state grants. The effect would have varied by state due to, among other 
factors, differences in changes to the tax allowance by state and 
differences in state award policies. In Wisconsin, for example, we 
estimate that over 50 percent of state aid award recipients in our case 
study would have seen a decrease in their state award. In contrast, in 
Tennessee, just over 10 percent of recipients in our case study would 
have seen a decrease in their state award. The average reduction for 
Wisconsin students would have been less than that for Tennessee 
students due to the differences in how the states compute awards: 
Wisconsin's computation decreases aid for each dollar increase in EFC 
by less than Tennessee's computation. (See table 6.):

Table 6: Estimated Impacts in State Need-Based Aid for Two States:

Wisconsin; 
Percentage with a lower amount: 53%; 
Average dollar decrease: -$115.

Tennessee; 
Percentage with a lower amount: 13%; 
Average dollar decrease: -$220.

Source: GAO analysis of case study results.

Note:Dollar figures are rounded to the nearest $5.

[End of table]

The Effect of the Proposed Update on Institutional Need-Based Aid Would 
Vary Based on Institutional Policies and Changes in the EFC and Other 
Factors:

As with state aid, the effect of the proposed update on the need-based 
aid provided by schools themselves would have varied significantly 
across schools due to, among other factors, differences in 
institutional award policies and changes in the EFC of students 
attending the institutions. However, the impact would be limited to 
schools that use the federal methodology to award aid. Since 
institutional aid may change as a result of both changes in the EFC and 
changes in other aid awarded, the effect of the increased EFC on 
institutional aid cannot be easily determined. For example, a school 
that bases its award solely on EFC might decrease its award as a result 
of an EFC increase, while a school that bases institutional aid on 
other aid awarded might increase the institutional award for some 
students. At the two private nonprofit schools included in our case 
studies,[Footnote 17] our results show that while more than 20 percent 
of students at each school would have faced a decrease in institutional 
need-based aid under the proposed allowance, more than 10 percent of 
students at these same schools would have received more institutional 
aid. Overall, case study students attending one private nonprofit 
school would have seen a decrease in institutional aid of almost $800 
on average, whereas students at the other school would have seen a 
decrease of over $425 on average.[Footnote 18]

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.

The Tax Data Used for the Allowance May Not Represent Those Taxes Paid 
by Financial Aid Applicants:

The tax allowance calculated by Education may not reflect the taxes 
paid by most financial aid applicants because it is drawn only from 
those who itemize deductions on federal income tax returns--filers who 
may be taxed at a different rate than those who do not itemize. Because 
many FAFSA applicants have lower income--and taxpayers in lower income 
groups tend not to itemize--many applicants may not itemize. 
Specifically, we estimate that about 63 percent of FAFSA applicants do 
not itemize.[Footnote 19] Further, itemizers and nonitemizers within 
the same gross income group may have different state and other tax 
rates. On the one hand, for example, itemizers may be more likely to 
own a home than nonitemizers and thus would have a higher state and 
local tax liability due to real estate taxes. Conversely, those who 
itemize on their federal tax return may be more likely to itemize on 
their state return--and therefore have larger deductions, a lower state 
taxable income, and thus a lower state income tax than those who do not 
itemize on their federal return.

Data Used for the Current Allowance No Longer Include State and Local 
Sales Taxes:

Although sales taxes were included in SOI data when Congress formally 
provided for a tax allowance in the 1986 HEA amendments,[Footnote 20] 
tax reform legislation subsequently disallowed the deduction of state 
and local sales taxes, effectively eliminating them from this dataset. 
Therefore, the data collected by SOI for tax year 1987 and beyond have 
not reflected all state and other taxes. Excluding sales taxes may 
cause the allowance to be lower than it otherwise would be, especially 
for students and families who reside in states where sales taxes 
compose a significant portion of state and local revenue. In October 
2004, Congress passed and the President signed the American Jobs 
Creation Act of 2004, which provides taxpayers who itemize deductions 
the choice of claiming a state and local tax deduction for either sales 
or income taxes, but only for tax years 2004 and 2005. As a result, the 
data collected by SOI for tax years 2004 and 2005 will likely include a 
mix of sales and income tax deductions reflecting the choices made by 
tax filers. Were these data used to update the allowance, the 
deductibility of sales taxes could increase the allowance for students 
and families, especially for those who reside in states where sales 
taxes compose a significant portion of state and local revenue. 
Regardless, the SOI data will not reflect both state and local sales 
and income taxes paid by individual taxpayers, as was the case prior to 
tax year 1987.

SOI Tax Data Are Several Years Older than Reported Income Information:

SOI data available for any given award year are several years older 
than the income information reported by aid applicants on the FAFSA. 
For example, in its proposed update for award year 2004-2005 that was 
published in May 2003, Education used 2000 SOI data, the most recent 
available at the time of its data request. Because applicants would 
report 2003 income information for award year 2004-2005, had the 
allowance been implemented, there would have been a mismatch of 3 years 
between the tax data and the income data.[Footnote 21] Table 7 shows 
when SOI publishes the state and local tax data after the end of a tax 
year. Some time lag between the end of a tax year and when SOI 
publishes data for that year is expected because returns are collected 
after the end of the tax year and because of the time needed for 
processing those returns. This time lag could be extended when there 
are unexpected difficulties in processing the returns. For example, 
2002 tax data were published after about 2 years, while 2000 and 2001 
were published in 15 months. Further, SOI officials reported that the 
agency may be unable to publish the 2003 tax tables because it has been 
experiencing technical problems in processing returns from that 
year.[Footnote 22]

Table 7: Publication Dates of SOI State and Local Tax Data:

Tax year: 1997; 
Publication date: June 2000; 
Elapsed time in months: 29.

Tax year: 1998; 
Publication date: February 2001; 
Elapsed time in months: 25.

Tax year: 1999; 
Publication date: July 2001; 
Elapsed time in months: 18.

Tax year: 2000; 
Publication date: April 2002; 
Elapsed time in months: 15.

Tax year: 2001; 
Publication date: April 2003; 
Elapsed time in months: 15.

Tax year: 2002; 
Publication date: October 2004; 
Elapsed time in months: 21. 

Source: Interviews with SOI officials and GAO analysis.

[End of table]

Education's Calculation of the Allowance Does Not Fully Consider 
Varying Tax Levels Paid by Different Income Groups:

Education's method of calculating the state and other tax allowance 
does not accurately capture the amount in taxes paid by students and 
families. While Education calculates an allowance for each of the two 
income categories established by Congress--those earning less than 
$15,000 and those earning $15,000 or more[Footnote 23]--its methodology 
does not take into account the varying level of taxes paid by these two 
groups. To determine the allowance for families with income less than 
$15,000, Education uses the total of state and local taxes paid by all 
tax itemizers regardless of income, despite the fact that the SOI data 
provide separate information for 12 different income groups.[Footnote 
24] Education's methodology likely overestimates the taxes paid by the 
lower-income group for two reasons. First, higher-income individuals 
generally face higher tax rates than lower-income individuals. Our 
analysis of 2001 SOI tax data shows that those with an income below 
$20,000 have a state and other tax liability of about 3 percent on 
average, while those with an income of $20,000 or more have an average 
5 percent tax liability. (See app. III.) Second, higher-income 
individuals are also more highly represented in the SOI data than 
lower-income individuals. For example, our analysis of the 2001 income 
distribution of financial aid applicants and of itemizers shows that 
about 35 percent of aid applicants have an income of less than $20,000, 
while less than 10 percent of itemizers have incomes in that range. 
(See table 8.):

Table 8: Comparison of Income Distribution in 2001 of FAFSA Applicants 
and Federal Income Tax Itemizers:

Percentage of FAFSA applicants; 
Dollars: 0 or Less: 2.51%; 
Dollars: 0.01 to 9,999: 15.44%; 
Dollars: 10,000 to 19,999: 16.76%; 
Dollars: 20,000 to 29,999: 15.50%; 
Dollars: 30,000 to 49,999: 18.60%; 
Dollars: 50,000 to 74,999: 13.95%; 
Dollars: 75,000 to 99,999: 8.40%; 
Dollars: 100,000 to 149,999: 6.45%; 
Dollars: 150,000 to 199,999: 1.51%; 
Dollars: 200,000 to 499,999: 0.81%; 
Dollars: 500,000 to 999,999: 0.06%; 
Dollars: 1 million or more: 0.01%.

Percentage of itemizers; 
Dollars: 0 or Less: 0.76%; 
Dollars: 0.01 to 9,999: 2.07%; 
Dollars: 10,000 to 19,999: 5.12%; 
Dollars: 20,000 to 29,999: 7.85%; 
Dollars: 30,000 to 49,999: 20.70%; 
Dollars: 50,000 to 74,999: 24.85%; 
Dollars: 75,000 to 99,999: 16.27%; 
Dollars: 100,000 to 149,999: 12.87%; 
Dollars: 150,000 to 199,999: 4.12%; 
Dollars: 200,000 to 499,999: 4.25%; 
Dollars: 500,000 to 999,999: 0.73%; 
Dollars: 1 million or more: 0.40%. 

Sources: GAO analysis of Education's 2002-2003 sample of FAFSA 
applicants and data from the Internal Revenue Service's Statistics of 
Income Division.

Note: The 12 income groups shown in this table are those used by SOI to 
display state and local tax information.

[End of table]

To calculate the allowance for the higher-income group, Education 
deducts a percentage point from the rate it calculates for the lower 
income group, a process that fails to account for the fact that higher-
income individuals face higher tax rates than lower-income individuals. 
Since the estimate for the lower-income group reflects more of the 
taxes paid by those with higher income, this methodology likely 
underestimates the taxes paid by this higher-income group.

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. Except for the 
first option, use of these strategies would require legislative 
changes. Also, these four strategies differ in their impacts on federal 
costs and on aid applicants.

Use SOI Data with a Revised Methodology:

The first strategy would be to make better use of SOI data to calculate 
the tax allowance, such as by modifying how the allowance is calculated 
and coordinating with SOI to ensure that the most recently available 
data are used. Education could use the SOI data on separate income 
bands to calculate the allowance for families rather than using the 
aggregate totals that SOI publishes.[Footnote 25] This would ensure 
that tax rates for different income bands are based on information more 
representative of those groups. With regard to coordinating with SOI, 
Education obtained SOI data for tax year 2000 for its update in 2003 
about 3 months before SOI published data for tax year 2001. Thus, when 
Education published its proposed update in 2003, it was not based on 
the most recently available data. Coordinating with SOI could reduce 
the mismatch between the year of the income data collected from 
applicants and the tax data collected from SOI from 3 to 2 years. 
Education officials acknowledged that in the future, they may have the 
flexibility to wait for more recently available SOI data and still meet 
their schedule for publishing notice of a proposed update to the state 
and other tax allowance. Appendix IV shows what the tax allowance would 
be under this strategy for each state.

Replace SOI Data with One of Several Other Datasets:

The second strategy would be to discontinue use of SOI tax data and to 
replace it with publicly available data, such as the following:

* Bureau of Economic Analysis Personal Income and U.S. Census Bureau 
Tax Tables:

* Description--The Bureau of Economic Analysis (BEA) annually publishes 
"Personal Income" tables, which cover aggregate household income, by 
state and are based on data from federal and state government programs, 
such as state unemployment insurance programs.[Footnote 26] The U.S. 
Census Bureau annually publishes "State Government Tax Collections" 
tables, which include overall state figures for individual income 
taxes, real estate taxes levied by states but not local governments, 
property taxes, and sales taxes for both individuals and businesses. 
This information is gathered by the U.S. Census Bureau through a mail 
canvass of appropriate state government offices that are directly 
involved with state-administered taxes; locally collected and retained 
tax amounts are not included in the survey. Both sets of tables and 
related documentation are available via the Internet.[Footnote 27]

* Use--Education could calculate the allowance by combining the 
information from both sets of tables. This approach has three potential 
advantages over using SOI data: The BEA data includes income from the 
entire population, including both filers and nonfilers, and the census 
data covers all tax filers instead of only itemizers, whereas SOI data 
only include itemizers, sales taxes are included in the tax collections 
tables--although they include taxes paid by businesses--and information 
is available 4 months after the end of a year.[Footnote 28] This allows 
income data reported by aid applicants and tax information 
corresponding to the prior year to be used to develop the allowance. A 
disadvantage of census data as compared with SOI data is that property 
tax information is more limited. Like the SOI data, the tables 
published by the BEA and the U.S. Census Bureau reflect aggregate 
measures of taxes and income and would not necessarily reflect the 
experiences of the typical family. Also, because the BEA and the U.S. 
Census Bureau report information in the aggregate--whereas SOI data are 
separated into different income bands--Education would need to make 
adjustments to differentiate tax rates by income.

* U.S. Census Bureau--Current Population Survey (CPS)--Annual Social 
and Economic Supplement (ASEC):

* Description--The Census Bureau annually publishes the Annual Social 
and Economic Supplement to the Current Population Survey, which 
includes income, estimated state income taxes, and estimated real 
estate taxes. The CPS household income information is gathered through 
a survey of 100,000 households. State income tax information is 
estimated by the U.S. Census Bureau based on reported income and filing 
status information and review of state income tax regulations. Real 
estate tax information is generated in a similar manner. Household 
characteristics are matched to the Census Bureau's American Housing 
Survey to provide simulated real estate and property taxes. The CPS 
dataset and related documentation are available via the Internet.

* Use--Education could use CPS household-level data to generate tax 
allowances by income. An advantage of using the CPS is that it allows 
Education to estimate the taxes paid by the typical family rather than 
the taxes paid in aggregate, and CPS data also reflect the entire 
population--itemizers, nonitemizers, and nonfilers. Two disadvantages 
are that although we have assessed the information collected by the 
U.S. Census Bureau in generating the CPS to be reliable, the CPS tax 
information is not based on actual taxes paid but rather on U.S. Census 
Bureau tax models and is therefore subject to error and that the CPS 
does not include sales taxes. In addition, CPS data are available only 
somewhat sooner than SOI data, and because of the size of its sample, a 
3-year average must be taken to generate reliable state-level 
information.

* Institute on Taxation and Economic Policy (ITEP)--Who Pays? A 
Distributional Analysis of the Tax Systems in All 50 States:

* Description--ITEP is a nonprofit research and education organization 
that has published two reports on state taxes, one in 1996 and one in 
2003, both entitled Who Pays? A Distributional Analysis of the Tax 
Systems in All 50 States. According to an ITEP official, ITEP plans to 
publish future updates every 3 years. These reports present estimated 
state information on income, real estate, property, and sales tax 
rates. The ITEP state tax tables are based on the 1988 public-use SOI 
sample of 365,000 federal tax returns, stratified so that they are 
representative at the state level and aged to reflect the most recent 
statistics on general population and tax filer characteristics 
published by the IRS and the U.S. Census Bureau. These returns and 
state tax regulations are analyzed to estimate state, local, real 
estate, property, and sales taxes paid based on household 
characteristics. Adjustments are made to reflect potential nonfilers as 
well. These reports are available via the Internet.

* Use--Were Education to determine ITEP data reliable, Education could 
use the ITEP tax figures to generate tax allowances by income 
band.[Footnote 29] Two advantages of ITEP data are that they include 
sales taxes and that an adjustment is made to estimate what nonfilers 
pay in sales taxes, whereas SOI data do not reflect sales taxes and do 
not account for nonfilers. A disadvantage is that ITEP's income bands 
are not consistent across states and do not match those established by 
Congress.

While these publications are publicly available, Education could also 
contract with any of these organizations to customize a dataset for the 
purpose of developing the tax allowance.

Apply a Standard Allowance to All Aid Applicants, Regardless of State 
of Residence:

The third strategy would be to apply the same allowance to all aid 
applicants, regardless of their state of residence. This would involve 
creating a standard allowance based on the CPS that reflects the median 
taxes paid by all households.[Footnote 30] This strategy would have the 
advantage of simplifying the need analysis methodology, but a 
disadvantage is that it would not account for the variation in taxes 
paid across states or income bands. For example, using a standard 
allowance may on average underestimate the taxes paid by those from 
high-tax states but may overestimate the taxes paid by those from low-
tax states.

Collect Tax Information Directly from Aid Applicants:

The fourth strategy would be to collect tax information directly from 
aid applicants by adding questions to the financial aid application 
form. Under this strategy, applicants would report state and other 
taxes along with their federal taxes paid, information that could be 
used to reduce available household financial resources directly, making 
an allowance unnecessary. While documentation would likely be available 
for aid applicants to use in reporting their state income and property 
taxes, documentation concerning sales taxes may not be as readily 
available. Independent of this report, the Advisory Committee on 
Student Financial Assistance is currently assessing this strategy in 
the context of simplifying the financial aid application process and is 
expected to release its report in early 2005. One of the options 
considered by the Advisory Committee on Student Financial Assistance is 
to have the FAFSA questions tailored to the applicant, where applicants 
from different states (and with different financial circumstances) 
would answer different questions, and questions not relevant to an 
applicant would not be asked. Education officials expressed concern 
with this strategy because it might add to the administrative burden of 
students, schools, and Education. For example, Education's current 
guidance directs applicants to specific line items from their federal 
tax returns for their federal taxes paid, and it would be difficult to 
do the same with state taxes, given the variations among state tax 
forms. Because institutions are required, on a limited basis, to verify 
information reported by students and families on the FAFSA, Education 
officials noted that having students and families report additional 
information on the FAFSA could increase the burden on institutions of 
verifying such information.

Strategies Would Differ in Terms of Their Effects on Federal Student 
Aid Expenditures and Financial Aid Applicants:

These various strategies would have differed in their impacts on 
federal expenditures and on financial aid applicants if they were 
applied to the 2004-2005 award year.[Footnote 31] First, each strategy 
would have changed federal expenditures for grant and loan programs, 
for acquiring data, and for other administrative activities. For 
example, we estimate that Pell Grant program expenditures could have 
increased by as much as $400 million or decreased by as much as $200 
million were the different options adopted and used to allocate aid for 
2004-2005. Second, each strategy would have affected the amount of 
federal, state, and institutional aid that financial aid applicants 
receive and the number of applicants receiving such aid. For Pell 
Grants, using a standard allowance of 4 percent would have caused about 
83,000 recipients to become ineligible for the program, but the other 
options would have affected fewer recipients. Table 9 shows the 
potential merits of each option in terms of federal expenditures for 
the Pell Grant program and the impact on expected family contribution, 
and table 10[Footnote 32] shows the extent to which the tax allowances 
calculated under each strategy would accurately reflect state and local 
taxes paid by students and families.

Table 9: Framework for Evaluating Options Identified to Change the 
State and Other Tax Allowance Relative to the Current Allowance in Use:

Change in federal Pell Grant expenditure[G]; 
Proposed 2004- 2005 tables: - 0.3 billion; 
Strategy I: SOI with revised methodology[A]: + 0.1 billion; 
Strategy II: Alternative data sources: BEA/Census[B]: + 0.2 billion; 
Strategy II: Alternative data sources: CPS (ASEC)[C]: - 0.2 billion; 
Strategy II: Alternative data sources: ITEP[D]: + 0.4 billion; 
Strategy III: Standard allowance (4%)[E]: - 0.2 billion; 
Add question to FAFSA[F]: - -.

Percentage of students facing a reduction in Pell Grant award; 
Proposed 2004-2005 tables: 38; 
Strategy I: SOI with revised methodology[A]: 19; 
Strategy II: Alternative data sources: BEA/Census[B]: 11; 
Strategy II: Alternative data sources: CPS (ASEC)[C]: 32; 
Strategy II: Alternative data sources: ITEP[D]: 2; 
Strategy III: Standard allowance (4%)[E]: 29; 
Add question to FAFSA[F]: --.

Percentage of students facing a reduction in Pell Grant award: 
Percentage retaining eligibility; 
Proposed 2004-2005 tables: 36; 
Strategy I: SOI with revised methodology[A]: 19; 
Strategy II: Alternative data sources: BEA/Census[B]: 11; 
Strategy II: Alternative data sources: CPS (ASEC)[C]: 31; 
Strategy II: Alternative data sources: ITEP[D]: 2; 
Strategy III: Standard allowance (4%)[E]: 27; 
Add question to FAFSA[F]: --.

Percentage of students facing a reduction in Pell Grant award: 
Percentage not retaining eligibility (number of students affected)[H]; 
Proposed 2004-2005 tables: 2; (92,000); 
Strategy I: SOI with revised methodology[A]: <1; (26,000); 
Strategy II: Alternative data sources: BEA/Census[B]: <1; (22,000); 
Strategy II: Alternative data sources: CPS (ASEC)[C]: 1; (62,000); 
Strategy II: Alternative data sources: ITEP[D]: <1; (1,000); 
Strategy III: Standard allowance (4%)[E]: 2; (83,000); 
Add question to FAFSA[F]: --.

Average dollar change in Pell Grant award for those with a decrease[I]; 
Proposed 2004-2005 tables: - 144; 
Strategy I: SOI with revised methodology[A]: - 103; 
Strategy II: Alternative data sources: BEA/Census[B]: - 135; 
Strategy II: Alternative data sources: CPS (ASEC)[C]: - 118; 
Strategy II: Alternative data sources: ITEP[D]: - 90; 
Strategy III: Standard allowance (4%)[E]: - 177; 
Add question to FAFSA[F]: --.

Change in expected family contribution[J]; 
Proposed 2004-2005 tables: + 3.5 billion; 
Strategy I: SOI with revised methodology[A]: + 0.4 billion; 
Strategy II: Alternative data sources: BEA/Census[B]: - 0.9 billion; 
Strategy II: Alternative data sources: CPS (ASEC)[C]: + 2.3 billion; 
Strategy II: Alternative data sources: ITEP[D]: - 3.9 billion; 
Strategy III: Standard allowance (4%)[E]: + 2.8 billion; 
Add question to FAFSA[F]: --.

Percentage of students facing an increase in EFC; 
Proposed 2004-2005 tables: 62; 
Strategy I: SOI with revised methodology[A]: 38; 
Strategy II: Alternative data sources: BEA/Census[B]: 22; 
Strategy II: Alternative data sources: CPS (ASEC)[C]: 59; 
Strategy II: Alternative data sources: ITEP[D]: 4; 
Strategy III: Standard allowance (4%)[E]: 48; 
Add question to FAFSA[F]: --.

Average dollar change in EFC for those with an increase[K]; 
Proposed 2004-2005 tables: 493; 
Strategy I: SOI with revised methodology[A]: 295; 
Strategy II: Alternative data sources: BEA/Census[B]: 471; 
Strategy II: Alternative data sources: CPS (ASEC)[C]: 338; 
Strategy II: Alternative data sources: ITEP[D]: 242; 
Strategy III: Standard allowance (4%)[E]: 616; 
Add question to FAFSA[F]: --.

Source: GAO analysis.

Notes:All alternatives are based on what information would have been 
available to Education as of January of 2003 for publication in the May 
2003 Federal Register.

[A] The "SOI with Revised Methodology" figures are based on 2000 SOI 
data and were calculated (by income band) by dividing the aggregate 
total taxes paid deduction by the aggregate adjusted gross income for 
families and by dividing the aggregate state and local income taxes by 
the aggregate adjusted gross income for individuals.

[B] The "BEA/Census" figures are based on 2001 BEA and U.S. Census data 
and were calculated by dividing the sum of property taxes, general 
sales and gross receipts, and individual income taxes from the U.S. 
Census by personal income from the BEA for families and by dividing the 
sum of general sales and gross receipts and individual income taxes 
from the U.S. Census by personal income from the BEA for individuals. 
Note that BEA and U.S. Census data are not provided separately by 
income band.

[C] The "CPS" figures were generated based on a 3-year average of the 
median effective tax rate, by state, across 1999, 2000, and 2001 CPS 
data, as prescribed by CPS documentation for the study of state-based 
information in the CPS. The median effective tax rate reflects the 
median across households of the sum of state income taxes paid and 
household property taxes divided by total personal income for families 
and of state income taxes paid divided by total personal income for 
individuals.

[D] The "ITEP" figures are based on ITEP's analysis of tax data and 
were calculated for each income band by summing general sales tax 
rates, other sales and excise tax rates, property tax rates, and 
personal income tax rates for families and by summing general sales tax 
rates, other sales and excise tax rates, and personal income tax rates 
for individuals. As explained in appendix I, we were unable to 
determine the reliability of the ITEP data.

[E] The standard allowance of 4 percent is based on an estimate of the 
median household across states using CPS data.

[F] The impacts of adding a question to the FAFSA could not be 
estimated.

[G] The estimated expenditure of the Pell Program in award year 2004-
2005 is about $13 billion under the current allowance.

[H] The sampling errors for those not retaining eligibility for SOI 
(Revised), Census/BEA, and ITEP range from 6 percent (SOI) to 27 
percent (ITEP). All others have a sampling error of 5 percent or less. 
Figures for the number of students not retaining eligibility are 
rounded to the nearest 1,000.

[I] The estimated average Pell award for award year 2004-2005 is about 
$2,440 under the current allowance.

[J] The estimated sum of EFCs across all FAFSA applicants in award year 
2004-2005 is about $75 billion under the current allowance.

[K] The estimated average EFC in award year 2004-2005 is about $6,450 
under the current allowance.

[End of table]

Figure 6: Framework for Evaluating the Alternative Datasets Identified 
Relative to SOI Data:

[See PDF for image]

Notes: The data quality categories are based upon those described in 
the Office of Management and Budget (OMB) guidelines for assessing data 
quality. Please see OMB document "Statistical Policy Working Paper 31 - 
Measuring and Reporting Sources of Error in Surveys.":

[A] The assessment of "timeliness" is based on whether Education would 
be able to base its published allowance tables on more recent data than 
under SOI or not.

[B] For years in which ITEP publishes updated tax rates, Education 
would be able to use more recent data in calculating the allowance than 
SOI data would allow, but in other years ITEP data would not yield an 
advantage over SOI data and may in fact be based on data older than 
what SOI would provide.

[C] The assessment of "data accuracy" is based on whether the allowance 
for state, local, property, real estate, and other taxes is based on a 
population more representative of financial aid applicants and whether 
a current reliability assessment is available for review.

[D] The CPS property tax data are based on a Census model. Since this 
model has not been assessed for accuracy since 1992, the accuracy of 
the CPS tax data is undetermined. If the data proved to be accurate, 
then this data source would be an improvement compared with SOI data.

[E] As explained in appendix I, we were unable to determine the 
reliability of the ITEP data.

[F] The assessment of "relevance" is based on whether state, local, and 
sales taxes are included in the calculation.

[G] Because property taxes reported by the U.S. Census Bureau are 
limited and because sales taxes include both those paid by individuals 
and corporations, we were unable to determine the relevance of U.S. 
Census Bureau tax data.

[H] The assessment of "completeness" is based on whether data are 
provided on an individual basis and whether the appropriate income 
bands are represented.

[End of figure]

Conclusions:

Millions of students rely on federal, state, and institutional aid 
every year to help pay for their postsecondary education. These awards 
are distributed to students and their families based in part on 
estimates about what they can afford to pay out of their own pockets. 
Yet if these estimates are considerably incorrect, the awards may not 
be distributed as equitably as they could be. Because state and local 
tax rates may have changed over the past decade, and Education has 
updated the allowance only once and given the limited way in which 
Education uses SOI data, it is very likely that the federal government 
may have been making an allowance for more taxes than were actually 
paid, or in other cases, undercompensating for taxes that were paid. 
Although Education has taken some recent steps to update the allowance, 
these efforts have not been successful. An inaccurate allowance could 
yield adverse effects for the federal government and students and their 
families. On the one hand, students and families could erroneously gain 
eligibility, which would cause federal funds to be misdirected. On the 
other, students and families could inappropriately lose eligibility for 
aid. Because state and institutional aid programs also make use of the 
federal need analysis methodology, such losses may be compounded for 
students and families.

Recommendations for Executive Action:

To ensure that relevant tax data from the Statistics of Income are 
requested systematically and that the most recent data are obtained, we 
recommend, in the short run, that the Secretary of Education develop 
formalized updating procedures and document such procedures in writing. 
Such procedures could include (1) making annual written requests to the 
Internal Revenue Service for state and local tax information and 
documenting those requests and (2) coordinating with the IRS to make 
sure Education knows when SOI data will be publicly released and to 
ensure that the most currently available data are used.

To better capture the amount of taxes paid by students and families, we 
also recommend, in the short run, that Education revise its methodology 
for calculating the state and other tax allowance. Revisions could 
include using tax figures reflective of the different income groups to 
calculate the allowance rather than figures based on all itemized tax 
returns.

To determine whether alternative methodologies and data would better 
enable Education to annually update the allowance, we recommend, in the 
longer run, that Education assess the cost and reliability of available 
data, including the alternative data sources identified in this report. 
If Education determines that statutory changes are needed to implement 
more effective alternatives, it should seek such changes from Congress.

Agency Comments:

In written comments on our draft report Education generally agreed with 
our reported findings and recommendations. In its letter, Education 
offered a number of suggestions and observations. Education requested 
that we refer to the state tax rates as "'proposed state tax rates 
under the HEA' in the final report rather than using the label 
'proposed state tax rates of the Department,'" because it believes it 
does not have the authority to "ignore the clear statutory requirement 
to perform the update." Because we explain in our report that the 
Congress incorporated the state and other tax allowance in the HEA and 
required Education to annually revise the allowance, we do not believe 
our characterization of the state tax rates leads to any confusion. 
Accordingly, we did not change how we refer to the state tax rates.

Education also commented on the strategies we identified that address 
some of the limitations associated with the tax allowance and noted 
that it would review each of the alternative data sources discussed in 
our report that could be used to substitute for the SOI file data, as 
we recommended. Education noted that it believed all four strategies we 
identified in our report would likely require congressional action. We 
agree that those strategies that involve using alternative data sources 
to substitute for the SOI file data would require legislative changes, 
as we noted in our report. We also agree with Education's comment that 
using income bands other than those specified by Congress would likely 
require legislative change. We disagree that congressional action is 
required for Education to continue to use SOI data but with a revised 
method for calculating the allowance--one of the strategies identified 
in our report. While the HEA directs Education to use the SOI file to 
revise the allowance, and establishes the income categories for which 
the allowance should be calculated for parents of dependent students 
and independent students with dependents other than a spouse (which we 
define as "families" in this report), the HEA does not specify a 
particular method to calculate the allowance. Therefore, we believe 
that Education could revise its methodology, as we recommended, without 
congressional action. Education also echoed some of the disadvantages 
we discussed in our report associated with applying the same allowance 
to all applicants and collecting tax information directly from aid 
applicants by adding questions to the application form.

Education also stated that it generally agreed with our assessment of 
the impact of the revised allowance tables on Pell Grant recipients but 
noted that we could have provided additional information concerning 
applicants who would no longer have been eligible for Pell Grants. As 
we stated in the report, these applicants typically would no longer 
have received the minimum Pell Grant award, reflecting that such 
applicants typically have higher incomes than those who would have 
continued to receive Pell Grants. Additionally, we show that Pell Grant 
recipients with household income over $25,000 would have been 
significantly more likely to have either received less in Pell Grants 
or become ineligible for them. Education also suggested in its letter 
that it would be helpful to clarify that a change in EFC would not 
necessarily cause an identical change to a student's award amount with 
respect to federal student loans, Campus-Based aid, and state and 
institutional financial aid programs: "in other words," the department 
noted, "include a brief explanation of potential interactive effects." 
As noted in our report, our case studies of students at selected 
schools showed that as the EFC would have increased, subsidized loans 
would have decreased, and unsubsidized loans would have increased in 
response to the decreases in other forms of financial aid. In response 
to Education's comment, however, we added information concerning how 
EFC changes would have affected need-based aid overall with respect to 
our case study schools. Education also noted that it understood why we 
chose to analyze the effects of the proposed 2003 update had it been 
implemented in 2004-2005. (Soon after we had submitted our draft report 
to Education for comment, the department published, on December 23, 
2004, an updated allowance for the 2005-2006 award year.) In its 
letter, Education includes the results from its preliminary analysis of 
the effects of the 2004 update for 2005-2006. Education's results are 
generally consistent with the results from our analysis. We did not, 
however, verify the accuracy of Education's estimates.

Education also expressed concern that we misinterpreted the 
department's intentions with respect to updating the allowance for the 
2005-2006 award year. While we understood the department's intentions, 
we made technical clarifications to the report to address Education's 
concern.

With respect to our recommendation that the department establish formal 
procedures to ensure that it annually requests and obtains the most 
current tax data from the IRS, Education stated that it had such 
procedures in place as "evidenced by the update published in the spring 
of 2003." However, as noted in our report, Education could not provide 
us with written procedures guiding staff on the routine steps necessary 
to update the tax allowance or to identify what data would be needed to 
update the allowance. In response to the department's comment, we 
clarified that our recommendation included documenting formalized 
procedures in writing. Lastly, Education provided technical comments, 
which we incorporated as appropriate. Education's written comments 
appear in appendix V.

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 7 days 
from its date. At that time we will send copies of this report to the 
Secretary of Education, appropriate congressional committees, and other 
interested parties. In addition, the report will be available at no 
charge on GAO's Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call 
me on (202) 512-8403 or Jeff Appel, Assistant Director, on (202) 512-
9915. You may also reach us by e-mail at AshbyC@gao.gov or 
AppelC@gao.gov. Other contacts and staff acknowledgments are listed in 
appendix VI.

Signed by: 

Cornelia M. Ashby: 
Director, Education, Workforce, and Income Security Issues:

Congressional Requesters:

The Honorable Edward M. Kennedy: 
Ranking Minority Member: 
Committee on Health, Education, Labor, and Pensions: 
United States Senate:

The Honorable Christopher J. Dodd: 
United States Senate:

The Honorable Tom Harkin: 
United States Senate:

The Honorable Barbara A. Mikulski: 
United States Senate:

The Honorable James M. Jeffords: 
United States Senate:

The Honorable Jeff Bingaman: 
United States Senate:

The Honorable Patty Murray: 
United States Senate:

The Honorable Jack Reed: 
United States Senate:

The Honorable Hillary Rodham Clinton: 
United States Senate:

The Honorable Jon S. Corzine: 
United States Senate:

[End of section]

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.

To carry out the objectives, we analyzed Education's 2002-2003 aid 
applicant sample file and Education's Cost Estimation and Analysis 
Division's Statistical Abstract (CEAD STAB), the most current versions 
available at the time of our review. We worked closely with financial 
aid officials from two states--Tennessee and Wisconsin--and four 
colleges--one public and one private nonprofit school in each of the 
two states. We interviewed officials from the U.S. Department of 
Education, Advisory Committee on Student Financial Assistance (ACSFA), 
and U.S. Department of the Treasury's Internal Revenue Service-
Statistics of Income (SOI) Division--as well as officials from the 
states and schools we contacted. We also interviewed officials from 
associations representing institutions, including the American 
Association of State Colleges and Universities (AASCU), National 
Association of Independent Colleges and Universities (NAICU) and the 
College Board, as well as other experts. In addition, we reviewed and 
analyzed the statutory requirements and legislative history of the 
state and other tax allowance. Furthermore, we reviewed and analyzed 
state and other tax data from SOI, Bureau of the Census, Bureau of 
Economic Analysis, and the Institute on Taxation and Economic Policy. 
We performed our work in accordance with generally accepted government 
auditing standards between October 2003 and November 2004.

Datasets:

In estimating how Education's proposed update would affect students' 
and their families' eligibility for financial assistance, we analyzed 
two datasets. We used Education's aid applicant sample file from the 
2002-2003 award year to estimate changes in (a) expected family 
contribution and Pell awards nationally, (b) state need-based aid for 
Wisconsin and Tennessee, (c) Supplemental Educational Opportunity 
Grants (SEOG), Perkins loans and Work-Study, and (d) institutional 
need-based aid for the four institutions. This dataset is a randomly 
drawn, nationally representative sample of over 450,000 aid applicants. 
To estimate the percentage of Stafford subsidized and unsubsidized and 
Parent Loans for Undergraduate Students (PLUS) recipients that are 
likely to have their loan award changed, we used Education's CEAD STAB. 
CEAD STAB is a randomly drawn, representative sample of 1.8 million 
borrowers (about 7 million loans) from the National Student Loan Data 
System (NSLDS), which is a comprehensive national database of Title IV 
loan and grant recipients. Our analysis of the CEAD STAB focused on 
Stafford subsidized and unsubsidized and PLUS borrowers who originated 
loans from July 2002 to June 2004. We assessed the reliability of both 
datasets by conducting electronic testing of key variables for obvious 
problems in accuracy and completeness, interviewing appropriate 
Education officials, and reviewing related documentation. Based on 
these tests and reviews, we determined that the samples were 
sufficiently reliable for our purposes.

Estimation Methodology:

EFC and Pell Grants:

To estimate changes in expected family contribution (EFC) and Pell 
Grant awards nationally, our analysis followed Education's approach to 
estimating EFC and Pell awards in the 2004-2005 award year. To do this, 
the 2002-2003 aid applicant sample file was converted to better reflect 
aid applicants in the 2004-2005 award year by adjusting all income and 
asset amounts for inflation and changing the weights assigned to each 
sample applicant so that the sample takes into account projected 
changes in the number and type of applicants. We reviewed Education's 
approach to converting the sample file to the 2004-2005 award year and 
calculating EFC and Pell awards for accuracy and interviewed Education 
officials about the approach's reliability. We determined that 
Education's approach was sufficiently reliable for our purposes.

EFC and Pell awards in the 2004-2005 award year were estimated for each 
sample aid applicant using both the current 2004-2005 state and other 
tax allowance, which is based on 1988 SOI data, and the proposed 2004-
2005 state and other tax allowance, which is based on 2000 SOI data. To 
assess the impact of the update on EFC and Pell Grant awards, these 
amounts were compared. We also examined how these impacts vary by 
family income, dependency status, and state of residence. We designated 
student state of residence as the state of residence of the parent(s) 
when they differed.

Stafford and PLUS Loans:

Our methodology for obtaining national-level estimates on the 
percentage of loan recipients who could have had their loan award 
affected involved the steps listed below.

1. Using the aid applicant sample file, we estimated the percentage of 
applicants in award year 2004-2005 who would have had their EFC changed 
because of the proposed update for each combination of dependency 
status, state of residence, and specified income group.

2. We used the resulting percentages to estimate the likelihood that 
each CEAD-STAB sample borrower's EFC would have been changed due to the 
update.

3. We estimated the likelihood that each individual borrower would have 
had his or her Stafford subsidized and unsubsidized loan award affected 
as equal to this percentage if the recipient borrowed less than the 
maximum allowed by law. We estimated as zero the likelihood that each 
individual borrower would have had his or her Stafford subsidized and 
unsubsidized loan award affected if the recipient borrowed the maximum 
allowed by law.

4. For PLUS recipients, the likelihood that each recipient would have 
had his or her aid award affected was estimated as equal to the 
percentage who would have had their EFC changed because of the proposed 
update that we estimated from our analysis of the aid applicant sample 
file.

Estimating whether students would have seen a change in their loan 
amounts because of the proposed update is complex largely because these 
loan amounts depend on the extent to which all other financial aid 
awards--including Campus-Based, state, and institutional aid--would 
have been affected, and no complete information is available on the 
specific awarding policies of all states and institutions for these 
types of aid. To compensate for this lack of information, we made 
several assumptions regarding how Stafford and PLUS loans would have 
been affected, which may either over-or underestimate what the actual 
changes would have been. However, these assumptions may somewhat offset 
each other, and we believe our estimates are informative of the 
percentage of borrowers whose loan awards could have been affected.

Stafford and PLUS loan estimates may be biased upward for the following 
reasons. Stafford loan estimates may be biased upward because we 
assumed that all borrowers who currently receive less than the maximum 
allowed and whose EFC would have changed under the proposed update 
would have had their loan award amount changed as well, yet this is not 
always the case. For example, because the subsidized loan award equals 
the cost of attendance less EFC and other financial aid awards, subject 
to the loan limits, subsidized Stafford loan amounts would not have 
been affected if the decrease in other financial aid awards exactly 
offset the EFC increase resulting from the proposed update. Because the 
unsubsidized Stafford loan award equals the cost of attendance less 
other financial aid awards (including subsidized loan awards), subject 
to the loan limits, unsubsidized loan amounts would not have been 
affected if other aid awards did not change because of the 
update.[Footnote 33] Furthermore, we assumed that all PLUS borrowers 
whose EFC would have changed because of the update would have had their 
loan award affected, but, similar to unsubsidized Stafford loans, this 
would not have occurred had other aid awards not changed because of the 
update. It is difficult to know the size of this upward bias because 
the dataset does not include information on the extent to which other 
financial aid awards would have been affected.

Our estimates for Stafford loans may be biased downward because we 
assumed that all borrowers who receive the maximum allowed would not 
have had their loan award affected, which also is not always the case. 
For unsubsidized Stafford loans, this bias appears to be very small 
because unsubsidized loans would only decrease if students have a 
cumulative net increase in their other financial aid awards, which case 
studies and expert interviews show to be unlikely. For subsidized 
Stafford loans, this bias may be larger, yet we believe that it is 
still relatively small. Subsidized Stafford loan awards that are 
currently at the maximum would only decrease when the EFC plus other 
aid increase enough to cause the student to lose eligibility for the 
maximum loan amount, and analysis of the National Postsecondary Student 
Aid Survey (NPSAS) shows that most students are not likely to face this 
circumstance.[Footnote 34]

We also assumed that the borrowers in award year 2004-2005, the year of 
the proposed update, are from the same states, have the same incomes, 
and have the same costs of attendance as the most recent CEAD-STAB 
borrowers, and the extent to which they differ would cause our 
estimates to be less accurate. For example, if we underestimate the 
number of students in likely high-impact states, our estimates would 
likely underestimate the overall proportion of students who could face 
a change in their loan award.

To complement this national-level loan analysis, we determined the 
percentage of students at our case study schools who would have 
experienced a change in their subsidized and unsubsidized loans, along 
with the size and direction of the changes. We could not determine this 
information for PLUS loans for our case study schools since the schools 
did not package PLUS loans for the purpose of estimating potential 
impacts of the proposed update.

State and Institutional Need-Based Aid and Campus-Based Aid:

To provide illustrative examples of how the proposed update can affect 
state and institutional need-based aid and Campus-Based aid, we worked 
closely with two states--Wisconsin and Tennessee--and four colleges, 
including one public and one private nonprofit institution in each of 
the two states. We chose these states because they use the Higher 
Education Act (HEA) federal methodology to disburse state aid, are 
geographically dispersed, and represent high-and low-impact states, 
based on an index we calculated for the following components: (1) the 
average EFC change resulting from Education's update, (2) the 
percentage of full-time undergraduates receiving grant aid, and (3) the 
average state need-based grant per undergraduate. We averaged the three 
components to generate an index of the overall average impact. The 44 
states and the District of Columbia that use the federal methodology 
were then sorted in descending index order and separated into three 
groups of 15, with the highest index group being designated "high-
impact states," the next group being designated "medium-impact states," 
and the last group being designated "low-impact states." For the 
components and index value we estimated for each state, see appendix 
II. The institutions we chose include the University of Wisconsin at 
Madison, Wisconsin's Marian College, Middle Tennessee State University, 
and Tennessee's Carson-Newman College. We chose schools within the two 
selected states based on the following criteria: (1) use of the HEA 
federal methodology to disburse aid, (2) participation in the federal 
Campus-Based aid program, (3) provision of institutional need-based 
aid,[Footnote 35] (4) number of students with household income between 
$25,000 and $75,000, and (5) willingness and capacity to calculate 
estimated impacts on need-based aid.

For each of these two states and four institutions, we generated a 
subsample from Education's aid applicant sample file that reflects the 
students who attended school in these two states and the students who 
attended school at the four institutions in the 2002-2003 award year. 
For each student, the dataset contained information on the student's 
estimated EFC under the current and proposed allowance and the 
student's dependency status. Using these subsamples, examples of the 
effect of the proposed update on state, institutional, and Campus-Based 
aid were calculated. While the aid applicant sample file is a 
nationally representative sample, it may not be representative of the 
aid applicants who attend school in these specific states or at these 
specific institutions. The subsamples had the following number of 
observations:

* Wisconsin: 7,469,

* Tennessee: 8,385,

* University of Wisconsin at Madison: 580,

* Wisconsin's Marian College: 54,

* Middle Tennessee State University: 533, and:

* Tennessee's Carson-Newman College: 62.

We estimated the impacts on Wisconsin's state need-based aid using the 
Wisconsin subsample, along with the state aid award methodologies 
provided to us by the Wisconsin Higher Educational Aids Board. The 
state need-based aid programs that we analyzed were the Wisconsin 
Higher Education Grant and the Wisconsin Tuition Grant programs.

The Tennessee Student Assistance Corporation, the agency responsible 
for determining state aid in Tennessee, performed its own analysis of 
the impact on state need-based aid using the Tennessee subsample and 
then shared the results with us. The aid program analyzed was the 
Tennessee Student Assistance Award. To verify the validity of the 
Tennessee aid determination, we verified that the aid awarded fell 
within the maximum award limit and that those within an EFC range 
received similar award amounts; that is, that those with a lower EFC 
received a higher award amount.

To estimate the impacts on institutional need-based and Campus-Based 
aid, financial aid directors or financial aid specialists at each of 
the four selected schools calculated the impacts using their relevant 
subsample. While the focus was on need-based institutional aid and 
Campus-Based aid, three institutions also calculated the effect on 
Stafford loans. To check the validity of these simulations, we checked 
(1) the order in which different forms of aid were awarded to see if 
they were consistent with common aid packaging protocols, (2) the 
formulas used to calculate remaining need at each stage of the award 
packaging process to make sure they were accurate, (3) the range of aid 
levels awarded to make sure they fell within bounds defined by 
regulation, (4) the total aid awarded to make sure it did not exceed 
financial need, and (5) the relationship between aid awarded and EFC 
levels to make sure that those with lower EFCs were provided more aid 
than those with higher EFCs.

Calculation of Estimated Tax Rates from Alternative Data Sources:

Methodology:

For the purposes of this report, we define "families" to include 
parents of dependent children (students) and independent students with 
dependents other than a spouse, and we define "individuals" to include 
dependent students and independent students without dependents other 
than a spouse. The specific methodologies used for each source are 
described in the footnotes to table 9.

Reliability Assessment:

In assessing the reliability of state personal income estimates from 
the U.S. Bureau of Economic Analysis (BEA), we reviewed information 
available online from the BEA Web site on its data quality assurance 
processes and interviewed relevant officials. On the basis of the 
results of our document review and discussions with relevant officials, 
we concluded that the BEA data we used were reliable for our purposes 
for this analysis.

In assessing the reliability of state government tax collections 
estimates from the U.S. Census Bureau, we interviewed relevant 
officials, who stated that there was no published data reliability 
documentation. Thus, we were unable to determine if the Census data we 
used were reliable for our purposes for this analysis.

In assessing the reliability of data from the U.S. Census Bureau's 
Annual Social and Economic Supplement, we reviewed information 
available online from the U.S. Census Bureau Web site on its data 
quality assurance processes and interviewed relevant officials. On the 
basis of the results of our document review and discussions with 
relevant officials, we have determined that the information collected 
by the U.S. Census Bureau in generating the Current Population Survey 
(CPS) is reliable, but we were unable to determine whether the CPS tax 
data we used, which is not collected directly but rather generated from 
U.S. Census Bureau tax models, were reliable for our purposes for this 
analysis.

In assessing the reliability of data from the Institute on Taxation and 
Economic Policy's Who Pays publication, we interviewed a relevant 
official and reviewed available documentation. However, we were unable 
to reach a determination as to the reliability of the data, primarily 
because of a lack of sufficient documentation.

Sampling Error:

Because our analysis relied on samples of aid applicants and borrowers, 
our estimates are subject to sampling errors. Sampling errors are often 
represented as a 95 percent confidence interval: an interval that 95 
times out of 100 will contain the true population value. For the 
percentages and numbers presented in this report on the EFC, Pell 
award, Stafford loan, and PLUS loan impacts, we are 95 percent 
confident that the results we would have obtained had the entire 
population been studied are within plus or minus 5 percent of the 
results, unless otherwise noted. The results for state and 
institutional need-based aid and Campus-Based aid are not necessarily 
based on representative samples and therefore should be considered as 
case study findings, or illustrative examples. Thus, we did not 
calculate sampling errors for these three categories of aid.

[End of section]

Appendix II: State Selection Matrix--Ranking of Potential Impact of 
Proposed Allowance, Listed by Category:

State: Minnesota; 
Overall average EFC dollar change[A]: 542; 
Percentage of students receiving need-based aid: 15.01; 
Estimated average need-based aid amount per undergraduate: 4,420; 
Impact level[B]: High.

State: Vermont; 
Overall average EFC dollar change[A]: 489; 
Percentage of students receiving need-based aid: 34.99; 
Estimated average need-based aid amount per undergraduate: 1,749; 
Impact level[B]: High.

State: Massachusetts; 
Overall average EFC dollar change[A]: 570; 
Percentage of students receiving need-based aid: 36.22; 
Estimated average need-based aid amount per undergraduate: 1,176; 
Impact level[B]: High.

State: Illinois; 
Overall average EFC dollar change[A]: 273; 
Percentage of students receiving need-based aid: 28.93; 
Estimated average need-based aid amount per undergraduate: 2,998; 
Impact level[B]: High.

State: Iowa; 
Overall average EFC dollar change[A]: 611; 
Percentage of students receiving need-based aid: 13.97; 
Estimated average need-based aid amount per undergraduate: 2,712; 
Impact level[B]: High.

State: Wisconsin; 
Overall average EFC dollar change[A]: 647; 
Percentage of students receiving need-based aid: 27.24; 
Estimated average need-based aid amount per undergraduate: 1,098; 
Impact level[B]: High.

State: New Jersey; 
Overall average EFC dollar change[A]: 150; 
Percentage of students receiving need-based aid: 30.73; 
Estimated average need-based aid amount per undergraduate: 2,701; 
Impact level[B]: High.

State: Maine; 
Overall average EFC dollar change[A]: 477; 
Percentage of students receiving need-based aid: 32.72; 
Estimated average need-based aid amount per undergraduate: 960; 
Impact level[B]: High.

State: Michigan; 
Overall average EFC dollar change[A]: 547; 
Percentage of students receiving need-based aid: 15.26; 
Estimated average need-based aid amount per undergraduate: 2,012; 
Impact level[B]: High.

State: Indiana; 
Overall average EFC dollar change[A]: 303; 
Percentage of students receiving need-based aid: 19.84; 
Estimated average need-based aid amount per undergraduate: 2,612; 
Impact level[B]: High.

State: South Carolina; 
Overall average EFC dollar change[A]: 484; 
Percentage of students receiving need-based aid: 21.70; 
Estimated average need-based aid amount per undergraduate: 1,228; 
Impact level[B]: High.

State: Virginia; 
Overall average EFC dollar change[A]: 456; 
Percentage of students receiving need-based aid: 16.00; 
Estimated average need-based aid amount per undergraduate: 1,791; 
Impact level[B]: High.

State: Washington; 
Overall average EFC dollar change[A]: 226; 
Percentage of students receiving need-based aid: 23.14; 
Estimated average need-based aid amount per undergraduate: 2,007; 
Impact level[B]: High.

State: Colorado; 
Overall average EFC dollar change[A]: 430; 
Percentage of students receiving need-based aid: 14.32; 
Estimated average need-based aid amount per undergraduate: 1,981; 
Impact level[B]: High.

State: California; 
Overall average EFC dollar change[A]: 181; 
Percentage of students receiving need-based aid: 12.55; 
Estimated average need-based aid amount per undergraduate: 3,109; 
Impact level[B]: High.

State: West Virginia; 
Overall average EFC dollar change[A]: 357; 
Percentage of students receiving need-based aid: 17.24; 
Estimated average need-based aid amount per undergraduate: 1,850; 
Impact level[B]: Medium.

State: Kentucky; 
Overall average EFC dollar change[A]: 224; 
Percentage of students receiving need-based aid: 27.90; 
Estimated average need-based aid amount per undergraduate: 1,246; 
Impact level[B]: Medium.

State: Maryland; 
Overall average EFC dollar change[A]: 345; 
Percentage of students receiving need-based aid: 15.56; 
Estimated average need-based aid amount per undergraduate: 1,788; 
Impact level[B]: Medium.

State: Arkansas; 
Overall average EFC dollar change[A]: 253; 
Percentage of students receiving need-based aid: 19.54; 
Estimated average need-based aid amount per undergraduate: 1,736; 
Impact level[B]: Medium.

State: North Carolina; 
Overall average EFC dollar change[A]: 335; 
Percentage of students receiving need-based aid: 12.71; 
Estimated average need-based aid amount per undergraduate: 2,065; 
Impact level[B]: Medium.

State: Delaware; 
Overall average EFC dollar change[A]: 668; 
Percentage of students receiving need-based aid: 2.97; 
Estimated average need-based aid amount per undergraduate: 1,370; 
Impact level[B]: Medium.

State: New Mexico; 
Overall average EFC dollar change[A]: 268; 
Percentage of students receiving need-based aid: 9.63; 
Estimated average need-based aid amount per undergraduate: 2,436; 
Impact level[B]: Medium.

State: Nebraska; 
Overall average EFC dollar change[A]: 565; 
Percentage of students receiving need-based aid: 13.09; 
Estimated average need-based aid amount per undergraduate: 747; 
Impact level[B]: Medium.

State: New Hampshire; 
Overall average EFC dollar change[A]: 591; 
Percentage of students receiving need-based aid: 8.34; 
Estimated average need-based aid amount per undergraduate: 884; 
Impact level[B]: Medium.

State: Rhode Island; 
Overall average EFC dollar change[A]: 418; 
Percentage of students receiving need-based aid: 15.92; 
Estimated average need-based aid amount per undergraduate: 706; 
Impact level[B]: Medium.

State: Kansas; 
Overall average EFC dollar change[A]: 411; 
Percentage of students receiving need-based aid: 7.62; 
Estimated average need-based aid amount per undergraduate: 1,466; 
Impact level[B]: Medium.

State: Connecticut; 
Overall average EFC dollar change[A]: -58; 
Percentage of students receiving need-based aid: 19.21; 
Estimated average need-based aid amount per undergraduate: 2,328; 
Impact level[B]: Medium.

State: Texas; 
Overall average EFC dollar change[A]: 96; 
Percentage of students receiving need-based aid: 13.45; 
Estimated average need-based aid amount per undergraduate: 2,190; 
Impact level[B]: Medium.

State: North Dakota; 
Overall average EFC dollar change[A]: 574; 
Percentage of students receiving need-based aid: 7.54; 
Estimated average need-based aid amount per undergraduate: 564; 
Impact level[B]: Medium.

State: Montana; 
Overall average EFC dollar change[A]: 354; 
Percentage of students receiving need-based aid: 16.08; 
Estimated average need-based aid amount per undergraduate: 526; 
Impact level[B]: Medium.

State: Tennessee; 
Overall average EFC dollar change[A]: 194; 
Percentage of students receiving need-based aid: 14.10; 
Estimated average need-based aid amount per undergraduate: 1,419; 
Impact level[B]: Low.

State: Hawaii; 
Overall average EFC dollar change[A]: 509; 
Percentage of students receiving need-based aid: 1.00; 
Estimated average need-based aid amount per undergraduate: 1,329; 
Impact level[B]: Low.

State: Missouri; 
Overall average EFC dollar change[A]: 255; 
Percentage of students receiving need-based aid: 9.09; 
Estimated average need-based aid amount per undergraduate: 1,530; 
Impact level[B]: Low.

State: Oklahoma; 
Overall average EFC dollar change[A]: 199; 
Percentage of students receiving need-based aid: 15.06; 
Estimated average need-based aid amount per undergraduate: 1,168; 
Impact level[B]: Low.

State: Florida; 
Overall average EFC dollar change[A]: 192; 
Percentage of students receiving need-based aid: 15.36; 
Estimated average need-based aid amount per undergraduate: 1,074; 
Impact level[B]: Low.

State: Nevada; 
Overall average EFC dollar change[A]: 67; 
Percentage of students receiving need-based aid: 6.50; 
Estimated average need-based aid amount per undergraduate: 2,138; 
Impact level[B]: Low.

State: District of Columbia; 
Overall average EFC dollar change[A]: 291; 
Percentage of students receiving need-based aid: 3.18; 
Estimated average need-based aid amount per undergraduate: 1,149; 
Impact level[B]: Low.

State: Utah; 
Overall average EFC dollar change[A]: 251; 
Percentage of students receiving need-based aid: 4.70; 
Estimated average need-based aid amount per undergraduate: 749; 
Impact level[B]: Low.

State: Wyoming; 
Overall average EFC dollar change[A]: 247; 
Percentage of students receiving need-based aid: 1.06; 
Estimated average need-based aid amount per undergraduate: 773; 
Impact level[B]: Low.

State: Arizona; 
Overall average EFC dollar change[A]: 181; 
Percentage of students receiving need-based aid: 1.49; 
Estimated average need-based aid amount per undergraduate: 966; 
Impact level[B]: Low.

State: Georgia; 
Overall average EFC dollar change[A]: 258; 
Percentage of students receiving need-based aid: 0.98; 
Estimated average need-based aid amount per undergraduate: 667; 
Impact level[B]: Low.

State: Idaho; 
Overall average EFC dollar change[A]: 221; 
Percentage of students receiving need-based aid: 3.70; 
Estimated average need-based aid amount per undergraduate: 457; 
Impact level[B]: Low.

State: Louisiana; 
Overall average EFC dollar change[A]: 254; 
Percentage of students receiving need-based aid: 1.74; 
Estimated average need-based aid amount per undergraduate: 501; 
Impact level[B]: Low.

State: Mississippi; 
Overall average EFC dollar change[A]: 151; 
Percentage of students receiving need-based aid: 1.52; 
Estimated average need-based aid amount per undergraduate: 940; 
Impact level[B]: Low.

State: Alabama; 
Overall average EFC dollar change[A]: 184; 
Percentage of students receiving need-based aid: 1.11; 
Estimated average need-based aid amount per undergraduate: 577; 
Impact level[B]: Low.

State: Alaska; 
Overall average EFC dollar change[A]: 163; 
Percentage of students receiving need-based aid: 0.00; 
Estimated average need-based aid amount per undergraduate: 0; 
Impact level[B]: N/A.

State: New York; 
Overall average EFC dollar change[A]: 430; 
Percentage of students receiving need-based aid: 49.10; 
Estimated average need-based aid amount per undergraduate: 1,968; 
Impact level[B]: N/A.

State: Ohio; 
Overall average EFC dollar change[A]: 431; 
Percentage of students receiving need-based aid: 24.96; 
Estimated average need-based aid amount per undergraduate: 1,201; 
Impact level[B]: N/A.

State: Oregon; 
Overall average EFC dollar change[A]: 359; 
Percentage of students receiving need-based aid: 15.98; 
Estimated average need-based aid amount per undergraduate: 1,070; 
Impact level[B]: N/A.

State: Pennsylvania; 
Overall average EFC dollar change[A]: 476; 
Percentage of students receiving need-based aid: 32.89; 
Estimated average need-based aid amount per undergraduate: 2,331; 
Impact level[B]: N/A.

State: South Dakota; 
Overall average EFC dollar change[A]: 376; 
Percentage of students receiving need-based aid: 0.00; 
Estimated average need-based aid amount per undergraduate: 0; 
Impact level[B]: N/A.

Sources: EFC Change and Impact Category--GAO analysis of Education's 
2002-2003 aid applicant sample file and the proposed tax allowance. 
Need-Based Aid Information--"National Association of State Student 
Grant and Aid Programs' 33rd Annual Survey Report on State-Sponsored 
Student Financial Aid, 2001-02 Academic Year.

[A] The sampling errors for Alaska, Connecticut, Delaware, District of 
Columbia, Hawaii, Idaho, Maine, Montana, Nevada, New Hampshire, New 
Mexico, North Dakota, Rhode Island, South Dakota, Utah, Vermont, West 
Virginia, and Wyoming vary from slightly over 5 percentage points (for 
New Hampshire, Utah, and West Virginia) to just under 15 percentage 
points (for District of Columbia). All others have sampling errors at 
or below 5 percentage points.

[B] Only states that use the HEA federal methodology were given a 
ranking. Thus, the ranking does not apply to the six states listed 
last.

[End of table]

[End of section]

Appendix III: Average Tax Rates on Adjusted Gross Income, by State and 
Income Level:

State: Alabama; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 3.

State: Alaska; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: Arizona; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: Arkansas; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: California; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 7.

State: Colorado; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: Connecticut; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 6.

State: Delaware; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: District of Columbia; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 7.

State: Florida; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: Georgia; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Hawaii; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Idaho; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Illinois; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: Indiana; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: Iowa; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Kansas; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Kentucky; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Louisiana; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: Maine; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 6.

State: Maryland; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 7.

State: Massachusetts; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 6.

State: Michigan; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Minnesota; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 6.

State: Mississippi; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 3.

State: Missouri; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: Montana; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Nebraska; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Nevada; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: New Hampshire; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: New Jersey; 
Tax rate by income level (percentage): Less than $20,000: 3; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 7.

State: New Mexico; 
Tax rate by income level (percentage):: Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: New York; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 8.

State: North Carolina; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 6.

State: North Dakota; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: Ohio; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 6.

State: Oklahoma; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 4.

State: Oregon; 
Tax rate by income level (percentage): Less than $20,000: 3; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 7.

State: Other areas[A]; 
Tax rate by income level (percentage): Less than $20,000: 5; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: Pennsylvania; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Rhode Island; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 7.

State: South Carolina; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: South Dakota; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 1.

State: Tennessee; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 1.

State: Texas; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: Utah; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Vermont; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Virginia; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 5.

State: Washington; 
Tax rate by income level (percentage): Less than $20,000: 1; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 2.

State: West Virginia; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 3.

State: Wisconsin; 
Tax rate by income level (percentage): Less than $20,000: 2; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 7.

State: Wyoming; 
Tax rate by income level (percentage): Less than $20,000: 0; 
Tax rate by income level (percentage): Greater than or equal 
to $20,000: 1.

Source: GAO analysis of SOI data for tax year 2000.

Notes: Taxes include state and local income taxes, real estate taxes, 
personal property taxes, and taxes paid to a foreign country or U.S. 
possession.

[A] "Other Areas" includes American Samoa, Federal States of 
Micronesia, Guam, Marshall Islands, Northern Marianas, Palau, Puerto 
Rico, Virgin Islands, and other U.S. states and territories.

[End of table]

[End of section]

Appendix IV: Simulation of Tax Allowance Percentages under Various 
Options, by State--Families with Adjusted Gross Income of $15,000 or 
More:

State: Alabama; 
Current: Tables published in 1993: 4; 
Proposed 2004-2005 tables: 2; 
Strategy I: SOI with revised methodology: 3; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 3; 
Strategy II: ITEP: 7; 
Strategy III: Standard allowance (4%): 4.

State: Alaska; 
Current: Tables published in 1993: 2; 
Proposed 2004-2005 tables: 1; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 1; 
Strategy II: CPS: 1; 
Strategy II: ITEP: 2; 
Strategy III: Standard allowance (4%): 4.

State: Arizona; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 7; 
Strategy III: Standard allowance (4%): 4.

State: Arkansas; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 2; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: California; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 5; 
Strategy I: SOI with revised methodology: 7; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Colorado; 
Current: Tables published in 1993: 6; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 4; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 7; 
Strategy III: Standard allowance (4%): 4.

State: Connecticut; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 5; 
Strategy I: SOI with revised methodology: 6; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Delaware; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 4; 
Strategy II: CPS: 6; 
Strategy II: ITEP: 5; 
Strategy III: Standard allowance (4%): 4.

State: District of Columbia; 
Current: Tables published in 1993: 9; 
Proposed 2004-2005 tables: 6; 
Strategy I: SOI with revised methodology: 7; 
Strategy II: BEA/Census: 9; 
Strategy II: CPS: 8; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Florida; 
Current: Tables published in 1993: 3; 
Proposed 2004-2005 tables: 1; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 4; 
Strategy II: CPS: 1; 
Strategy II: ITEP: 5; 
Strategy III: Standard allowance (4%): 4.

State: Georgia; 
Current: Tables published in 1993: 6; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Hawaii; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 9; 
Strategy II: CPS: 13; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Idaho; 
Current: Tables published in 1993: 6; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Illinois; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Indiana; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Iowa; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 7; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Kansas; 
Current: Tables published in 1993: 6; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: Kentucky; 
Current: Tables published in 1993: 6; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Louisiana; 
Current: Tables published in 1993: 3; 
Proposed 2004-2005 tables: 1; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 2; 
Strategy II: ITEP: 7; 
Strategy III: Standard allowance (4%): 4.

State: Maine; 
Current: Tables published in 1993: 8; 
Proposed 2004-2005 tables: 5; 
Strategy I: SOI with revised methodology: 6; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 6; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: Maryland; 
Current: Tables published in 1993: 8; 
Proposed 2004-2005 tables: 6; 
Strategy I: SOI with revised methodology: 7; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 7; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Massachusetts; 
Current: Tables published in 1993: 8; 
Proposed 2004-2005 tables: 5; 
Strategy I: SOI with revised methodology: 6; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 7; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Michigan; 
Current: Tables published in 1993: 8; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 6; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Minnesota; 
Current: Tables published in 1993: 8; 
Proposed 2004-2005 tables: 5; 
Strategy I: SOI with revised methodology: 6; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 6; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: Mississippi; 
Current: Tables published in 1993: 4; 
Proposed 2004-2005 tables: 2; 
Strategy I: SOI with revised methodology: 3; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 3; 
Strategy II: ITEP: 7; 
Strategy III: Standard allowance (4%): 4.

State: Missouri; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Montana; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 6; 
Strategy III: Standard allowance (4%): 4.

State: Nebraska; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Nevada; 
Current: Tables published in 1993: 2; 
Proposed 2004-2005 tables: 1; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 1; 
Strategy II: ITEP: 4; 
Strategy III: Standard allowance (4%): 4.

State: New Hampshire; 
Current: Tables published in 1993: 6; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 3; 
Strategy II: CPS: 2; 
Strategy II: ITEP: 4; 
Strategy III: Standard allowance (4%): 4.

State: New Jersey; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 6; 
Strategy I: SOI with revised methodology: 7; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 7; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: New Mexico; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 2; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 3; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: New York; 
Current: Tables published in 1993: 10; 
Proposed 2004-2005 tables: 7; 
Strategy I: SOI with revised methodology: 8; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 7; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: North Carolina; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 6; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 6; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: North Dakota; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 1; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 3; 
Strategy II: ITEP: 6; 
Strategy III: Standard allowance (4%): 4.

State: Ohio; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 6; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: Oklahoma; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 4; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: Oregon; 
Current: Tables published in 1993: 9; 
Proposed 2004-2005 tables: 6; 
Strategy I: SOI with revised methodology: 7; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 8; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: Other Areas; 
Current: Tables published in 1993: 3; 
Proposed 2004-2005 tables: 2; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 6; 
Strategy III: Standard allowance (4%): 4.

State: Pennsylvania; 
Current: Tables published in 1993: 6; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 7; 
Strategy III: Standard allowance (4%): 4.

State: Rhode Island; 
Current: Tables published in 1993: 8; 
Proposed 2004-2005 tables: 5; 
Strategy I: SOI with revised methodology: 7; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 9; 
Strategy III: Standard allowance (4%): 4.

State: South Carolina; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 3; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: South Dakota; 
Current: Tables published in 1993: 3; 
Proposed 2004-2005 tables: 0; 
Strategy I: SOI with revised methodology: 1; 
Strategy II: BEA/Census: 4; 
Strategy II: CPS: 2; 
Strategy II: ITEP: 5; 
Strategy III: Standard allowance (4%): 4.

State: Tennessee; 
Current: Tables published in 1993: 2; 
Proposed 2004-2005 tables: 0; 
Strategy I: SOI with revised methodology: 1; 
Strategy II: BEA/Census: 4; 
Strategy II: CPS: 1; 
Strategy II: ITEP: 5; 
Strategy III: Standard allowance (4%): 4.

State: Texas; 
Current: Tables published in 1993: 2; 
Proposed 2004-2005 tables: 1; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 4; 
Strategy II: CPS: 1; 
Strategy II: ITEP: 5; 
Strategy III: Standard allowance (4%): 4.

State: Utah; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 6; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Vermont; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 8; 
Strategy II: CPS: 5; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Virginia; 
Current: Tables published in 1993: 7; 
Proposed 2004-2005 tables: 4; 
Strategy I: SOI with revised methodology: 5; 
Strategy II: BEA/Census: 5; 
Strategy II: CPS: 6; 
Strategy II: ITEP: 7; 
Strategy III: Standard allowance (4%): 4.

State: Washington; 
Current: Tables published in 1993: 3; 
Proposed 2004-2005 tables: 1; 
Strategy I: SOI with revised methodology: 2; 
Strategy II: BEA/Census: 6; 
Strategy II: CPS: 1; 
Strategy II: ITEP: 6; 
Strategy III: Standard allowance (4%): 4.

State: West Virginia; 
Current: Tables published in 1993: 5; 
Proposed 2004-2005 tables: 2; 
Strategy I: SOI with revised methodology: 3; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 4; 
Strategy II: ITEP: 8; 
Strategy III: Standard allowance (4%): 4.

State: Wisconsin; 
Current: Tables published in 1993: 9; 
Proposed 2004-2005 tables: 5; 
Strategy I: SOI with revised methodology: 7; 
Strategy II: BEA/Census: 7; 
Strategy II: CPS: 8; 
Strategy II: ITEP: 10; 
Strategy III: Standard allowance (4%): 4.

State: Wyoming; 
Current: Tables published in 1993: 2; 
Proposed 2004-2005 tables: 0; 
Strategy I: SOI with revised methodology: 1; 
Strategy II: BEA/Census: 4; 
Strategy II: CPS: 0; 
Strategy II: ITEP: 4; 
Strategy III: Standard allowance (4%): 4.

Source: GAO analysis.

Notes: (1) The CPS tax rates were generated based on a 3-year average 
of 1999, 2000, and 2001 CPS data. The standard allowance of 4 percent 
was calculated as the median across states of this three-year average; 
and (2) "Families" are defined to include parents of dependent students 
and independent students with dependents other than a spouse.

[End of table]

[End of section]

Appendix V: Comments from the Department of Education:

UNITED STATES DEPARTMENT OF EDUCATION:

OFFICE OF POSTSECONDARY EDUCATION:

THE ASSISTANT SECRETARY:

Ms. Cornelia M. Ashby: 
Director, Education, Workforce, and Income Security Issues: 
United States Government Accountability Office: 
Washington, DC 20548:

Dear Ms. Ashby:

Secretary Paige has asked me to respond to your request for comments on 
the Government Accountability Office (GAO) draft report, "Need 
Determination Could Be Enhanced through Improvements in Education's 
Estimate of Applicant's State Tax Payments," which was transmitted to 
the Department of Education by your letter of December 21, 2004.

Thank you for the opportunity to review this draft report. My staff had 
previously shared our technical comments with your office.

We appreciate GAO's acknowledging the Department's obligation under the 
Higher Education Act of 1965, as amended WA), to update annually the 
tables of allowances for state and local taxes using Internal Revenue 
Service Statistics of Income (SOI) file data. Absent legislation to the 
contrary, as was provided in P.L. 108-199, the Consolidated 
Appropriations Act, 2004, we believe we do not have the authority to 
ignore the clear statutory requirement to perform the update. 
Therefore, we request that you reference "proposed state tax rates 
under the HEA" in the final report rather than using the label 
"proposed state tax rates of the Department."

At its core, the Federal need analysis divides a family's financial 
resources into discretionary and non-discretionary (living expenses and 
taxes) uses, and the portion of discretionary resources that is 
considered available to pay for postsecondary education expenses is 
called the expected family contribution (EFC). The ILEA provides 
standard allowances for living expenses and Federal aid applicants 
report the amount of Federal income taxes they paid on the Free 
Application for Federal Student Aid (FAFSA). An allowance for Social 
Security taxes (FICA) is calculated using the earnings from employment 
also reported on the FAFSA. The allowance for state and local taxes is 
a state-specific percentage of income that varies by type of student 
(financially dependent or self-supporting) and income (in the case of 
parents of dependents students and certain self-supporting students).

Many people seem to believe that a better way to determine the non-
Federal tax burden of students and their families in the Federal need 
analysis formula is needed, and we are interested in discussing 
alternatives in an effort to address that concern. We also recognize 
the need to work with the Congress because legislation would be needed 
to alter the statutorily required update. In our view, all four 
strategies GAO has offered to address shortcomings of the current state 
and local, tax allowance calculation would likely require 
Congressional action.

Currently, the HEA directs the Secretary to update the tables for 
parents of dependent students and independent students with dependents 
other than a spouse. Both tables provide for two allowances, divided by 
a $15,000 income threshold. Incorporating additional or different 
income bands as you suggest would likely require a statutory change. 
Current law also provides for a single income grouping for dependent 
students and independent students without dependents other than a 
spouse, so incorporating income bands for these students would likely 
require a statutory change as well.

Each of the remaining three strategies GAO identified, replacing the 
S01 file data with an alternative source, applying a uniform allowance 
to the incomes of all applicants, and collecting information on state 
and local taxes directly from Federal aid applicants, clearly would 
require legislation because SOI file data would not be used We 
appreciate your identifying these strategies and will briefly share our 
views.

The alternative data sources you identified, including Department of 
Commerce and private, third-party publications, that could be used to 
substitute for the SOI file data provide a good starting point. As you 
note, each of these sources has its own limitations and may not result 
in improved data as compared to the SOI file, but we will review each 
of them.

In the report, we note GAO's criticism that the update methodology 
currently used by the Department tends to overstate the non-Federal tax 
burden for lower income families and understates it for higher income 
families. However, the third strategy presented in your report 
requiring a uniform allowance for state and local taxes for all aid 
applicants would accomplish the same result. This strategy, then, would 
not seem to be an improvement with respect to the current practice.

We believe that GAO's fourth strategy to have the Department collect 
state and local tax information directly on the FAFSA would result in 
an unacceptable increase in burden for both families and institutions. 
Families, especially those who itemize their Federal income tax 
deductions, would likely have little difficulty reporting state and 
local income and property taxes, but reporting consumption taxes would 
be problematic. Yet, as you note in the draft report, consumption taxes 
likely represent most non-Federal tax expenditures for lower-income 
families and therefore, need to be included in order to determine the 
true tax burden. The burden on institutions would also increase as a 
result of the need to collect source documents to support amounts 
reported as state and local tax expenditures for verification purposes. 
Even though institutions are not required to verify more than 30 
percent of their Federal aid applicants.under current regulations, it 
is conceivable that one institution might need to collect supporting 
documentation, such as state income tax returns or property tax bills, 
from several states and numerous local jurisdictions.

Generally, we agree with GAO's assessment of the impact of the revised 
tables on Poll Grant program participants, including your estimate that 
nearly two-thirds of Pell Grant recipients would not be negatively 
affected by the revised tables of allowances. However, GAO could have 
provided additional information in the draft report regarding the Pell-
ineligible portion of the Federal aid applicant population.

Though we understand your congressional requesters asked you to examine 
2004-05 data, the Department has conducted a preliminary analysis for 
the 2005-06 award year. For the 2005-06 award year, we estimate that 
slightly fewer than 81,000 Pell recipients would lose their eligibility 
for Pelf Grants. Furthermore, we estimate that about three-fourths of 
these students would have benefited from the statutory provision that 
provides a $400 Pell Grant to any student who otherwise qualifies for a 
grant of at least $200 but less than $400. Similarly, we agree with 
your assessment of the impact on FAFSA filers whose EFCs would increase 
as a result of the revised tax tables, namely, that the increase would 
average about $500. We estimate that the average family income for this 
group of Pell-ineligible Federal aid applicants would be almost 
$85,000.

We also appreciate GAO acknowledging the difficulty in fully assessing 
the impact of the updated state tax tables, especially on a state-by-
state basis for Pell Grants, but also with respect to the Federal 
student loan and campus-based programs, as well as state and 
institutional financial aid programs. The sample of 2002-03 Federal 
student aid applicants and Pell recipients was drawn to reflect the 
income characteristics and dependency status of students and 
prospective students. The sample was not drawn to provide for state-
level comparisons. GAO acknowledges this by noting several times that 
it has less confidence in certain of its estimates for Federal aid 
applicants in low-enrollment states such as Connecticut, New Mexico and 
Rhode Island.

In the final report, it would be helpful if you clarified that a change 
in EFC would not necessarily cause an identical change to a student's 
award amount in any of the following: Federal student loans, campus-
based aid, and state and institutional financial aid programs. For 
example, you estimate that the average Pell Grant reduction would be 
$144. You also estimate that the average Perkins loan reduction would 
be $1,200. Clearly, the average student who receives both a Pell Grant 
and a Perkins loan would nut have his or hor total financial aid 
reduced by $1,344. In other words, include a brief explanation of 
potential interactive effects.

We are also concerned that you have misinterpreted the Department's 
intentions with respect to updating these tables of allowances for the 
2005-06 award year. When we failed to meet the June 1 deadline 
specified in section 482 of the HEA for updating all formula parameters 
for 2005-06, we sent a letter to the relevant Congressional committees, 
as required by section 482, informing the Congress that we missed the 
deadline. In that letter, we told Congress that we would publish all 
formula updates except for the tables of allowances for state and local 
taxes by June 1 S. We also said that we were delaying the update of 
state tax tables pending a thorough review of the available SOT data, 
and to be able to consider the preliminary findings of the Advisory 
Committee on Student Financial Assistance's congressionally-directed 
examination of the procedures used to update formula offsets and 
allowances. The Secretary did not indicate that he planned to suspend 
publication of the revised state tax tables this year.

Finally, your recommendation that the Department formalize procedures 
to ensure that we annually request and obtain the most current tax data 
from the IRS is already in place and has been in place since 2002, as 
evidenced by the update published in the spring of 2003. By delaying 
publication this year until December, we were able to narrow the gap in 
time between financial data and tax data used for calculating the EFC 
to a period of two years. This is a substantial improvement over last 
year when the Department was required to use tax data that resulted in 
a gap of fifteen years. We intend to continue our efforts to keep the 
gap in time as narrow as possible for the future.

If you or your staff have any questions, please do not hesitate to 
contact my office.

Sincerely,

Signed by: 

Sally L. Stroup: 

[End of section]

Appendix VI: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Jeff Appel, Assistant Director (202) 512-9915: 
Tranchau Nguyen, Analyst-in-Charge (202) 512-2660:

Staff Acknowledgments:

In addition to those named above, the following people made significant 
contributions to this report: Jeff Weinstein, Cynthia Decker, Bob 
Parker, Sue Bernstein, Amy Buck, James Wozny, and Melba Edwards.

FOOTNOTES

[1] Title IV aid programs include Pell Grants, subsidized and 
unsubsidized Stafford loans, and Parent Loans for Undergraduate 
Students (PLUS), as well as Supplemental Educational Opportunity Grants 
(SEOG), Perkins loans, and Work-Study aid funded by the federal 
government and administered by participating institutions, commonly 
known as Campus-Based aid. About $68 billion in aid was provided under 
Title IV programs during fiscal year 2003-2004; in addition, the 
College Board estimates that about $29 billion was provided under state 
and institutional aid programs during award year 2003-2004.

[2] ACSFA was established by Congress with the enactment of the 1986 
HEA amendments. The committee began its operation in 1988 by serving as 
a source of advice and counsel to Congress and the Secretary of 
Education on student financial aid policy. 

[3] The College Board estimates that about 75 percent of state aid was 
need-based.

[4] On December 23, 2004, about 6 months past the deadline specified by 
the HEA for updating the allowance, Education published updated state 
and other tax tables for award year 2005-2006 using 2002 SOI tax data. 
According to Education, it delayed the publication of these tables in 
order to complete a thorough review of available SOI information and to 
consider the findings of a congressionally mandated review by the 
Advisory Committee on Student Financial Assistance on the efficiency, 
effectiveness, and fairness of current procedures to update formula 
offsets and allowances. 

[5] Education did not have records to show that it had requested SOI 
data in 1997, 1998, 2000, 2001, and 2002. 

[6] According to SOI officials, Education had options in obtaining the 
data. Requesting SOI to tabulate state and other taxes from all tax 
returns would have been a lower-cost option because SOI already had the 
procedures in place to make this tabulation.

[7] SOI currently provides state and other tax data by state for tax 
years 1997 to 2002 on its Web site. 

[8] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999).

[9] The percentage of those with a decrease in the amount they are 
expected to contribute is less than 1 percent.

[10] "Families" includes parents of dependent students and independent 
students with children.

[11] "Individuals" includes dependent students and independent students 
without children.

[12] High-income families would very rarely have qualified for Pell 
Grants and thus would not have been affected.

[13] Because some states and institutions do not use the federal EFC to 
award state and institutional aid, a change in the federal EFC may not 
affect the amount of such aid. 

[14] Subsidized Stafford loan amounts, unlike unsubsidized Stafford and 
PLUS loan amounts, are directly determined by the EFC, subject to an 
annual maximum. 

[15] PLUS loans were not packaged by our case study schools. However, 
because families can borrow up to their EFC (plus any remaining or 
"unmet" need) using PLUS loans and because EFCs typically would have 
increased under the proposed update, we estimate that PLUS loan amounts 
could have increased as well. Furthermore, in cases where a student is 
already receiving the maximum unsubsidized loan amount, PLUS loans 
could have compensated for decreases in other forms of financial aid.

[16] Three of the four case study schools reported SEOG information, 
and all four schools reported Work-Study and Perkins information.

[17] The two public schools do not offer need-based institutional aid.

[18] Case studies show that the majority of aid recipients would have 
seen a decrease in their need-based aid equal to or less than their EFC 
increase. However, for about 8 percent of aid recipients, the decrease 
in need-based aid would have been more than 150 percent of their EFC 
increase. 

[19] This estimate is made using 2001 SOI data on the percentage of tax 
returns itemized by various income groups and FAFSA Applicant File data 
on the income distribution in 2001 of FAFSA applicants. To make this 
estimate, we assumed that FAFSA applicants within the income groups 
specified by SOI have the same likelihood of itemizing their tax return 
as overall taxpayers do.

[20] 1983 SOI tax data was used in establishing the tax allowance when 
it was first incorporated in the HEA amendments. 

[21] The FAFSA requires applicants to report asset information as of 
the date of the application. 

[22] According to an SOI official, while SOI has made a commitment to 
fix technical problems with its 2003 master files containing the state 
and other tax data, it is uncertain whether it can provide the level of 
detail needed to update the allowance or when it could release such 
information.

[23] In contrast, the Institutional Methodology (IM) used by the 
College Board has 12 income categories for families, which some experts 
told us allows for more refined estimates of state and other taxes paid 
by financial aid applicants.

[24] To determine the allowance for this group, the methodology 
involves taking the sum of the state and other taxes claimed as income 
tax deductions divided by the adjusted gross income (AGI). AGI is the 
amount used in the calculation of an individual's income tax liability 
and one's income after certain adjustments are made, but before 
standardized and itemized deductions and personal exemptions are made. 
The sum of the taxes paid includes taxes such as state and local income 
taxes, personal property taxes, and real estate taxes. For the 
dependents and independents without children, the methodology involves 
dividing the state and local income tax by AGI. 

[25] The income categories established by Congress differ from those 
published by SOI. Congress established income categories of $0 to less 
than $15,000 and $15,000 and above, while SOI data income categories 
are different. Education could have SOI data customized to provide the 
required categories or could use the data on the income groups that 
best match the established categories.

[26] In the BEA tax tables, household income includes wage and salary 
disbursements, supplements to wages and salaries, proprietors' income 
with inventory valuation and capital consumption adjustments, rental 
income of persons with capital consumption adjustment, personal 
dividend income, personal interest income, and personal current 
transfer receipts, less contributions for government social insurance.

[27] BEA: Methodology-http://www.bea.gov/bea/regional/articles/spi2002 
Reliability assessment-http://www.bea.gov/bea/papers/
Reliability_SPI_Estimates.PDF. Census: Methodology-http://
www.census.gov/govs/www/statetaxtechdoc2003.html. Reliability 
assessment - none available.

[28] These tables are also available on a quarterly basis. However, GAO 
used the annual publication to develop the alternative allowances for 
this report.

[29] As explained in appendix I, we were unable to determine the 
reliability of the ITEP data.	

[30] Education could use any data source, including those discussed 
above that provides household-level information to generate the income 
and taxes paid by the median household.

[31] Our estimates on the impacts are limited to changes in the EFC and 
Pell Grant program. We were not able to assess the impact for federal 
Stafford loans and Campus-Based, state, or institutional aid programs. 
As previously mentioned, estimating the impact on federal Stafford 
loans would require data on the extent to which the amount of other 
forms of aid changed as a result of a change in EFC, and such data are 
not available at a national level. Because schools vary in the way they 
award Campus-Based aid, we were similarly unable to assess the 
potential effects on these programs nationally. With respect to state 
and institutional aid, there is no central repository of information on 
state and institutional awarding policies, which prevented us from 
estimating changes in state and institutional aid. 

[32] As previously discussed, recent legislation providing taxpayers 
who itemize deductions the choice of claiming a state and local tax 
deduction for either sales or income taxes would affect the data 
collected by SOI. Because these effects would be limited to 2 tax 
years--2004 and 2005--and the effects could not be estimated, we did 
not consider them in our comparisons.

[33] This could occur for students whose other financial aid awards do 
not depend on the federal methodology.

[34] Our analysis of NPSAS suggests that over 70 percent of subsidized 
Stafford loan borrowers would be eligible to borrow an additional $500 
or more were it not for the maximum loan cap. Since the average EFC 
change is less than $500, the vast majority of these students would not 
lose eligibility for the maximum under the proposed update.

[35] We were unable to gain the collaboration of a public institution 
that offers institutional need-based aid in either of these two states.

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