We provided the group of schools using the antitrust exemption, Secretary of Education, and Attorney General with a copy of our draft report for review and comments. The group of schools using the exemption reviewed a draft of this report and stated it was a careful and objective report, but raised concerns about the data used in our econometric analysis and the report’s tone and premise. We believe that the data we used were reliable to support our conclusions. The group of schools using the exemption also provided technical comments, which we incorporated where appropriate. The group’s written comments appear in appendix IV. The Department of Education reviewed the report and did not have any comments. The Department of Justice provided technical comments, which we incorporated where appropriate. In the early 1990’s the U.S. Department of Justice (Justice) sued nine universities and colleges, alleging that their practice of collectively making financial aid decisions for students accepted to more than one of their schools restrained trade in violation of the Sherman Act. By consulting about aid policies and aid decisions, through what was known as the Overlap group, the schools made certain that students who were accepted to more than one Overlap school would be expected to contribute the same towards their education. Thus, according to Justice, “fixing the prices” students would be expected to pay. All but one school, Massachusetts Institute of Technology (MIT), settled with Justice out of court, ending the activities of the Overlap group. The District Court ruled that MIT’s joint student aid decisions in the Overlap group violated the Sherman Act. On appeal, the Third Circuit Court of Appeals agreed with the District Court that the challenged practices were commercial activity subject to the antitrust laws. However, it reversed the judgment and directed the District Court to more fully consider the procompetitive and noneconomic justifications advanced by MIT during the court proceedings and whether social benefits attributable to the practices could have been achieved by means less restrictive of competition. In recognition of the importance of financial aid in achieving the government’s goal of educational access, but also mindful of the importance of antitrust laws in ensuring the benefits of competition, the Congress passed a temporary antitrust exemption. In 1994, Congress extended the exemption and specified the four collective activities in which schools that admit students on a need-blind basis could engage. The exemption was extended most recently in 2001, and is set to expire in 2008. For many students, financial aid is necessary in order to enroll in and complete a postsecondary education. In school year 2004-2005, about $113 billion in grant, loan, and work-study aid was awarded to students from a variety of federal, state, and institutional sources. Need analysis methodologies are used to determine the amount of money a family is expected to contribute toward the cost of college and schools use this information in determining how much need-based financial aid they will award. For the purposes of awarding federal aid, expected family contribution (EFC) is defined in the Higher Education Act of 1965, as amended, as the household financial resources reported on the Free Application for Federal Student Aid, minus certain expenses and allowances. The student’s EFC is then compared to the cost of attendance to determine if the student has financial need. (see fig. 1) While the federal methodology is used to determine a student’s eligibility for federal aid, some institutions use this methodology to award their own institutional aid. Others prefer a methodology developed by the College Board (called the institutional methodology) or their own methodology. Schools that use the institutional methodology require students to complete the College Scholarship Service/Financial Aid PROFILE application and the College Board calculates how much they and their families will be expected to contribute toward their education. Schools that use these alternative methodologies feel they better reflect a family’s ability to pay for college because they consider many more factors of each family’s financial situation than the federal methodology. For example, the institutional methodology includes home and farm equity when calculating a family’s ability to pay for college, while the federal methodology excludes them. See table 1 below for a comparison of the federal methodology to the institutional methodology. Twenty-eight schools formed a group under the antitrust exemption and engaged in one of the four activities allowable under the exemption. School officials believed that the one activity—development of a common methodology for assessing financial need—would help reduce variation in amounts students were expected to pay when accepted to multiple schools and allow students to base their decision on which school to attend on factors other than cost. In developing the common methodology, called the consensus approach, schools modified an existing need analysis methodology and reached agreement on how to treat each element of the methodology. While the schools reached agreement on a methodology, implementation of the methodology among the schools varied. Twenty-eight schools, all of which have need-blind admission policies as required under the law, formed the 568 Presidents’ Group in 1998 with the intent to engage in activities allowed by the antitrust exemption. Members of the group are all private 4-year schools that have highly selective admissions policies. One member school dropped out of the group because the school no longer admitted students on a need-blind basis. (See table 2 below for a list of current and former member schools.) Membership is open to colleges and universities that have need blind admissions policies in accordance with the law. Member schools must (1) sign a certificate of compliance confirming the institution’s need-blind admissions policy and (2) submit a signed memorandum of understanding that indicates willingness to participate in the group and adhere to its guidelines. Additionally, members share in paying the group’s expenses. In addition to the group’s 28 members, 6 schools attended meetings of the group to observe and listen to discussions, but have not become members. In order to attend meetings, observer schools were required to provide a certificate of compliance stating that they had a need-blind admission policy. Observer schools explained that their participation was based on a desire to be aware of what similar schools were thinking in terms of need analysis methodology, as well as have an opportunity to participate in these discussions. Despite these benefits, observer schools said they preferred not to join as members because they did not wish to agree to a common approach to need analysis or they did not want to lose institutional independence. Other institutions with need-blind admissions reported that, although eligible to participate in activities allowed by the exemption, they were not interested or not aware of the group formed to use the antitrust exemption. Some told us that they did not understand how students would benefit from the schools’ participation in such activities. Others cited limited funding to make changes to their need analysis methodology and concerns that they would lose the ability to award merit aid to students. Of the four activities allowed under the antitrust exemption, the 28 schools engaged in only one—development of the consensus approach for need analysis. With respect to the other three activities allowed under the exemption, the schools either chose to not engage in the activities or piloted them on a limited basis. For example, three schools in the group attempted to share student-level financial aid data through a third party. However, they reported that because the effort was too burdensome and yielded little useful information, they chose not to continue. The group also expressed little need or interest in creating another common aid application form as such a form already existed. Schools also decided to leave open the option to award aid on a non-need basis. According to the officials representing the 28 schools, the main purpose of the group was to discuss ways to make the financial aid system more understandable to students and their families and commit to developing a common methodology for assessing a family’s ability to pay for college, which they called the consensus approach. Developing an agreed upon common approach to need analysis, according to school officials, might help decrease variation in what families were expected to pay when accepted to multiple schools, allowing students to base their decision on what school to attend on factors other than cost. School officials also believed that agreeing to a common need analysis methodology would produce expected family contributions that were reasonable and fair for families and allow schools to better target need-based aid. The group did not address the composition of a student’s financial aid package; specifically, what combination of grants, loans, or work-study a student would receive. In developing the consensus approach for need analysis, the schools modified elements already in the College Board’s institutional methodology, but member schools agreed to treat these elements the same when calculating a student’s EFC. Some of the modifications that the group made to College Board’s institutional methodology were later incorporated into the institutional methodology. The consensus approach and the institutional methodology similarly treat income from the non- custodial parent, and both account for the number of siblings in college in the same manner when calculating a student’s expected family contribution. However, there are differences in how each methodology treats a family’s home equity and a student’s assets. For example, the institutional methodology uses a family’s entire home equity in its assessment of assets available to pay for college, while the consensus approach limits the amount of home equity that can be included. According to one financial aid officer at a member school, including the full amount of a family’s home equity was unfair to many parents because in some areas of the country the real estate market had risen so rapidly that equity gains inflated a family’s assets. Officials representing some member schools stated that adjustments to home equity would likely affect middle and upper income families more than lower income families who are less likely to own a home. Table 3 below further illustrates the differences and similarities between the consensus approach and the institutional methodology. In addition, under the consensus approach schools agreed to a common calendar for collecting data from families. Members continue to maintain the ability to exercise professional judgment in assessing a family’s ability to pay when there are unique or extenuating financial circumstances. Twenty-five of 28 schools implemented the consensus approach; 3 did not. While 13 schools implemented all the elements of the consensus approach, the remaining schools varied in how they implemented the methodology.