Update Federal Methodology

Current Law

Need Analysis is covered in The Higher Education Act, Title IV, Part F. The law defines need, cost of attendance, expected family contribution. It specifies the formulas for use in Federal Methodology (FM).

Issue:

Federal Methodology has fallen behind. CPI data is used to update the Income Protection Allowance (IPA) and the Employment Allowance, but the CPI system is based on assumptions dating from the 1960s. IRS data that is incomplete for sales tax defines allowances for state and local taxes; FM tax tables have remained the same for a number of years even as state and local tax systems have changed. Retirement allowances are based on a BLS methodology.

Proposal:

Tables and formulas that underpin Federal Methodology should be reviewed and revised in order to benefit students and their families by arriving at reasonable and equitable family contributions. CES data can be used to establish better Allowances for Standard Maintenance. The College Board uses a database for state and local taxes that more closely approximates what families pay. The College Board has also dropped the Retirement Allowance in favor of a CES-derived Emergency Reserve Allowance. We urge the federal government to adopt these databases.

Possible Objections:

Any revision in the underlying tables used for need analysis would increase the cost of financial aid since the revisions would result in lower family contributions.

Counter Argument:

Federal methodology cannot be based on outdated databases. Controlling cost in this way is not appropriate. The federal government can control costs within the methodology by adjusting assessment rates, but the methodology itself should be based on accurate underlying databases.