Can the idea of automatic tax returns be adapted to improve college financial aid?

The Kennedy School’s Susan Dynarski and Judith Scott-Clayton, in a working paper, put the cost of complexity in the student loan process at $4 billion a year, argue that it does not help target aid to the right students, and say it actually discourages some from applying.

Empirical evidence on the behavioral impact of aid suggests that complexity in the aid system undermines its efficacy. While simple, easily communicated aid programs have been shown to have a robust impact on college entry and completion, we have little to no compelling evidence that the traditional forms of student aid (which require a FAFSA) increase schooling for their target populations. Complexity may be the culprit. Simply put, potential college students cannot respond to a price subsidy if they do not know it exists.

Although FAFSA student aid forms ask for 70 pieces of data, four of them – adjusted gross income, marital status, family size, and the number of family members in college – explain more than 75 percent of the variation in federal grant aid. Dynarski and Scott-Clayton estimate that simulated grants from these sources are within $500 of current grants for 85 percent of students. A previous simplification of the financial aid process allows low-income students to skip 50 of the 70 questions, but this option is never communicated on the paper form, which most low-income students use, and is not mentioned until halfway through the online form.

Testifying before the House last year, Dynarski promoted using previously collected tax information to help students and their families estimate the amount of money available to them in aid. One of the obstacles to better decision making is the overestimation of college costs, and the pessimism among low-income students that they will be able to afford college.

Just as workers are annually sent projections of their Social Security benefits to help them plan for retirement, families could be sent estimates of their tax benefits to help them plan for college. This early, clear information would give students and families confidence they can afford college, and encourage them to work hard in elementary school and high school.

If the cost of these mailings is too high, Dynarski says a table of rough aid calculations based on income and family size could be posted in high school hallways. In previous research, Dynarski has found that the simplicity of Georgia’s HOPE scholarship program – get a B average, go to school in the state for free – is the primary reason why 90 percent of Georgia high school freshman know about it and can explain its rules.

Dynarski would offer families the option to apply for a federal grant by checking a box on their income tax form, instructing IRS to forward applicants’ adjusted gross income, dependency status, and number of dependents to the Department of Education.

This would eliminate the time costs of applying for aid, saving $2 billion in hours currently lost to filling out aid forms. Further, if income information came directly to the Department of Education from the IRS, rather than from self-reports on a FAFSA, schools would no longer need to audit three million applications a year. Every application would effectively be “audited,” since the data generating eligibility would come directly from IRS.

A more radical idea that Dynarski considers briefly would be to have the IRS take over the college aid process.

One Response to “Can the idea of automatic tax returns be adapted to improve college financial aid?”

  1. Gregory Says:

    The IRS can barely handle the task they have. Asking them to administer college financial aid is asking for trouble.

    However, I think linking in with the IRS database would be good to give people an idea of what kind of fin’l aid they could get. That info is all on-line now. The problem is getting access to it in a secure way.

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