June 2001
CONTENTS
Executive Summary Introduction --- Creating a Consensus Approach to Need Analysis
Part I --- Need Analysis and Professional Judgment Issues
Part II --- Management and Process Issues
Part III --- Recommendations for Future Work
Appendices
Executive Summary
The Subcommittee on Common Standards unanimously recommends that the 568 Presidents’ Working Group adopt a new Consensus Approach to Need Analysis as outlined in the following Report.
In coming to this recommendation, the Subcommittee began with the assumption that the College Board’s 1999 revision of the Institutional Methodology (IM) should serve as the starting point for our work.
The Subcommittee has reached broad consensus and makes specific recommendations in three areas:
Recommendations
Need Analysis and Professional Judgment Recommendations — Specific recommendations have been made in each of the following areas of need analysis:
Management and Process Recommendations
Recommendations for Future Work Long-Term Maintenance of the Consensus Approach
We believe that this Consensus Approach to Need Analysis, if properly implemented and maintained, will eliminate much of the variance in need analysis that has been experienced in recent years. We do not view the Consensus Approach as a panacea, however. Need analysis procedures have traditionally depended on "professional judgment" applied locally. Although the Consensus Approach would standardize many policies now subject to professional judgment, it is important to recognize that no system will completely eliminate disparate results or the effects of individual institutional "packaging" decisions.
In developing its recommendations, the Subcommittee has focused on arriving at the "right" approach to determining parental ability to pay, without regard to potential cost implications. We expect that the adoption of our recommendations could significantly affect parent contributions in the aggregate and, in many cases, expected family contributions will be reduced. The impact of the recommendations is likely to vary from institution to institution depending on the school’s applicant profile and the extent to which similar adjustments are already included in their need analysis procedures.
Although the Subcommittee fully supports the Consensus Approach outlined in this paper, it is important to note that our recommendations can be expected initially to heighten the difficulties associated with the new IM and certain institutional changes that have been announced in the last few years. Specifically, both the new IM and certain need analysis modifications adopted unilaterally by individual schools have led to cases in which the institution’s family contribution is less than the one derived from Federal Methodology, resulting in an over-award which limits or eliminates eligibility for federal funding. In an effort to deal with this problem the Professional Judgment Guidelines Manual will include a section on the various methods schools may wish to adopt to reconcile differences in results between institutional and federal need analysis.
The Subcommittee believes strongly that matters of professional judgment should be independent of the qualifications or desirability of a particular applicant to an institution. That is, rules should not be interpreted more leniently because an applicant will bring strong academic or athletic ability or other desirable qualities to the campus.
The Subcommittee is also concerned about restrictions that federal regulations place on the expenditure of need-based institutional aid funds. We believe that the Consensus Approach will produce fair parent contribution levels and that participating institutions should not be forced to disadvantage students by reducing the amount of institutional aid they may receive or excluding them from subsidized federal loans or work-study. We recommend, therefore, that the 568 Presidents’ Working Group, singularly or in concert with other groups, petition Congress for relief in this critical area of institutional prerogative.
Finally, it is important to note that the Subcommittee views its efforts as the beginning of a long-term process. Some of the issues identified in our paper require further exploration and analysis. Moreover, implementation of the Consensus Approach will present, over time, new and unexpected issues and concerns. Likewise, technological advances will provide opportunities for improving and updating the recommendations outlined in the attached paper. Responding to these concerns will require the regular attention of an experienced standing Consensus Approach Need Analysis Committee and a continuing training effort for participants.
Background
On April 18, 2000, the 568 Presidents’ Working Group met and appointed a group of eight senior financial aid professionals to serve on a Common Standards Subcommittee and to report back to them concerning:
whether it is possible to reach agreement on common standards for determining financial need at the institutional level consistent with the Statement of Principles for need-based financial aid and as permitted by Section 568.
The charge to the Subcommittee further requested that, in the pursuit of these goals, the panel:
The work of the Subcommittee was in turn guided by a statement of Need Analysis Principles adopted by the 568 Presidents at that meeting. These Principles are as follows:
FINANCIAL AID PRINCIPLES
The Common Standards Subcommittee held two face-to-face meetings as well as conducted numerous conference call meetings and regular exchanges of various draft documents via e-mail. The recommendations that appear below represent the best efforts of the Subcommittee to develop a Consensus Approach that is both consistent with the Need Analysis Principles adopted by the 568 Presidents and is compatible with the financial aid policies of institutions committed to the values that underlie the 568 Presidents’ Statement of Principles.
The Subcommittee recommends that the 568 Presidents agree to adopt and implement a Consensus Approach for determining the financial need of applicants. This Consensus Approach would have certain key components, including: 1) common elements of need analysis as described below; 2) a common calendar for the collection of data from families; 3) a means of training aid professionals in the application of the Methodology; 4) an oversight group to review and modify the methodology as needed over time; and 5) to the extent allowed by law, a data sharing capability among eligible institutions in order to evaluate institutional consistency in the application of the Methodology.
It is the Subcommittee’s strong recommendation that, where possible, the professional expertise and program services of the College Scholarship Service (CSS) of the College Board be used as resources to advance the implementation of a Consensus Approach. In addition to their long-standing role as the primary data collection agency, CSS services can also assist with the modeling of various recommendations in order to assess their impact on both families and institutions.
Finally, because need analysis is a complex and detailed process requiring the examination of many dozens of elements to measure a family’s ability to pay, several recommendations of the Subcommittee are inconclusive and will require additional discussion and research. In this sense this report to the Presidents should be viewed as an "organic" document. While containing a number of quite specific recommendations for the implementation of a Consensus Approach, it is only the first step in an ongoing process to develop a need analysis system that seeks to assure fair and equitable access to educational opportunity.
Introduction -- Creating a Consensus Approach
to Need Analysis
In response to the charge of the 568 Presidents’ Working Group, the Common Standards Subcommittee has reached agreement on a series of common need analysis standards designed to be included in a Consensus Approach to Need Analysis. We believe that this Consensus Approach, if applied in a consistent manner, would go a long way toward eliminating the divergent results that now threaten the long-standing tradition of awarding aid on the basis of need. It is important to note that our efforts have been restricted to policies affecting first-year awards only. The issue of school-to-school inconsistency applies primarily to first-year students and we believe that it is necessary for financial aid officers to retain as much flexibility as possible in dealing with their already-enrolled students. Moreover, any budgetary issues associated with these recommendations will be moderated by implementing a phase-in one class at a time.
Our Subcommittee began its work with the understanding that the College Board’s Institutional Methodology (IM), as revised in 1999, would serve as our starting point. Consequently, we have focused on those aspects of the current IM that are most often subject to local interpretation or professional judgment. We have attempted to approach our work with an eye toward serving the "greater good" rather than our individual institutions’ needs and capabilities. This required compromise in some cases, but we believe that we have remained true to both the institutional and professional principles that undergird our efforts.
At the Subcommittee’s first meeting, we reviewed our charge and began the difficult task of reviewing a need analysis methodology that, with revisions, has been in place nationally for more than forty-five years. We discussed the new IM at some length and agreed that the revisions included in this Consensus Approach have been helpful in removing some of the problems inherent in the previous methodology.
Building on the items included in our initial charge, we developed a list of those issues that required further review. A number of less complex issues were resolved at our first meeting. Several more complicated issues required the appointment of small working groups. Issues addressed by the working groups included: 1) the creation of a regional cost-of-living adjustment; 2) the treatment of small business issues (and real estate ventures); 3) the treatment of divorced and separated parents; 4) the development and testing of a post-award data sharing project; and 5) the creation of a Professional Judgment Guidelines Manual to be made available to all institutions making use of the Consensus Approach.
In developing its recommendations, the Subcommittee has focused on arriving at the "right" policy without regard to the potential cost implications. We would expect that adoption of these common sense recommendations could serve to reduce expected parent contributions in the aggregate. As noted in earlier 568 Group discussions, schools will be free to deal with institutional resource issues through their packaging policies.
We have attempted, as charged, to err on the side of simplicity. Some of the issues, however, do not lend themselves to a simplified process. Matters relating to divorced and separated parents and the analysis of small business enterprises are two such examples. We believe, however, that our collective interest in achieving a fair and equitable result justifies the added complexity associated with our recommendations in these two areas. Additionally, we believe that the new IM, as amended by our recommendations, will encourage savings for college and recognizes that a family’s ability to pay is largely a function of a) its financial strength and b) the number of children they will have been required to educate. In the area of discouraging asset manipulation, our recommendations begin the process of addressing this problem, but more work needs to be done in this difficult area.
Our recommendations and this paper are divided into three sections: Part I --- Need Analysis and Professional Judgment Issues; Part II --- Management and Process Issues; and Part III --- Recommendations for Future Work.
Part I --- Need Analysis and Professional Judgment Issues
At the core of the need analysis system is the accepted methodology for treating each element that goes into determining a family’s ability to pay. We have examined fifteen specific and important areas and we recommend a common standard to deal with each.
A. Divorced and Separated Families
Recommendation: Both natural parents are expected to cooperate and provide financial information and, if one or both of the custodial parents has remarried, both natural parents and the stepparent(s) are expected to cooperate. Exactly how the information is used in measuring the student's need would be based upon other considerations and additional guidelines to be provided.
Discussion: Of the many challenges facing the financial aid office, treatment of the divorced and separated family is clearly one of the most vexing. As a result, locally applied professional judgment varies from campus to campus, substantially contributing to inconsistency in parent contributions. We anticipate that the use of the Professional Judgment Guidelines Manual by participating institutions will lead to reasonably consistent parent contributions. Our Subcommittee’s recommendations in this critical area are outlined in Appendix A.
B. Assessment of Business and Real Estate
Recommendation: Continue to exclude business and rental losses from the calculation of income in central processing; add back rental depreciation; impute rental property value; redesign Business/Farm Supplement Form to improve quality of data; seek expert advice on various adjustments; and ask CSS to keep us informed of and involved in their work in this area.
Discussion: An increasing number of our applicant families present complex business and real estate profiles for our review and this complexity makes central processing of this information impossible. Consequently, financial aid professionals have attempted to make sense of this information with varying levels of experience, expertise, and applicant-provided information. More experienced aid officers have learned to apply a "sixth sense" to these cases, while those with little experience and limited staff resources are often forced to deal with these applicants as if they were salaried employees rather than as self-employed business persons or entrepreneurs. Understandably, the self-employed family’s calculated ability to pay often varies significantly from campus to campus. Because business and real estate issues may not always lend themselves to central processing, we propose to standardize local treatment of these matters. The details of our recommendations can be found in Appendix B.
C. Cost of Living Variances
Recommendation: Monitor new developments and refine procedures on this issue over time.
Discussion: It is widely understood that cost of living in Manhattan, Kansas, is substantially different than it is in Manhattan, New York. Although the current Institutional Methodology offers a local option that provides cost-of-living adjustments in a few metropolitan areas, the central calculation does not. This failure reduces the "face validity" of current parent contributions and must be corrected. Although we considered a series of options ranging from zip code to regional adjustments, we have determined that the expanded metropolitan cost-of-living structure previewed in Appendix C and provided to users electronically. As new technologies and pricing models are developed we would expect to refine our approach further.
D. Family and Student Assets
Recommendation: In general, student assets and assets held in college savings programs and pre-payment tuition plans are to be treated as family assets.
Discussion: Traditional need analysis procedures have examined parent and student assets individually, assessing separate contributions from the resources of each. Assets held by the parent are assessed at a marginal taxation rate of 5%, while student assets are taxed at 25% (35% in the old methodology and FM). This separate treatment of assets has been deemed appropriate in the past because a student should participate fully in the financing of his or her education. Parents, on the other hand, must pay for their children’s educational expenses, support their families, and prepare for retirement, all from the same resources. When families take advantage of the lower tax rates by saving for college in their children’s names, they must often make significantly higher contributions towards college expenses because of the higher rate of student asset assessment. We believe that this result is inappropriate and that parents who attempt to prepare for college expenses in this way are being unfairly penalized. Moreover, the harsh treatment of assets held in the student’s name encourages families to spend or transfer those resources in an effort to circumvent the financial aid system.
Our Subcommittee recommends that all assets be viewed as family assets and be assessed at the lower parental rate. As a result of recent IM revisions, sibling assets are already viewed as family assets. Treating student assets as family assets will insure consistency in the treatment of all family-owned assets. While we recognize that student trust funds and particularly large student asset accumulations will and should be the subject of professional judgment, as a general principle, all family assets should be treated as parent assets. This policy will encourage further saving for college. (See Appendix D.)
E. Home Equity
Recommendation: Count home equity capped at 2.4 times income minus mortgage debt with professional judgement adjustments in individual cases.
Discussion: Congress’s decision to remove home equity from the federal formula has been a major factor in the confusion now surrounding need-based aid awards nationally and particularly at institutions like ours. The absence of home equity in the federal formula has meant that for many families contributions based on the Federal Methodology have often been considerably lower than those calculated via IM. For reasons relating to both fairness and competition, institutions have begun to vary the manner in which home equity is considered. At some institutions, these policy changes have been applied across the board. At others the treatment of home equity has been applied selectively based on the applicant’s circumstances or the institutional admissions rating.
Our subcommittee believes that home equity can be an important indicator of a family’s financial strength and that it should be considered in need analysis. We believe that most of our 568 Group colleagues, as well as a significant number at other institutions, agree with this proposition; however, we feel that the current practice of capping home equity at 3 times income ignores the fact that home equity is an asset that is less liquid than other forms of assets and less readily available for financing education expenses. We also feel that it is important to realize that one’s home is both an investment good and a consumption good. While other assets are held strictly for the appreciation in wealth that they may bring (an investment good), one’s home is also a good from which housing services are currently provided and non-pecuniary factors are important (a consumption good). The current methodology ignores the consumption value of the home and treats it strictly as an investment good like any other asset. For these reasons, and to narrow the divide between the treatment of home equity in the FM and the Consensus Approach we recommend capping the value of the home at 2.4 times income. Because many 568 institutions already adjust home equity in some fashion, we feel that this recommendation will encourage consistency in the treatment of this important asset.
F. Retirement Allowance
Recommendation: Create a retirement allowance for families not now covered by a formal retirement plan.
Discussion: Until its recent revision the standard IM treatment of assets included a retirement allowance provision for all families. This provision was created at a time when most families expected that Social Security would serve as their principle source of retirement income. The IM retirement allowance was designed to supplement the family’s Social Security income during retirement. Because most families are now covered by formal, privately owned retirement plans not considered in need analysis, CSS determined that the IM retirement allowance was no longer necessary. It was eliminated and formal educational savings and family emergency savings allowances were added.
Our Subcommittee believes that it is appropriate to provide retirement protection for those families not covered by a formal retirement plan. We recommend that such an allowance be created in consultation with CSS and other experts in the field of retirement planning. Our Subcommittee recognizes that this will require CSS to add one, possibly two questions on the PROFILE form. In the short term, we recommend that the current Federal Methodology (FM) asset protection (retirement allowance) tables be used, if necessary.
We understand that CSS plans a long-term project in which they will review retirement assets currently held by applicant families. Although our Subcommittee does not necessarily agree with the inclusion of such assets in the need analysis formula, we are interested in supporting and participating in this project.
G. Institutional Methodology Taxation Bands
Recommendation: No change until further study assesses their impact
Discussion: Institutional Methodology is a highly progressive formula designed to determine the family’s ability to pay through a careful review of their overall financial circumstances. An Income Protection Allowance (IPA) does not define the amount of money required by most families to cover their living expenses–in fact it is much lower than that. Instead, it represents the income level below which a family has no discretion about how its income is spent. Parents with incomes at or below the IPA are not asked to make contributions at all to their children’s educational costs. Those with higher incomes have more choices about how they spend their income and are expected to use some fraction of their income to pay for their children’s education. Because of concerns about the progressivity of the IPA, the new IM has recalibrated the lower-income taxation bands and reduces the highest band by one percent.
After a great deal of consideration, we have concluded that a better understanding of the impact these changes have on the new IM is needed. Given this uncertainty and the additional methodological changes recommended elsewhere in this paper, we believe that it is important to understand the impact of the revised tables as part of developing a Consensus Approach. Consequently, we recommend that no additional adjustments be made at this time. We propose, instead, to study this critical aspect of the new IM over the next three years, making any appropriate changes at that time.
H. Number of Siblings in College
Recommendation: Adopt the revised Institutional Methodology formula for multiple siblings in college.
Discussion: In recent years the need analysis formula divided the total parent contribution by the number of siblings enrolled in college to derive an expected parent contribution for each sibling. This approach meant that families with children spaced closely together were advantaged when applying for financial aid while families with children born farther apart were penalized. Concerns about the inequity resulted in a restoration of the original rationale in IM that considers the number of children enrolled simultaneously, but instead of dividing by the number in college it reduces the calculated Parent Contribution by 40% for two in college and by 55% if three are enrolled.
A number of institutions ignored this change because they were concerned about the impact that reduced aid eligibility might have on enrollment. After a great deal of consideration, our Subcommittee recommends that the current IM treatment of the number of siblings in college be included in the Consensus Approach.
Additionally, we recommend that the Consensus Approach include the following policy clarifications:
A related issue is the consideration of previous educational debt the parents may have accumulated when educating other children. This issue is addressed in Section O below.
I. Elementary and Secondary School Tuition Expenses
Recommendation: Employ the Institutional Methodology optional treatment of such expenses.
Discussion: Unlike the Federal Methodology (FM), both the old and new IM formulas offered the option of counting elementary and secondary school expenses. In each case the tuition allowance cap for each sibling is based on a national average of the annual cost of elementary/secondary school tuition. We recommend that this IM formula option be made a standard part of the Consensus Approach. Tuition expenses in excess of the cap would generally not be considered.
Although the Federal Methodology ignores elementary and secondary school expenses, most 568-type schools already use the IM formula.
J. Extrapolating Assets
Recommendation: Employ the Institutional Methodology treatment of extrapolating assets.
Discussion: Cash and investment assets reported by both parents and students often fail to correlate with interest and dividend income as reported on federal tax forms. Institutions use a variety of formulas to extrapolate the asset holdings implied by the reported income. We recommend that the Consensus Approach incorporate the annually updated IM option for extrapolating assets where the result exceeds reported assets. If available information does not allow CSS to make this adjustment centrally, local adjustments will utilize the annual CSS multiplier.
K. Day Trader Stock Issues
Recommendation: Professional Judgment Guidelines Manual Issue.
Discussion: An increasing number of financial aid applications show income earned from "day trading" in stocks. The large volume of stock trades reported on tax forms often makes it very difficult to verify family holdings. Given the complexity of this issue we recommend that a consultant be retained to develop language to be included in the Professional Judgment Guidelines Manual.
L. Medical Expenses
Recommendation: Employ the Institutional Methodology treatment of such expenses.
Discussion: Families whose unreimbursed medical expenses exceed 7.5% of income may deduct these expenses when completing their federal tax forms. Unlike the Federal Methodology, which ignores these costs, current IM considers unreimbursed medical expenses that exceed 4%. We recommend that the current IM treatment of medical expenses be included in the Consensus Approach. In cases of extreme medical expenses, professional judgment guidelines should be applied locally.
M. One-time Income Adjustments
Recommendation: Exclude certain non-recurring income.
Discussion: Families often request that the income used for need analysis be reduced to reflect non-recurring income. Such income might include certain capital gains, withdrawals from pension plans, IRA rollovers, or unemployment income. We suspect that most 568-type schools already reduce need analysis income by documenting one-time-only income and we recommend that this practice be incorporated into the Consensus Approach. Specifically not included would be over-time and bonus income unless the parent’s employer can document a related change in company policy.
Recommendation: Consider the impact of certain non-reoccurring, non-discretionary expenses.
Discussion: Families often incur one-time only, non-reoccurring expenses that can significantly affect their ability to support educational costs. These expenses can include costs associated with parental care, funeral expenses, uninsured natural disasters, and extraordinary home repair costs. Treatment of such costs varies from campus to campus and contributes to the variability in need analysis results. The Professional Judgment Guidelines Manual will include specific recommendations on how institutions can respond to these expenses.
O. Family Loan Debt
Recommendation: Recognize educational debt under certain circumstances.
Discussion: Many parents support their children’s costs of education by borrowing through formal programs such as PLUS as well as informal programs including home equity and pension fund loans. Repayment of these funds exacerbates the difficulty associated with supporting future educational expenses. As outlined in Appendix E, we recommend that the Consensus Approach include consideration of these expenses.
Part II --- Management and Process Issues
Our Subcommittee also discussed what steps might need to be taken to assist with the maintenance and management of a new common standard of need analysis if it were to be adopted by a significant number of institutions.
A. Tax Form Collection
Recommendation: Collect all of the most recent tax and W-2 forms from all applicants.
Discussion: While most 568-type institutions require families to submit their most recent tax forms (all pages and all schedules) before releasing financial aid resources for account payments, application requirements for first-year students vary considerably from institution to institution. Some institutions will not prepare first-year awards until the family submits either their most recent or prior year tax forms. Others use tax forms if they are available, verifying awards after the fact when tax documents are received. Some institutions require W-2 forms and others do not. We believe that this lack of uniformity in tax form usage could be a source of the variance in measuring the family’s ability to pay.
As a general policy, we recommend, therefore, that institutions subscribing to the Consensus Approach require that families be asked to submit their most recent tax forms (personal and, where appropriate, corporate) and all W-2 forms before first-year aid awards are prepared. If families have not completed their most recent year tax forms when applications are due, these forms should be submitted no later than May 1 of the application year. While we expect that this policy may require a calendar change at some institutions, it should not increase the workload significantly at most schools. But it will insure that participating institutions subscribe to recognized and formal verification procedures prior to providing a final financial aid notification.
While we believe that the timely receipt of tax forms will result in more consistent aid awards, we recognize the importance of being able to complete first-year aid offers expeditiously. We further understand that there will be families with uncomplicated financial circumstances where a delay in award preparation would disadvantage both the family and the institution. Consequently, the Professional Judgment Guidelines Manual will outline those circumstances where it will be appropriate to prepare the aid award before tax forms are received.
B. Professional Judgment Guidelines Manual
Recommendation: Create a Professional Judgment Guidelines Manual that borrows heavily from the current CSS manual with modifications as appropriate
Discussion: As mentioned several times in this paper, we propose that institutions participating in the Consensus Approach be provided with a Professional Judgment Guidelines Manual. We recognize that locally applied professional judgment is a critical component of need analysis and it is not our intention to eliminate or restrict this practice. Instead, this manual will be designed to standardize both those issues that should be treated locally and, to the extent possible, the manner in which such issues are handled.
Rather than reinvent the proverbial wheel, we have collected the tried-and-true professional judgment advisories prepared by the CSS and others. We expect to modify these where appropriate and add others as needed. Those advisories will be collected and developed by our Subcommittee for dissemination at a later date.
Finally, the issue of training is critical to the success of the Consensus Approach. Staff members, especially new hires, must be trained in the Methodology. Time and resources should be devoted to both in-house and group activities.
C. Limited Data Exchange
Recommendation: Move forward with a data exchange test using three small colleges with a large common applicant database
Discussion: In addition to seeking agreement on the Consensus Approach, we have explored ways of developing a data exchange program as permitted by the MIT Settlement Standards of Conduct. Amherst, Wesleyan, and Williams have agreed to participate in this project. (See Appendix F.)
Part III --- Recommendations for Future Work
Maintaining a Consensus Approach to Need Analysis: Federal Methodology Concerns: Current regulations specify that an award containing federal Title IV funds (Federal Work-Study, Perkins, SEOG, and subsidized Stafford loans), must not exceed the eligibility established through Federal Methodology (FM). Due to the standard Institutional Methodology, we already have a number of cases in which the institutional contribution is lower than the federal. The Consensus Approach is likely to increase the number of such cases.
Current approaches to the problem vary. Some schools default to the higher federal contribution while others use the lower institutional contribution and package institutional grant and unsubsidized federal loan. Still others use the lower institutional level and package institutional grant, subsidized institutional loan, and institutional work.
We recommend that the 568 Presidents’ Working Group support efforts for legislative relief in this critical area. If the Consensus Approach produces fair contribution levels, we should not be in a position of disadvantaging students either in the amount of aid that they receive or by excluding their eligibility for subsidized federal loans or Work-Study.
APPENDICES
Appendix A---Divorced/Separated/Single Parent Guidelines
Appendix B---Treatment of Self-Employment/Rental Property
Appendix C---Cost-of-Living Adjustment
Appendix D---Treatment of Assets Held in the Student’s Name
Appendix E---Previous Educational Debt
Appendix F---Limited Data Exchange
Appendix B---Treatment of Self-Employment/Rental Property
Appendix C---Cost-of-Living Adjustment
Appendix D---Treatment of Assets Held in the Student’s Name
Appendix E---Previous Educational Debt
Appendix F---Limited Data Exchange