Issue Briefs

Need Analysis

Need analysis is the term for formulas used to determine a student’s amount of financial need to pay for their postsecondary education. Federal need analysis consists of an overall formula of “cost of attendance (COA)” minus “expected family contribution (EFC)” minus “other estimated financial assistance not found in Title IV of the Higher Education Act (HEA)” to determine the amount of need.
 
On December 27, 2020, the President signed into law H.R. 133, the Consolidated Appropriations Act of 2021, which included the Free Application for Federal Student Aid (FAFSA) Simplification Act of 2020. This bill makes dramatic changes to the overall need analysis formula that will go into effect on July 1, 2023. 
 
The FAFSA Simplification Act makes modifications to the COA. These modifications expand what institutions can consider when determining their COA, including replacing “room and board” with “housing and food;” further defining what an allowance for transportation should include; and introducing a new approach of ensuring that there is an allowance for “living expenses” that includes food and housing costs incurred by a student on at least a half-time basis.
 
The bill modifies the EFC in a number of ways. To start, the bill changes the name of the EFC to a Student Aid Index (SAI). It maintains the three major categories of students based on dependency status but makes modifications to the formulas, including increasing income protection allowances and removing other allowances, including social security tax allowances; state and other tax allowances; and any tax credit in the American Opportunity Tax Credit and Lifetime Learning Credit.
 
The bill also removes an important part of the formula that requires the number of family members, or students, in college to be considered when determining the SAI. Furthermore, it allows a student to have a negative SAI of $1,500, makes changes to certain definitions that are used in the formulas, and clarifies the level of discretion that can be used by the financial aid administrators when reviewing a student’s federal student aid award amount.
 
In addition, the FAFSA Simplification Act amends the definition of “other financial assistance” in current law by excluding emergency financial assistance to students for unexpected expenses, excluding payments made to foster care individuals, and removing the special combat pay prohibition.
 
Lastly, the bill includes language reducing the number of questions on the FAFSA from over 100 to a base of 20.  The changes to the FAFSA are set to take effect in Academic Year 2023-2024.
 
NAICU Key Concerns
While the FAFSA Simplification Act makes some important improvements to the need analysis formula, NAICU remains concerned with the following:

  • The removal of “numbers in college” in the SAI calculation;
  • The horizontal inequity of families of the same size and income level being treated differently due to different metrics used in the formulas;
  • The modifications of the definitions used to determine total income, excludable income, and untaxed income and benefits; and
  • Whether the system changes will be so dramatic that states and institutions will no longer accept the federal system and turn toward alternative private systems instead, creating confusion and a proliferation of application processes for students.

About

Need analysis is the main formula used to determine a student’s amount of financial need to finance their postsecondary education. Need analysis consists of an overall formula of “cost of attendance (COA)” minus “expected family contribution (EFC)” minus “other estimated financial assistance not found in Title IV of the Higher Education Act (HEA)” equaling the amount of need.

In order for the amount of need to be determined, a student must complete the Free Application for Federal Student Aid (FAFSA).  The data gathered from the completion of the FAFSA serves as the foundation of elements used in the need analysis formula. In passing the FAFSA Simplification Act in December 2020, Congress significantly rewrote the need analysis formula for the first time since 1992.

Key Terms

Cost of Attendance: The COA is determined by the institution of higher education. An institution is able to consider a number of elements when determining the cost of attendance, including tuition and fees; an allowance for books, supplies, transportation, and miscellaneous personal expenses; an allowance for room and board; and the one-time cost of obtaining the first professional credentials for students who are enrolled in programs requiring professional licensure or certification.
 
Expected Family Contribution: The EFC is the amount of money a student, or a student’s parent(s), is expected to contribute to their postsecondary education. In order to determine this amount, there are multiple formulas and tables that are used and the information is taken from the FAFSA.
 
Overall, there are three main student categories: dependent student, independent student without dependents (other than a spouse), and independent students with dependents (other than a spouse). Depending on the student classification, a certain formula is used with metrics to determine their EFC. A dependent student is a student who lives with their parent(s), is under the age of 24, and is receiving more than one-half of their support from their parent(s). Students outside of this definition are considered independent students. The number of family members, or students, in college is a factor that is taken into consideration when determining the overall EFC of a household, and the EFC can be no lower than zero.
 
Other Estimated Financial Assistance: Other estimated financial assistance is considered to be scholarships, grants, loans, or other assistance that the institution is aware of when the amount of financial need is determined. Certain tax credits that are not required to be reported as gross income are not included, nor is financial assistance provided by a state to offset a specific component of the COA or special combat pay.

History

In the early 1950s, John Monro, Director of the Harvard University Financial Aid Center at the time, developed the first need analysis formula, known as the “15 percent rule,” to be used by institutions to help them distribute institutional scholarships for students with financial needs. Before the development of this formula, institutions were simply awarding financial aid grants to students based on the desires and philanthropic efforts of community members who were wealthy. The creation of the 15 percent rule led to the creation of the College Scholarship Service (CSS) by the College Board, which institutionalized a methodology that could be used by all institutions. While CSS had created a method, there were other organizations at the time that did the same, such as American College Testing.
 
When what would later be known as the Pell Grant program was created in the Higher Education Amendments of 1972, a separate formula written in the law was used to determine the amount that each student could receive.  However, in 1978, the Department of Health, Education, and Welfare, from which the Department of Education was created, decided to use data from a uniform methodology created by the National Task Force on Student Aid Problems between 1974 and 1975. 
 
In 1986, Congress followed the lead of the taskforce and created a congressional methodology for determining student financial aid but kept the formula for the Pell Grant separate. The congressional methodology introduced various formulas for dependent students, independent students without dependents, and independent students with dependents. It wasn’t until 1992 that a federal methodology was created to merge the Pell Grant formula and the congressional methodology together to create a federal methodology that was widely adapted by states and institutions.

  • Talk to your financial aid officer to determine how the changes in need analysis might affect your students’ and institution’s budgets and access to federal aid. 
  • If you are concerned about the loss of “numbers in college” or the equitable treatment of all family types, speak to your Senators and Representative.
  • Make sure you are ready to comply with the new standards in the FAFSA Simplification Act by paying particular attention to:
    • New financial aid administrator discretion changes.
    • The repeal of the need to provide notices to students concerning penalties for drug violations.
    • The elimination of the 150 percent cap on subsidized loans for students.
    • The forgiveness of the disbursed amounts of your HBCU Capital Finance Loan  (for HBCUs).
    • The new definition of “prison education program”.

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