Student Loan Blog : Internal Revenue Service

FAFSA Discourages Students From Applying for Federal Loans

Student Loan Girl — Wed, 10 Jun 2009 21:10:00 GMT

A large proportion of students who only take out non-federal private student loans to finance their education aren’t applying for federal financial aid at all, and it’s the application itself that may be culprit, a new study suggests (“Nightmare Application May Be Driving Students to Costly Loans,” Forbes, June 9, 2009).

In his study of 250,000 students, Mark Kantrowitz, publisher of FinAid.org, a website that offers information on financial aid and student loans, found that since 1999, among those students who relied exclusively on private student loans, 60 percent of undergraduates and nearly 90 percent of graduate students didn’t complete the FAFSA, the Free Application for Federal Student Aid.

The number of students who only take out private student loans has increased 27 percent over the last 10 years. Between 2007 and 2008, the private loans taken out by students who forwent their federal financial aid options amounted to $6.2 billion — nearly 30 percent of the $22.5 billion in new private student loans originated that year.

Proposed Changes Would Eliminate FAFSA

The study’s findings come at a pivotal time in the FAFSA’s history, as the U.S. Department of Education weighs two proposals to overhaul the federal financial aid application process, one of which would carry out President Obama’s campaign promise to eliminate the FAFSA completely.

The FAFSA — currently the only way for families to apply for federal financial aid for college and graduate school — advertises itself as requiring only one hour to complete. But the six-page application calls for families to provide information about their adjusted gross income, marital status, value of their personal property, and taxable income — hurdles, Kantrowitz says, that “may deter students from applying for federal aid.”

A revamp of the FAFSA or of the application process itself could encourage more students to apply for federal student loans, which are typically less costly than private student loans, generally offering lower, fixed interest rates and more flexible repayment terms.

One proposal being considered would simplify the financial aid application form to require only adjusted gross income figures and tax exemption numbers. The other plan that’s been suggested would eliminate an application form altogether and allow the Internal Revenue Service to pass on information from financial aid applicants’ tax returns directly to the Department of Education.

Kantrowitz says a change in the financial aid application process may, in particular, help students from low-income families. His study found that low-income students have been more likely to end up turning to private student loans, which will generally cost them more than federal college loans would: Students from families who earn less than $50,000 a year accounted for two-thirds of those borrowers who financed their education solely with private loans.

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Restructuring of Pennsylvania Student Loan Agency’s Board Wouldn't Affect Tax-Exempt Status as Agency Claims

Student Loan Girl — Tue, 16 Sep 2008 00:03:00 GMT

The Internal Revenue Service has reportedly disproven the Pennsylvania Higher Education Assistance Agency’s claim that cutting the number of lawmakers on its board in half — as recommended by Pennsylvania Auditor General Jack Wagner — would threaten the state student loan agency’s tax-exempt status, according to an article in The Patriot-News (“PHEAA tax status not issue, IRS says,” Sept. 14, 2008).

A letter obtained by The Patriot-News confirms that an IRS official told Wagner’s Chief Counsel Robert Teplitz during a telephone conversation that the proposed board restructuring — based on an audit that found the agency to be lavishly overspending under the current lawmaker-dominated board — “would have ‘absolutely no effect’ ” on PHEAA’s tax-exempt status.

In response to the audit, Wagner proposed that PHEAA, the state’s student loan agency, replace half of the 16 lawmakers on its 20-member board with banking and community leaders, college and university officials, and a full-time college student to restore public confidence in the student loan agency.

James Preston, the CEO of PHEAA, had expressed concern that adhering to Wagner’s suggestion to reduce the number of legislators on the board would threaten the agency’s “tax-exempt status, the loss of which could reduce PHEAA’s ability to provide future public service programs.”

State Sen. Sean Logan, the vice chairman of PHEAA, said, however, that if the PHEAA receives written confirmation directly from the IRS, he would support Wagner’s proposal. “Reducing the number of legislators on the board is a reasonable thing to do,” Logan said.

Wagner’s recommendation followed a special audit of PHEAA’s spending practices between July 1, 2004, and June 30, 2007, in which Wagner concluded that “The PHEAA was governed and managed within a culture that sometimes allowed self-reward to supersede fiscal prudence.”

The audit revealed that PHEAA board members used public money for facials, pedicures, culinary classes, and falconry lessons and spent $768,000 on trips to lavish resorts between 2000 and 2005. Wagner also found that the PHEAA’s 12 executives were grossly overpaid, prompting Wagner to recommend that the salaries of these executives, whose combined income totaled $121 million during the three-year period of the audit, be trimmed.

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New Law May Simplify College Financial Aid Form

Student Loan Girl — Wed, 06 Aug 2008 00:55:00 GMT

Students and parents could spend less time filling out the Free Application for Federal Student Aid under a new provision of The Higher Education Opportunity Act of 2008, according to an article in The Austin American-Statesman, (“New Law to Trim College Financial Aid Form,” August 2, 2008). The legislation was approved by Congress last week but has yet to be signed into law by the president.

Currently, in order to qualify for federal financial aid, families are required to complete the lengthy 11-page FAFSA separately from their yearly tax forms even though the 100-question federal financial aid form is based on tax information families are required to report to the Internal Revenue Service each year. The proposed legislation would allow the IRS to share these figures with the Department of Education, eliminating the need for families to report the information twice.

Requiring the agencies to share data could eliminate the need for as many as 31 questions from the FAFSA, according to a 2007 study by the Institute for College Access and Success.

The current FAFSA, which is used by federal and state governments and most colleges to determine eligibility for financial aid, is so cumbersome to fill out that it represents a roadblock for many students who otherwise might be college bound, the Chronicle of Higher Education reported last year, (“Congress and the Education Department Move to Simplify the Student-Aid Process,” March 30, 2007).

At that time, Rep. George Miller, who is the chief sponsor of the U.S House of Representative’s version of the bill to simplify the FAFSA, told the Chronicle the FAFSA needed to be changed because “It’s long and complicated. It’s over 100 questions. We now see the situation that the form itself can impact the decision about whether students go to college.”

Legislators have not laid out a specific time frame for when the shortened FAFSA would be introduced, leaving the agencies involved to decide when to implement the new FAFSA and the other proposed revisions to the financial aid process:

A simplified process for re-applying for financial aid
Clearer explanations regarding student borrowing options
Requirements that schools and lenders adopt new codes of conduct
Increased transparency and disclosures regarding federal student loan programs

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