Two and a Half Cheers for Prior Prior Year!

Earlier this week, the National Association of Student Financial Aid Administrators (NASFAA) released a report I wrote with Gigi Jones of NASFAA on the potential to use prior prior year income data (PPY) in determining students’ financial aid awards. Compared to the current policy of prior year (PY) data, students could file the FAFSA up to a year earlier than under current law. (See this previous post for a more detailed summary of PPY.)

Although the use of PPY could advance the timeline for financial aid notification, this could also have the effect of changing some students’ aid packages. For example, if a dependent student’s family had a large decrease in family income the year before entering college, the financial aid award would be more generous under PY. Other students’ aid packages would be more generous under PPY. Although we might expect that the number of aid increases and decreases from a move to PPY would balance each other out, the existence of professional judgments (in which financial aid officers can adjust students’ aid packages based on unusual circumstances) complicates that analysis. As a result, it’s possible that PPY could increase program costs in addition to the burden faced by financial aid offices.

To examine the feasibility and potential distributional effects of PPY, we received student-level FAFSA data from nine colleges and universities from the 2007-08 through the 2012-13 academic years. We then estimated the expected family contribution (EFC) for students using PY and PPY data to see how much Pell Grant awards would vary by the year of financial data used. (This exercise also gave me a much greater appreciation for how complicated it truly is to calculate the EFC…and how much data is currently needed in the FAFSA!)

The primary result of the study is that about two-thirds of students would see the exact same Pell award using PPY as they would using PY. These students tend to fall into two groups—students who would never be eligible for the Pell (and are largely filing the FAFSA to be eligible for federal student loans) and those with zero EFC. Students near the Pell eligibility threshold are the bigger concern, as about one in seven students would see a change in their Pell award of at least $1,000 under PPY compared to PY. However, many of these students would never know their PY eligibility, somewhat reducing concerns about the fairness of the change.

To me, the benefits of PPY are pretty clear. So why two and a half cheers? I have three reasons to knock half a cheer off my assessment of a program that is still quite promising:

(1) We don’t know much about the burden of PPY on financial aid offices. When I’ve presented earlier versions of this work to financial aid administrators, they generally think that the additional burden of professional judgments (students appealing their aid awards due to extenuating circumstances) won’t be too bad. I hope they’re right, but it is worth a note of caution going forward.

(2) If students request professional judgments and are successful in getting a larger Pell award, program costs will increase. Roughly 5-7% of students would see their Pell fall by $1,000 or more under PPY. If about 2% of the Pell population is successful (200,000 students), program costs could rise by something like $300-$500 million per year. Compared to a $34 billion program budget, that’s noticeable, but not enormous.

(3) A perfectly implemented PPY program would let students know their eligibility for certain types of financial aid a year earlier than current rules, so as early as the spring of a traditional-age student’s junior year of high school. While that is an improvement, it may still not be early enough to sufficiently influence students’ academic and financial preparation for college. Early commitment and college promise programs reach students at earlier ages, and thus have more potential to be successful.

Even after noting these caveats, I would like to see PPY get a shot at a demonstration program in the next few years. If it can help at least some students at a reasonable cost, let’s give it a try and see if it does induce students to enroll and persist in college.

Can “Paying it Forward” Work?

While Congress is deadlocked on what to do regarding student loan interest rates (I have to note here that interest rates on existing loans WILL NOT CHANGE!), others have pushed forward with innovative ways to make college more affordable. I wrote last fall about an innovative proposal from the Economic Opportunity Institute, a liberal think tank from Washington State, which suggests an income-based repayment program for students attending that state’s public colleges and universities. The Oregon Legislature just approved a plan to try out a version of its program after a short period of discussion and bipartisan approval.

This proposal, which the EOI refers to as “Pay It Forward,” is similar to how college is financed in Australia. It would charge students no tuition or fees upfront and would require students to sign a contract stating that they would pay a certain percentage of their adjusted gross income per year (possibly three percent of income or one percent per year in college) for at least 20 years after leaving college. It appears that the state would rely on the IRS to enforce payment in order to capture part of the earnings of those who leave the state of Oregon. This would be tricky to enforce in theory, given the IRS’s general reticence to step into state-level policies.

While I am by no means convinced by simulations conducted regarding the feasibility of the program, I think the idea is worth a shot as a demonstration program. I think the cost of the program will be larger than expected, especially since income-based repayment programs decouple the cost of college from what students pay.  Colleges suddenly have a strong incentive to raise their posted tuition substantially in order to capture this additional revenue. In addition to the demonstration program, I would like to see a robust set of cost-effectiveness estimates under different enrollment, labor market, and repayment parameters. I’ve done this before in my research examining the feasibility of a hypothetical early commitment Pell program.

Needless to say, I’ll be keeping an eye on this program moving forward to see how the demonstration program plays out. It has the potential to change state funding of higher education, and at the very least will be an interesting program to evaluate.