Using Professional Judgment

1
Using Professional Judgment
2
Session Overview

• Past as prologue
• Professional judgment what, when, why
• Willingness and ability to pay
• Income assessment
• Asset assessment
• Family contribution
• Summary

3
Session Goals

• Strengthen financial aid administrator knowledge
  base
• Emphasize relationship of professional judgment
  to equity
• Support high professional standards

4
Past as Prologue

• John Monro - The Father of Need Analysis
• As the competition for enrollment and talent
  gets tighter, as it will, we may undercut the
  old-fashioned idea that financial aid is intended
  to help the needy and deserving scholar, and that
  well-off families should help themselves. We will
  do ourselves and the country no good if we
  diminish the force of this fine old idea.
  (1953)

5
Present and Future

• Reauthorization and the politics of financial aid
• Cost of higher education
• Process simplicity
• Access denied
• PJ protection
• The economy

6
Financial Aid Administrators Role

• Steward of funds
• Advocate for access
• Systems manager
• Professional activist

7
Truisms of Professional Judgment

• Rooted in a good understanding of need analysis
• Relies on financial aid administrator
  accountability
• With authority comes responsibility

8
Goal of Need Analysis

• Sensitive evaluation of the financial strength of
  applicants in a fair and consistent manner with
  attention to varying types of income, assets and
  family circumstances

9
Professional Judgment What Is It?

• Decision process to alter standard assessment
  when unique or exceptional circumstances impact a
  familys ability to pay for college
• PJ in FM Authority granted in the Higher
  Education Act for aid administrators to exercise
  discretion in specific areas of student aid
  administration

10
Higher Education Act - Section 479A

• Nothing shall be interpreted as limiting the
  authority of the financial aid administrator, on
  the basis of adequate documentation, to make
  adjustments on a case-by-case basis to the cost
  of attendance or the values of the data items
  required to calculate the expected student or
  parent contribution to allow for treatment of an
  individual eligible applicant with special
  circumstances.

11
Professional Judgment Why?

• Gives aid administrators the authority to
  consider individual circumstances
• Enables responsiveness to student circumstances
  that cant be fully anticipated in legislation or
  regulation
• Promotes access by targeting delivery of aid to
  qualified students in need

12
Professional Expectations

• Computers make calculation of family contribution
  easy invisible
• Whats behind the screen?
• Aid professionals must understand methodology or
  cant be sure FC or PJ decision is appropriate

13
Aid Professionals Doctors -Proper Diagnosis
Essential

• Doctor
• Examines patient
• Evaluates symptoms
• Makes diagnosis
• Develops treatment plan

• FA Professional
• Examines application
• Evaluates special circumstances
• Makes adjustments
• Develops financing plan

14
Professional Concerns

• Families more likely to challenge doctors and aid
  administrator decisions now than in past.
• Willingness vs. ability to exercise professional
  judgment
• Depends on campus circumstances
• Scope of federal authority
• Accountability
• Uncertainty

15
Professional Judgment What is Involved?

• Identifying special circumstances outside of
  standard assessment
• Judging validity of adjustments
• Evaluating the scope of adjustments
• Developing adequate documentation
• Maintaining consistent practice
• PJ is time-consuming finding the proper balance
  is tough

16
Professional Judgment - Decisions

• Evaluating
• Are adjustments appropriate?
• Implementing
• Where to make adjustments?
• Cost of attendance
• Educationally-related expenses such as books
  computers other expenses such as child care
• Need analysis data elements
• Income
• Assets
• Family size, dependency status

17
Decisions Supported by Data

• Professional judgment allows aid administrators
  to use data that best represents current family
  circumstances
• Professional judgment cannot be based only on a
  feeling it must also be based on a reasonable
  level of data information pertaining to
• the financial resources of a family (income
  and assets)
• nondiscretionary expenses (i.e., medical,
  family maintenance)
• functional (or not) relationships within the
  family

18
Evaluating Data

• Source
• FAFSA, PROFILE
• Letters from applicants and/or third parties
• Accuracy
• Verified using tax returns and other
  documentation
• Appropriateness
• Information that reflects a familys current
  circumstances and ongoing capacity to pay

19
Professional Judgment Federal Methodology

• What you can do
• Can must exercise PJ on case-by-case basis
• Change data values (but not data elements or
  allowance values)
• Adjust cost of attendance

20
Professional Judgment Federal Methodology

• What you cannot do
• Adjust methodology
• Change bottom line contribution
• Treat an ineligible student as eligible
• Cannot make an otherwise federally independent
  student dependent

21
Professional Judgment Institutional Flexibility

• Institutionally-defined flexibility
• Discretion in use of institutional funds
• Adjust data values and elements
• Adjust methodology
• Define acceptable documentation
• Group applicants with like circumstances
• Not limited to case-by-case adjustments
• Determines level of individual aid administrator
  discretion

22
Professional Judgment FM or IM - Use it Wisely

• With flexibility comes responsibility
• Professional judgment is not a toolto legitimize
  negotiation or to manipulate results or to
  manage enrollment.

23
Responsibility Accountability -Challenges

• Balance PJ frequency
• Manage policy and process
• Determine documentation
• Confront ambiguity
• Accept responsibility

24
Professional Judgment A Delicate Balance

• Too Much
• Undermines consistency
• Consumes time
• Changes need analysis system

• Not Enough
• Depersonalizes
• Fosters rigidity

• Either Extreme ..
• Contributes to ineffective resource management
• Impacts access
• Creates validity concerns

25
Professional Judgment - Institutional Policy

• Standardizes treatment of frequent circumstances
• Defines level of individual aid administrator
  authority
• Triggers review of students with like
  circumstances
• Determines funding options
• Grant vs. self-help
• Impact of creating unmet need
• States when professional judgment is not used

26
Professional Judgment - Institutional Process

• Proactive aid administrator takes initiative,
  and
• Reactive student requests review
• Individual authority
• Staff committee process
• Supports consistency
• Enhances staff development

27
Professional Judgment -Documentation

• Not defined in federal regulation
• Institutional forms promote consistency
• Additional information request
• What is reasonable?
• Supports independent review
• Audit
• Institutional self-assessment
• Replication by department peers

28
Professional Judgment -Documentation

• Why, what, who, when
• Rationale for decision
• How calculation was adjusted
• Supporting documentation
• Quantitative qualitative
• Staff name date of decision
• Paper or electronic format
• Written notification to applicant

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• To give away money is an easy matter, and in any
  (wo)mans power. But to decide to whom to give
  it, and how large and when and for what purpose
  and how is neither in every (wo)mans power, nor
  an easy matter. Hence, it is that such excellence
  is rare, praiseworthy and noble.
• Aristotle

30

• Need AnalysisMore than a function key

31
Philosophy of Need-Based Aid

• Paying for college is a partnership
• First responsibility of student and family
• Aid is a supplement to family resources
• Dependency status defines partnership

32
Family Responsibility

• Need analysis measures
• ability to pay
• not willingness

33
Parent / Student Responsibility

• Parent
• Support expected to extent of ability
• Trend in responsibility shift to student
• Single parent household issues
• Noncustodial parents
• Marital relationships end but parental
  responsibility endures

34
Parent Responsibility

• Stepparent responsibility
• FM requires data
• How appropriate is expectation?
• Nontraditional family structures
• Same-gender parents
• Others in surrogate parent role

35
Parent Responsibility Issues

• When need analysis involves
• more than numbers

36
Need Analysis

• Goal
• A reasonable family contribution
• Snapshot of family financial resources
• Methodology a starting point

37
Expected Family Contribution An Investment

• With reasonable FC computation, most families
  manage without major lifestyle changes
• Education like other large investments
• Payment over time
• Saving before college
• Paying from current income
• Borrowing against future income

38
Principles of Need Analysis

• Equity Fairness in need analysis
• Horizontal Equity
• Consistent treatment of people in similar
  circumstances
• Vertical Equity
• Appropriately differing treatment of people in
  different circumstances

39
Principles of Need Analysis

• Basic family needs come first
• Need analysis provides allowances for
  non-discretionary expenses
• After measuring discretionary resources, need
  analysis assesses the portion available for
  educational costs

40
Effective Need Analysis Key Characteristics

• Equity
• Validity
• Consistency
• Reasonable family contribution

41
Effective Need Analysis

• Sound professional judgment promotes equity and
  access using FM or IM
• Flexibility to recognize special family
  circumstances
• Supports validity of need analysis
• Yields more reasonable assessments

42
Case Study 1 - Unwilling Parents

• Lou and Louise Lewis have the ability to pay
  their daughter Lili's college expenses, but are
  not willing to do so because they disapprove of
  decisions she has made. Lili is 18, and a high
  school senior. She moved out of the Lewis' home
  in December of her senior year to live with her
  boyfriend.
• At the time she moved out, Lili was pregnant and
  has since had an abortion, which is contrary to
  her parents' strong religious beliefs. Lili's
  boyfriend is 23 years old. He works odd jobs, but
  usually draws unemployment compensation.
• Lili has been admitted to a college in her
  hometown. She wants to attend, but says that she
  will not leave her boyfriend who does not have
  any funds with which to assist her.

43
Income in Need Analysis

• Income is the major determinant of family
  contribution

Goal Identify students and familys recurring
annual income
44
Taxable Income

• Alimony
• Unemployment compensation
• Taxable social security
• Taxable pensions
• Taxable IRA
• Annuity distributions

• Wages, salaries, tips
• Interest
• Dividends
• Business income
• Farm income
• Capital gains
• Rental income royalties

45
Untaxed Income

• Child support
• Workers compensation
• SSI / Disability benefits
• Untaxed Social Security income
• TANF
• Untaxed interest income

46
Protecting Family Income

• FM and IM related allowances
• Federal, FICA, state other taxes
• Employment Allowance
• Income Protection Allowance (IPA)
• Medical/dental expenses
• IM standard
• FM adjustment (case-by-case)
• Elementary/secondary tuition expense
• IM option
• FM adjustment (case-by-case)
• Annual Education Savings Allowance
• IM standard
• FM - no equivalent

47
Allowances for Taxes

• Federal income tax
• Self-reported or verified
• FICA
• Self-reported or from W-2
• State and other taxes
• FM and IM derivations differ

48
Did you Know?

• What does the FICA acronym represent?
• F
• I
• C
• A

49
Employment Allowance

• Eligibility
• Double-income households, or
• Single working parent
• Recognizes work-related expenses due to being
  away from household

50
Income Protection Allowance

• Updated annually
• FM CPI based on 1967 BLS data
• IM Consumer Expenditure Survey
• No discretion over use of this income
• Family not expected to subsist on this allowance
• FM supports one national standard
• IM supports regional adjustment option

51
Income Assessment

• Vertical equity supports relative sacrifice
  concept
• Marginal assessment rates
• FM 22-47
• IM 22-46
• Student income assessed at higher rate if no
  dependents other than spouse

52
Income in Need Analysis -Think about

• Base year income
• Is base year the best predictor?
• Cash flow vs. declared taxable untaxed income

53
Income in Need Analysis -Think about

• What else might be affected if you decide to
  adjust income?
• FISAP reporting
• Eligibility for some state grant programs
• Allowances which are derived from total income
  (e.g., state and other taxes in FM and multiple
  allowances in IM).

54
Professional Judgment Income Issues

• Annual income fluctuation
• Degree of choice
• Frequency of fluctuation
• One-time event vs. recurring
• Renewal impact of PJ

55
Fluctuating Income

• Increases in income
• Capital gains
• Severance or bonus payments
• Overtime earnings
• Unemployment compensation
• Seasonal employment
• Gambling winnings
• Reductions in income
• Voluntary early retirement
• Capital business losses
• Business losses
• Business use of home
• Tax write-offs
• Depreciation

56
Fluctuating Income To Adjust or Not

• Documentation
• Letter from employer
• Pay stubs from this time last year
• Multiple years of tax returns
• Possible treatments
• Multiple year average
• Estimated year
• Consider impact on renewal application

57
Case Study 2 - Fluctuating Parent Income

• Frank and Flo Flux both have jobs with incomes
  that vary
• significantly from year to year.
• Frank is a long-distance truck driver who
  frequently experiences periods of unemployment
  and who at other times may earn considerable
  overtime pay. His earned income plus unemployment
  compensation for the past three years has been
  41,372, 54,660, and 38,000. In a letter to the
  aid office, Frank projected earnings of 31,000
  this year, stating that he expects lower income
  because of the incursion of Mexican trucks into
  California, his base.
• Flo sells cars on commission, and her income for
  the past three years has been 24,342, 31,690,
  36,007. She projects 33,000 for the current
  year.
• There are four in the family. Their son,
  Fletcher, will be a freshman in college and their
  daughter will be a college junior. Their assets
  are negligible.

58
Case Study 3 Students Projected Income

• Gloria Garcia is a 25-year-old single independent
  student without dependents who is about to begin
  college full-time after being a retail clerk for
  7 years. She will continue to live alone in the
  apartment that she rents and for which she pays
  600 a month. Her base year income was 18,000
  and she reported 500 in savings.
• Gloria plans to cut back her hours at work when
  she begins school. She expects to earn 1,500 a
  month in the first 8 months of the year prior to
  starting school, and 750 a month thereafter. She
  says that she will have no funds for college
  expenses and needs financial aid.

59
Exceptional Expenses

• Examples
• Elder/dependent care
• Educational debt
• Uninsured losses
• Bankruptcies
• Natural disasters
• Funerals
• Divorce expenses
• Legal fees
• Debts to IRS

• Not recognized instandard analysis
• Level of choice
• Discretionary
• Required
• Frequency
• Isolated instance
• Recurring

60
Exceptional Expenses - Documentation

• Family statement detailing expense
• Third party corroboration
• Receipts
• Payment agreements
• Insurance statements
• Other

61
Exceptional Expenses Possible Treatments

• Reduce income
• Reduce AGI
• FAFSA Worksheet C (Title IV exclusions)
• IM allowance
• Increase taxes paid
• Reduce assets
• Increase cost of attendance

62
Case Study 4 - Exceptional Expenses

• Jim and Judy Johnson have a combined income of
  90,000, and savings and investments of 120,000.
  They have three children. One will be a freshman
  in college in the fall and one a sophomore in
  high school.
• The third is a 27-year-old, Jim, who has severe
  emotional problems and is living in a group home.
  The cost of the group home is 15,000 a year, all
  of which the Johnsons pay. Additionally, they
  spend 1,200 a year for special assistance, which
  Jim is expected to need for the rest of his life.
  
• Judy's 70-year-old widowed mother is living in a
  nearby town. Her sole source of income is Social
  Security of 1,200 a month. The Johnsons
  contribute 10,000 a year to help her meet her
  expenses.

63
Assets in Need Analysis - Principles

• Asset analysis supports a more
  comprehensive measure of financial strength and
  stability.
• Assets provide a measure of choice in meeting
  current expenses and planning for the future.

64
Assets in Need Analysis - Issues

• Assessment a sensitive issue
• Liquid vs. non-liquid
• FM IM treatments differ
• Asset shifting
• Student to sibling or parent
• Valuation may be problematic

65
Assets in Need Analysis -Considerations

• Accumulated income
• Inheritance
• Retirement planning
• Educational savings
• Family emergencies

66
Defining Assets - FM and IM

• Cash, savings, checking
• Money market funds
• Equity in real estate other than home
• Trust funds
• CDs, stocks, bonds, mutual funds
• Coverdell 529 college savings plans
• Business or non-family farm equity

67
Defining Assets - IM not FM

• Home equity
• Family farm equity
• Treated as a business
• Farm supplement used to collect additional
  data
• Option to collect and/or assess retirement assets

68
Why Home is an IM Asset

• Supports vertical horizontal equity
• Homeowner gets benefits in tax system
• Home values appreciate
• Equity available to finance college expenses
• Homeowners housing costs are lower than those of
  renters with comparable incomes (17 of income
  vs. 28)
• Homeowners wealthier than renters
• Eliminating home equity results in higher aid
  eligibility for middle/upper income families,
  potentially diverting finite resources from
  needier families

69
What Role Assets?
70
The NumbersSource 2006-07 Dependent National
Filers with Parent Contribution lt
50,000Reported Values

• Investments 3,679,997,635
• Home 20,360,000,000
• Business 1,082,807,803
• Real Estate 1,850,100,958
• Farm 227,340,005
• Sibling Assets 171,182,516
• Savings 1,689,564,797
• Total 29,060,993,714

71
What about Retirement?

• Recent FASSAC research (before economic
  downturn)
• Self reported retirement wealth not sufficient

72
Parent Assets Without Retirement
2008- 09 PROFILE filer data base
73
Parent Assets With Retirement
2008- 09 PROFILE filer data base
74
Professional Judgment Asset Issues

• Trust funds
• Prior educational loan repayment
• Family home sale investments
• Emergency expenses
• Student assets or parent assets?

75
Professional Judgment Asset Issues

• Evaluating accuracy of reported asset
• Based on dividends, interest, capital gains
• Requires tax return
• Conflicting information potential if tax return
  on file
• Consistency issue if tax return not required

76
Imputing Assets

• Documentation
• Request family list assets and related debts
• Schedule B
• Determine true owner of assets
• Possible treatment
• Determine average rate of return for investment
• Divide investment income by rate of return
• Remember Lower rate of return yields higher
  imputed value
• Home value based on year of purchase and purchase
  price (IM only)

77
Case Study 5 - Imputing Assets

• Dylan Bitser is a 30-year-old full-time student.
  His wife, Leah, is a full-time professional.
• Dylan and Leahs jointly-filed tax return
  indicates two exemptions and taxable income of
  80,000, including interest income of 10,000.
  On the FAFSA, Dylan reported a total of 1,000 in
  net assets.

78
Protecting Assets in FM

• Educational Savings AssetProtection Allowance
• Protect assets for retirement
• Based on age of parents and marital status
• Assumes oldest parent retires at age 65 with
  average social security benefits
• Assumes annuity purchased now will support
  moderate standard of living in retirement

79
Protecting Assets in IM

• No retirement protection
• Retirement assets not in need analysis
• Emergency Reserve Allowance
• Protects assets in case of income loss
• Cumulative Education Savings Allowance
• Assumes family has saved of income for
  college based on income and number of children
  in household

80
Business Asset Protection -FM and IM

• Recognition of income-producing ability
• Net value equity in business
• Net value further protected according to business
  value

81
Asset Assessment FM IM Differ

• FM
• Available assets treated as income supplement
• Parent assets assessed up to 5.6
• Simple Needs Test
• Student assets - 20

• IM
• Assets assessed separately from income
• Parent assets assessed 3 - 5
• No Simple Needs Test
• Student assets treated as parent asset

82
Case Study 6 Educational Debt

• Miles and Mary Kidmore are both 60 years old.
  Miles is a carpenter and Mary is a registered
• nurse who worked part-time while the children
  were young. Their youngest daughter, Mia, is
• the last of six children to attend college.
  Other facts
• They currently have a combined income of 78,000,
  including 500 in interest income.
• Miles averages 10 months of employment per year
  and has not been able to accumulate significant
  retirement savings beyond his Social Security and
  union pension.
• They just inherited 150,000 in mutual funds from
  Marys father.
• Marys ability to work full-time is threatened by
  a back injury.
• The Kidmores have financed their five oldest
  childrens college educations through a
  combination of PLUS and private loans. Although
  they have paid off their private loans, they
  still have 80,000 in outstanding PLUS debt and
  are currently paying about 800 per month on PLUS
  loans.
• Due to their health, limited retirement savings,
  and accumulated debt, they are concerned about
  their ability to pay for Mias education. They
  used the EFC calculator on the College Boards
  web site and estimated a family contribution of
  18,000 to 20,000. They are very worried that
  Mia will be unable to attend college since they
  dont believe they can take on additional debt
  and are unable to pay their contribution from
  current income.

83
Household Size

• Parents student (student/students spouse)
• Students siblings children if they will
  receive more than half support or would be
  considered dependent based on FAFSA dependency
  questions
• Others who live with receive more than half
  support

84
Number in College FM and IM

• Contribution prorated by number of children
  enrolled in college at least half-time
• Parent enrollment excluded
• Parents with college students spaced 4 or more
  years apart receive no adjustment

85
Need Analysis More Than a Function Key

• The financial aid administrator has
  responsibility for assessing the validity and
  reasonableness of the calculation.
• Requires aid administrator understanding of how
  need analysis resulted in family contribution
• Reasonable Somewhat intuitive process

86
Is Family Contribution Reasonable?

• Does family contribution seem right?
• Are results reasonable based on amounts and
  sources of familys income and assets?
• Right means achievable over time
• Can you justify the FC to the family?
• FC must be viewed as multi-year effort(savings,
  income, borrowing)
• Some family sacrifice in funding the FC is a
  reasonable expectation

87
Is Family Contribution Reasonable?

• What to do if answer doesnt seem right
• Look at ISIR edits or PROFILE edits
• Has family explained unusual circumstances?
• Check for errors
• Ask colleague to review
• If unreasonable, why? Disproportionate
  expectation from income? Assets?
• Follow-up may be required

88
Professional Judgment Reality Checks

• Is adjustment worth time and effort?
• If contribution is already 0
• If no funds available student at borrowing
  limit
• If student is willing to work work-study funds
  are available
• Just to acknowledge special circumstances

89
Professional Judgment Its all About People

• Freedom to exercise professional judgment is at
  the heart of the financial aid profession
• Freedom comes with responsibility