Insights & Outlooks

The Biggest Barrier to Making Financial Aid Simpler? The IRS.

Financial Aid Reforms
The Biggest Barrier to Making Financial Aid Simpler? The IRS.

It seems the time is right for bold solutions on student debt – presidential candidates are proposing to forgive some or all of America’s education loans, states are attempting to regulate loan servicers, and even Secretary DeVos has called the current situation a crisis. But there are many steps on the path to big change, and often those intermediate measures are arcane changes to existing law. Although a lot can be done to improve how students access federal aid and repay their student loans, one fix is relatively straightforward: Freely sharing data between the Internal Revenue Service (IRS) and Department of Education’s Office of Federal Student Aid (FSA). 

Over the last decade, policymakers looking to provide financial aid and debt relief to students who need it the most have predicted eligibility on income – typically adjusted gross income (AGI) as calculated on individuals’ tax forms. Tax information is used by students and families who apply for aid via the FAFSA and servicers looking to verify federal student loan borrowers’ applications for income-driven repayment (IDR) plans. But right now, the IRS doesn’t freely share this information with FSA. Instead, FAFSA and IDR applicants must proactively and affirmatively share their information each and every year – even if they’ve given permission for the IRS to share their information with FSA before. 

The issue is both political and statutory. Section 6103 of the Internal Revenue Code puts strict limits on the disclosure of IRS data, including to other federal agencies. Though efforts have been made in recent years to develop data-sharing agreements and workarounds in the law, the complications and costs associated have led the IRS to determine that sharing information with FSA is not feasible. So, it’s up to Congress to step in, amend the law, and provide funding to ensure that well-meaning programs truly work.

Why is IRS/FSA data sharing important for federal aid recipients?

At best, the lack of data-sharing between the IRS and FSA causes a headache for students, families, and borrowers. At worst, it can prevent a student from enrolling in college, knock up borrowers’ debt balances by several thousand dollars, or even lead to default.

In the case of the FAFSA, families can import their tax information directly into the form via the IRS data retrieval tool (DRT). But the DRT suffers from connectivity issues and does not guarantee a student will not face the verification process, wherein a family must prove the data they inputted on the FAFSA is correct. Roughly one quarter of low-income students failed to complete verification in 2016-17, starving them of thousands of dollars in grant aid that could help them pay for college. Without that support, these students may not have pursued college at all, leaving their futures more uncertain. Automatic data sharing could mean lower verification rates and thus more low-income students in school and on the path to economic security.

The situation is arguably worse for federal student loan borrowers. Should a borrower want to use an IDR plan to make their monthly payments more affordable, they must submit an application form and income verification documents. While the latter does not have to come from the IRS, a tax return is the most straightforward way to provide credible information. But there’s a catch: borrowers must submit this information every year to stay in their plan, regardless of whether their circumstances changed. Research from 2016 shows that nearly 60 percent of students failed to recertify their IDR plan on time, which leads to interest capitalization, ultimately making debt less affordable to repay and extending borrowers’ repayment terms.

Sharing IRS data can also keep student loan borrowers out of default. When borrowers become delinquent on their debt, many can benefit from a lower monthly payment, which can typically be achieved by enrolling in an IDR plan. But right now, FSA and its loan servicers have no sense of how IDR would impact a struggling borrower. Automatic data sharing would provide FSA with the data they need to automatically enroll delinquent borrowers in a plan with lower monthly payments, thus making it more affordable to get out of delinquency and avoid default. In a perfect world, the IDR plan could be applied retroactively, thus reducing the borrower’s outstanding balance to as little as $0, effectively ending the delinquency and accruing credit toward eventual forgiveness.

A bipartisan solution can be a reality

Fortunately, policymakers have taken notice of this issue and crafted legislation to solve it. The Faster Access to Federal Student Aid Act, or FAFSA Act, was introduced in the last Congress by Senate Health, Education, Labor, and Pensions (HELP) Committee chair Lamar Alexander (R–TN) and Ranking member Patty Murray (D–WA), along with Senators Whitehouse (D–RI), Gardner (R–CO), Collins (R–ME), King (I–ME), Cornyn (R-TX), Stabenow (D-MI), Tillis (R-NC), and Hassan (D-NH). It was passed by unanimous consent in the Senate at the end of the session but was unfortunately never taken up in the House. 

Outside of Congress, several other government, research, and advocacy groups have thrown their support behind IRS/FSA data sharing, including the Trump administration, Pew Charitable Trusts, The Institute for College Access and Success (TICAS), Center for American Progress, National College Access Network, National Association of Student Financial Aid Administrators (NASFAA), and National Consumer Law Center

Though the bill has yet to be introduced as stand-alone legislation in this Congress, jurisdictional issues between the Ways and Means and Education & Labor Committees and lack of will to invest in data sharing could mean the FAFSA Act fails to get the consideration it deserves. 

And that’s a shame. A simple legislative change can make a world of difference for millions of students and borrowers, and it’s time for Congress to consider the issue in earnest.