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Methods of Implementing Adjustments

This page discusses how to identify where an adjustment should be made, if there is more than one possible location.

Adjustments should be made to the specific data element that is affected by the special circumstances, and the amount of the adjustment should be based on the financial impact of the special circumstances.

The Higher Education Act allows adjustments for a special circumstance to be made to either the cost of attendance or the FAFSA data elements. An adjustment to cost of attendance will generally have a bigger impact than an adjustment to income, and an adjustment to income will generally have a bigger impact than an adjustment to assets (with student assets having a bigger impact than parent assets). There are additional considerations affecting whether an adjustment is made to cost of attendance or data elements.

Clearly, if the special circumstances relate to a particular data element, one usually makes the adjustment to that data element. But sometimes other considerations can warrant an adjustment to a different data element. Also, some special circumstances relate to more than one data element.

When making an adjustment to a data element, one possible consideration is the impact of the adjustment on the EFC:

  • AGI, Worksheets A, B and C. Increases to worksheets A and B increase total income, while increases to worksheet C decrease total income. So adjustments implemented by reducing AGI, increasing worksheet C, or reducing worksheets A and B are all equivalent in impact.

  • Taxes Paid. It is worth noting that the state and other tax allowance is based on total income. So adjustments to AGI and/or the worksheets end up reducing the state and other tax allowance. (Adjustments to earned income affect the calculation of FICA tax.) Since the state and other tax allowance represents an actual expense, some financial aid administrators will adjust the taxes paid figure instead, or change the adjustment to compensate for the reduction in the state and other tax allowance. This is not quite kosher, unless the special circumstance is related to taxes paid. But it is, practically speaking, the only method of adjusting income that doesn't decrease the state and other tax allowance.

Generally speaking, financial aid administrators are not supposed to make adjustments according to their impact, since that treads very close to making changes in the formula or trying to change the EFC directly. So one should only adjust taxes paid, as opposed to the Worksheet figures or AGI, when the unusual circumstance relates to taxes paid. However, one can argue that an expenditure from after tax income, such as medical expenses or elementary and secondary school tuition, should not affect the state and other tax allowance. So the rule of thumb is that adjustments that correspond to an expenditure from after tax income should be made by adding the amount to taxes paid. (Note that adjustments to the worksheets will also be made from after-tax income, since the worksheets adjust total income and not AGI.) On the other hand, adjustments that correspond to a reduction in income, such as job loss, should be implemented through adjustments to AGI or the Worksheets.

It is also worth noting that adjustments to AGI affect FISAP, so many schools prefer to make adjustments to the worksheets in order to minimize the negative consequences of the adjustments on campus-based program allocations.

Another possible consideration is the nature of the expense. Each of the worksheets has a different focus, so one might want to choose the data element that has the greatest thematic similarity.

  • AGI. AGI represents taxable income before deductions.

  • Worksheet A. Worksheet A represents untaxed income, with a special emphasis on the types of untaxed income and benefits that are associated with lower income households, such as the earned income credit (EIC) and welfare. Worksheet A is distinguished from Worksheet B to allow financial aid administrators to use a non-zero value in Worksheet A to distinguish the neediest applicants.

  • Worksheet B. Worksheet B represents other untaxed income and benefits, including tax-deferred income, child support received, and cash support.

  • Worksheet C. Worksheet C represents exclusions from taxable income. These are amounts that were included in taxable income but which should be excluded from income for need analysis purposes, such as student aid included in AGI and child support paid.

Most financial aid administrators like including adjustments on the worksheets because it separates out the adjustments. This is easier administratively, making it easier to track. In addition, some families legitimately have no AGI (i.e., their income was low enough that no tax return was required by the IRS), in which case an adjustment to a worksheet or an increase to cost of attendance is the only available mechanism for implementing an adjustment to income. (If the family's income is low enough that they are not required to file an income tax return, their income is likely below that of the IPA and they may even qualify for automatic zero EFC, in which case an adjustment to cost of attendance is the only way to increase their financial aid eligibility. But financial aid administrators are reluctant to make adjustments to cost of education for circumstances that are not student-centric.) Also, making an adjustment to a worksheet preserves the ability to match AGI on the FAFSA with AGI on the income tax return. This will become more important as the US Department of Education and the IRS are instituting a data match on AGI.

Despite the AGI-match issue, some financial aid administrators prefer to make adjustments to AGI when the adjustment represents a change in taxable income. For example, when the financial aid administrator switches from prior tax year income to estimated award year income due to job loss, the adjustment represents a change in taxable income. In such situations the tax liability will also be adjusted to reflect the change in taxable income, and changing the AGI allows the new tax liability to correspond to the new AGI.

Many financial aid administrators prefer to include an adjustment as a positive amount on Worksheet C instead of as a negative amount on Worksheet B. This is partly because the applicant has to have sufficient income on Worksheet B for the adjustment to offset and partly because financial aid administrators like to focus on the positive. Also, Worksheet C represents amounts that were included in taxable income but need to be excluded from taxable income, and so is the appropriate place to make adjustments that do not change the tax liability.

Some financial aid administrators, however, feel uncomfortable including a miscellaneous adjustment on Worksheet C because it doesn't include a catch-all line like Worksheet B. They feel that it is inappropriate to call something a Worksheet C item if it is not one of the Worksheet C items listed on the FAFSA. Worksheet B has two miscellaneous catch-all categories, one for "any other untaxed income or benefits not reported elsewhere on Worksheets A and B" and "cash received, or any money paid on your behalf, not reported elsewhere on this form". Worksheet C does not. So instead of including an adjustment as a positive amount on Worksheet C, they include it as a negative amount on Worksheet B or as a reduction in AGI.

 

 
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