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Professional Judgment
Philosophical Basis of Need Analysis

It is important for financial aid administrators who perform professional judgment adjustments to have a firm understanding of the fundamentals of need analysis. It is not possible to make correct professional judgment decisions without understanding how those decisions will affect the family contribution and the extent to which special circumstances are already considered in the design of the need analysis formula.

The goal of need analysis is to estimate the family's ability to pay for their children's education. The family's willingness to pay and lifestyle choices are irrelevant. To estimate ability to pay, the need analysis formulas assess a portion of the parents' discretionary income and assets (referred to as available income and discretionary net worth). Discretionary income is the family's income after subtracting allowances for basic living expenses, required expenses (state and federal taxes) and necessary expenses for producing income (employment allowance).

The focus on the discretionary nature of the income and the non-discretionary nature of the allowances is a key principle behind evaluating whether a special circumstance merits a professional judgment adjustment.

Family income is based on the income reported on the income tax returns, after adding back in certain deductions that are discretionary in nature. These deductions are added back in to total income by including them on Worksheets A and B. For example, the current year's deductions for contributions to 401(k) and IRA retirement plans are counted as untaxed income. So although money in retirement plans doesn't count as an asset, the current year's contributions does count as income.

In addition, financial aid that was included in taxable income on the income tax return, such as Federal Work Study earnings, is subtracted from total income by including it on Worksheet C.

Student income and assets assumed to be primarily for paying for college. This is why the need analysis formula assesses 20% of student assets and 50% of student income.

The Expected Family Contribution is very heavily weighted toward discretionary income. Parent assets are assessed at a relative low rate (a maximum rate of 5.64% of net worth after excluding the age-based asset protection allowance and money in retirement funds) in order to encourage families to save. Instead, the formula emphasizes the family's free cash flow.

Need analysis uses adjusted gross income as a departure point because it is verifiable. Documentation of the family's financial circumstances is an important aspect of need analysis and professional judgment.

The Federal need analysis methodology is based on a "snapshot" philosophy. The information used to calculate financial aid eligibility should be accurate as of the application date. The intention is to base estimates of the family's ability to pay on the assets as of the application date and the income during the upcoming award year (income during the academic year). However, since income during the award year is not a priori verifiable, income during the prior tax year is substituted as a proxy for award year income. This can lead to an inaccurate estimate of the family's ability to pay if the prior tax year income was atypical. Accordingly, financial aid administrators can make adjustments to prior tax year income to compensate for special circumstances such as one-time events, in addition to special circumstances not considered by the boilerplate formula.

Because the formula focuses on a snapshot, the information on the application form must be accurate as of the application date. If the financial aid administrator discovers that any of the submitted information was inaccurate as of the application date, he or she can make a correction to that information. The financial aid administrator may not, however, update the information on the application form to reflect changes that occurred after the application date, with a few notable exceptions. Those exceptions relate to applications selected for verification. In particular, changes in the household size and number in college can be updated when the application is selected for verificiation (but only if the application is selected for verification), if the change is due to something other than a change in the applicant's marital status. The new information should be accurate as of the verification date.

Professional judgment does allow a financial aid administrator to adjust the information on the form, but only given the existence of special circumstances. When there are no special circumstances, the information may not be changed. A change in certain items, such as a change in income due to job loss, is in and of itself a special circumstance. A change in other items, such as the student's marital status, does not on its own constitute a special circumstance meriting an adjustment.

Thus there are three types of changes a financial aid administrator may make to a student's application:

  • Corrections. Information on the original application was not accurate as of the application date. Corrections are permitted at any time.
  • Updates. Information on the original application was accurate as of the application date, but has since changed and the application no longer accurately reflects the student's situation. Some data elements may not be updated. Other data elements may be updated, but only through verification. A few data elements may be updated at any time.
  • Adjustments and Overrides. Information on the application is accurate, but special circumstances justify a change. Adjustments may only occur through an exercise of professional judgment.

Nationwide, approximately 5% of Pell Grant recipients and about 1% of undergraduate students received professional judgment adjustments.


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