Department of Education's Update of the State and Other Tax	 
Allowance for Student Aid Award Year 2005-2006 (22-MAR-05,	 
GAO-05-408R).							 
                                                                 
This letter responds to a Congressional request concerning our	 
January 21, 2005, report Student Financial Aid: Need		 
Determination Could Be Enhanced through Improvements in 	 
Education's Estimate of Applicants' State Tax Payments		 
(GAO-05-105). The Department of Education (Education) proposed an
update to the state and other tax allowance, a part of the	 
federal need analysis for student financial aid. Most federal	 
aid, including Pell Grants and student loans, and some state and 
institutional aid are awarded based on a student's cost of	 
attendance less the student's and/or family's ability to pay	 
these costs--known as the expected family contribution (EFC). The
allowance, which accounts for the amount of state and other	 
nonfederal taxes paid by students and families, effectively	 
reduces the EFC. Education proposed to update the allowance on	 
the basis of information compiled by the Internal Revenue	 
Service's Statistics of Income (SOI) Division, specifically state
and other taxes paid by taxpayers and reported on their federal  
income tax returns for tax year 2000. Our January 2005 report	 
discussed (1) the factors that had affected the updating of the  
tax data on which the allowance is based, (2) the effects	 
Education's proposed 2003 update would have had on financial	 
assistance for student aid applicants for the 2004-2005 award	 
year, (3) the limitations associated with the method used to	 
derive the allowance, and (4) various strategies available to	 
address the limitations. Although the proposed 2003 update to the
state and other tax allowance did not take effect, shortly before
we issued our report--on December 23, 2004--Education updated the
state and other tax allowance for award year 2005-2006 on the	 
basis of information compiled by SOI for tax year 2002, which was
collected in the same manner as the tax year 2000 data. For this 
update, Education used the same methodology that was used for the
proposed 2003 update. As of January 2005, Education has begun	 
processing student aid applications for the 2005-2006 award year 
using the updated allowance. In light of Education's 2004 update 
of the state and other tax allowance for award year 2005-2006,	 
Congress asked us to update certain analyses included in our	 
January 2005 report, which focused on Education's prior proposal.
In particular, we determined how Education's update will affect, 
with respect to the 2005-2006 award year, (1) the state and other
tax allowance, by state and dependency status; (2) the average	 
EFC, by state; (3) eligibility for Pell Grants, by state,	 
household income, and dependency status; (4) the amount of the	 
average Pell Grant award, by state, household income, and	 
dependency status; and (5) aggregate Pell Grant expenditures and 
overall student eligibility for Pell Grants. Congress also asked 
us to include the effects if Education had adopted one of the	 
strategies discussed in our report for addressing the limitations
associated with calculating the allowance.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-408R					        
    ACCNO:   A19898						        
  TITLE:     Department of Education's Update of the State and Other  
Tax Allowance for Student Aid Award Year 2005-2006		 
     DATE:   03/22/2005 
  SUBJECT:   Aid for education					 
	     Data collection					 
	     Data integrity					 
	     Educational allowances				 
	     Federal funds					 
	     Income statistics					 
	     Income taxes					 
	     Student financial aid				 
	     Student loans					 
	     Students						 
	     Eligibility determinations 			 
	     Educational grants 				 
	     Pell Grant 					 

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GAO-05-408R

United States Government Accountability Office Washington, DC 20548

March 22, 2005

The Honorable David R. Obey Ranking Minority Member Committee on
Appropriations House of Representatives

Subject: Department of Education's Update of the State and Other Tax
Allowance for Student Aid Award Year 2005-2006

Dear Mr. Obey:

This letter responds to your request concerning our January 21, 2005,
report Student Financial Aid: Need Determination Could Be Enhanced through
Improvements in Education's Estimate of Applicants' State Tax Payments
(GAO-05-105). As you know, in 2003, the Department of Education
(Education) proposed an update to the state and other tax allowance, a
part of the federal need analysis for student financial aid. Most federal
aid, including Pell Grants and student loans, and some state and
institutional aid are awarded based on a student's cost of attendance less
the student's and/or family's ability to pay these costs-known as the
expected family contribution (EFC). The allowance, which accounts for the
amount of state and other nonfederal taxes paid by students and families,
effectively reduces the EFC. Education proposed to update the allowance on
the basis of information compiled by the Internal Revenue Service's
Statistics of Income (SOI) Division, specifically state and other taxes
paid by taxpayers and reported on their federal income tax returns for tax
year 2000. Our January 2005 report discussed (1) the factors that had
affected the updating of the tax data on which the allowance is based, (2)
the effects Education's proposed 2003 update would have had on financial
assistance for student aid applicants for the 2004-2005 award year, (3)
the limitations associated with the method used to derive the allowance,
and (4) various strategies available to address the limitations. Although
the proposed 2003 update to the state and other tax allowance did not take
effect, shortly before we issued our report-on December 23, 2004-Education
updated the state and other tax allowance for award year 2005-2006 on the
basis of information compiled by SOI for tax year 2002, which was
collected in the same manner as the tax year 2000 data. For this update,
Education used the same methodology that was used for the proposed 2003
update. As of January 2005, Education has begun processing student aid
applications for the 2005-2006 award year using the updated allowance.

In light of Education's 2004 update of the state and other tax allowance
for award year 2005-2006, you asked us to update certain analyses included
in our January 2005 report, which focused on Education's prior proposal.
In particular, you asked us to determine how Education's update will
affect, with respect to the 2005-2006 award

year, (1) the state and other tax allowance, by state and dependency
status; (2) the average EFC, by state; (3) eligibility for Pell Grants, by
state, household income, and dependency status; (4) the amount of the
average Pell Grant award, by state, household income, and dependency
status; and (5) aggregate Pell Grant expenditures and overall student
eligibility for Pell Grants. You also asked us to include the effects if
Education had adopted one of the strategies discussed in our report for
addressing the limitations associated with calculating the allowance.

Education's 2004 update decreases the state and other tax allowance for
most states for the 2005-2006 award year and will, thereby, increase the
expected family contribution (EFC) for a majority of student aid
applicants; the increase in expected family contribution will, in turn,
affect the allocation of federal aid. Specifically, we estimate that the
2004 update to the state and other tax allowance will increase EFCs by
about $440 on average for those with an increase, with EFC changes being
larger for students from states with larger changes in their allowance.
With respect to Pell Grants, our national analysis shows that the 2004
update will likely result in a decrease in Pell Grants for about 35
percent of students, and an additional 81,000 applicants (1.5 percent)
will no longer be eligible for the grant; taken together, the average
reduction amongst those with a decrease in their amount will be about
$130. Collectively, this will decrease overall Pell Grant expenditures by
about $250 million. Because these EFC changes will affect Pell and other
grant aid, Stafford and PLUS loan award amounts will be affected as well.
Our analysis shows that, as EFCs increase, those with income above $25,000
are most likely to have their subsidized Stafford loan awards affected.
The overall impacts on EFC, Pell Grants, and loans will be slightly less
when compared to what would have occurred under the proposed update of
2003.

In our January 2005 report, we identified four strategies to address some
of the limitations associated with the tax allowance. Using an updated
sample of aid applicants and tax data, these options would have ranged in
their impact on federal expenditures for the Pell Grant and other federal
programs. For example, depending on the option chosen, the effect would
have ranged from a $200 million decrease in Pell Grant expenditures to a
$200 million increase in the 2005-2006 award year.

We are providing this information more specifically in nine enclosures.

In providing updated information for this letter, we replicated the
methodology we used for our January 2005 report. For that report, we used
Education's aid applicant sample file from the 2002-2003 award year to
estimate changes to the expected family contribution and Pell Grant awards
nationally that would have resulted from Education's 2003 update. In
providing information for this letter, however, we used Education's aid
applicant sample file from the 2003-2004 award year to provide updated
information. We also analyzed Education's Cost Estimation and Analysis
Division's Statistical Abstract (CEAD STAB) data to estimate the
proportion of financial aid applicants who could experience a change in
their federal loans as a result of the update. We also reviewed and
analyzed state and other tax data from the Internal Revenue Service
(Statistics of Income Division), Bureau of the Census (Census), Bureau of
Economic Analysis (BEA), and the Institute on Taxation and Economic Policy
(ITEP). We conducted reliability assessments on the datasets used

from Census, BEA, and ITEP, and they are disclosed in the appropriate
enclosures. We conducted our work in February 2005 in accordance with
generally accepted government auditing standards. We provided Education
with a copy of our draft letter for review and comment. Education provided
a technical comment, which we incorporated.

As agreed with your office, unless you publicly announce its content
earlier, we plan
no further distribution of this letter until 30 days after its date. At
that time, we will
send copies of this letter to the Secretary of Education and other
interested parties.
The letter will also be available on GAO's home page at
http://www.gao.gov.

If you have any questions about this letter, please contact me at (202)
512-8403 or
Jeff Appel, Assistant Director, at (202) 512-9915. You may also reach us
by e-mail at
[email protected] or [email protected]. Tranchau Nguyen and Jeff Weinstein were
also
key contributors to this letter.

Sincerely yours,

Cornelia M. Ashby
Director, Education, Workforce,

and Income Security Issues

Enclosures

Enclosures

o  	Enclosure I: Comparison of Prior State and Other Tax Allowance,
Published in 1993, with That Proposed in 2003 and That Published in 2004,
by Income Level, for Parents and Independents with Children.

o  	Enclosure II: Comparison of Prior State and Other Tax Allowance,
Published in 1993, with That Proposed in 2003 and That Published in 2004,
for Dependents and Independents without Children.

o  	Enclosure III: Difference between Prior Allowance, Published in 1993,
and Education's 2004 Updated Allowance and Estimated EFC Impact, by State.

o  	Enclosure IV: Percentage of Recipients That Will Experience a Decrease
in Pell Grant Awards As a Result of Education's 2004 Updated Allowance,
Average Pell Grant Received Based on Prior Allowance, and Average Decrease
as a Result of Updated Allowance, Including Those No Longer Eligible for
an Award, by State.

o  	Enclosure V: Percentage of Recipients with a Decrease in Pell Award
Based on a Change from the Prior Allowance, Published in 1993, to
Education's 2004 Updated Allowance, by Household Income and Dependency
Status.

o  	Enclosure VI: Median Percentage Change in Amount of Pell Award for
Those with a Decrease Based on Change from the Prior Allowance, Published
in 1993, to Education's 2004 Updated Allowance, by Household Income and
Dependency Status.

o  	Enclosure VII: Percentage of Students Likely to Have a Change in
Subsidized Stafford Loans Based on Change from the Prior Allowance,
Published in 1993, to Education's 2004 Updated Allowance, by Household
Income and Dependency Status.

o  	Enclosure VIII: Framework for Evaluating Options Identified to Change
the State and Other Tax Allowance relative to the Prior Allowance.

o  	Enclosure IX: Simulation of Tax Allowances under Various Options, by
State-Families with Adjusted Gross Income of $15,000 or More.

Enclosure I

Comparison of Prior State and Other Tax Allowance, Published in 1993, with
That Proposed in 2003 and That Published in 2004, by Income Level, for
Parents and Independents with Children

Allowance Percentage

Income less than $15,000 Income $15,000 or more

      State of Residence      1993     2003    2004    1993    2003      2004 
           Alabama             5        3        3       4       2          2 
            Alaska             3        2        2       2       1          1 
           Arizona             6        4        4       5       3          3 
           Arkansas            6        3        3       5       2          2 
          California           8        6        7       7       5          6 
           Colorado            7        4        4       6       3          3 
         Connecticut           6        6        7       5       5          6 
           Delaware            8        4        4       7       3          3 
     District of Columbia      10       7        7       9       6          6 
           Florida             4        2        2       3       1          1 
           Georgia             7        5        5       6       4          4 
            Hawaii             8        4        4       7       3          3 
            Idaho              7        5        5       6       4          4 
           Illinois            6        4        5       5       3          4 
           Indiana             6        4        4       5       3          3 
             Iowa              8        4        5       7       3          4 
            Kansas             7        4        5       6       3          4 
           Kentucky            7        5        5       6       4          4 
          Louisiana            4        2        2       3       1          1 
            Maine              9        6        6       8       5          5 
           Maryland            9        7        7       8       6          6 
        Massachusetts          9        6        6       8       5          5 
           Michigan            9        5        5       8       4          4 
          Minnesota            9        6        6       8       5          5 
         Mississippi           5        3        3       4       2          2 
           Missouri            6        4        4       5       3          3 
           Montana             8        5        5       7       4          4 
           Nebraska            8        4        5       7       3          4 
            Nevada             3        2        2       2       1          1 
        New Hampshire          7        4        4       6       3          3 
          New Jersey           8        7        8       7       6          7 
          New Mexico           6        3        4       5       2          3 
           New York            11       8        8      10       7          7 
        North Carolina         8        5        6       7       4          5 
         North Dakota          6        2        2       5       1          1 
             Ohio              8        5        6       7       4          5 
           Oklahoma            6        4        4       5       3          3 
            Oregon             10       7        7       9       6          6 
         Other areas           4        3        3       3       2          2 
         Pennsylvania          7        4        5       6       3          4 

Allowance Percentage

Income less than $15,000 Income $15,000 or more

     State of Residence     1993     2003     2004     1993    2003      2004 
        Rhode Island         9        6        7        8        5          6 
       South Carolina        8        4        5        7        3          4 
        South Dakota         4        1        1        3        0          0 
         Tennessee           3        1        1        2        0          0 
           Texas             3        2        2        2        1          1 
            Utah             8        5        5        7        4          4 
          Vermont            8        5        6        7        4          5 
          Virginia           8        5        5        7        4          4 
         Washington          4        2        2        3        1          1 
       West Virginia         6        3        3        5        2          2 
         Wisconsin           10       6        7        9        5          6 
          Wyoming            3        1        1        2        0          0 

Source: 1993, 2003, and 2004 Federal Registers.

Note: This enclosure corresponds to table 1, found on page 12 of our
January 2005 report.

                                  Enclosure II

Comparison of Prior State and Other Tax Allowance, Published in 1993, with
That Proposed in 2003 and That Published in 2004, for Dependents and
Independents without Children

                              Allowance Percentage

     State of Residence     1993                  2003 2004                   
          Alabama              3                     2 2                      
           Alaska              0                     0 0                      
          Arizona              3                     3 2                      
          Arkansas             4                     3 3                      
         California            5                     5 5                      
          Colorado             4                     3 3                      
        Connecticut            2                     4 4                      
          Delaware             5                     3 3                      
    District of Columbia       7                     6 6                      
          Florida              1                     0 0                      
          Georgia              4                     3 3                      
           Hawaii              6                     4 4                      
           Idaho               5                     4 3                      
          Illinois             2                     2 2                      
          Indiana              4                     3 3                      
            Iowa               5                     3 3                      
           Kansas              4                     3 3                      
          Kentucky             5                     4 4                      
         Louisiana             2                     1 2                      
           Maine               5                     4 4                      
          Maryland             6                     5 5                      
       Massachusetts           5                     4 4                      
          Michigan             4                     3 3                      
         Minnesota             6                     4 4                      
        Mississippi            3                     2 2                      
          Missouri             3                     3 3                      
          Montana              5                     3 3                      
          Nebraska             4                     3 3                      
           Nevada              0                     1 1                      
       New Hampshire           1                     1 1                      
         New Jersey            3                     4 4                      
         New Mexico            4                     3 3                      
          New York             7                     5 5                      
       North Carolina          5                     4 4                      
        North Dakota           2                     1 1                      
            Ohio               5                     4 4                      
          Oklahoma             4                     3 3                      
           Oregon              6                     5 5                      
        Other areas            2                     2 2                      
        Pennsylvania           3                     3 3                      
        Rhode Island           4                     4 4                      
       South Carolina          5                     3 3                      
        South Dakota           0                     0 0                      
         Tennessee             0                     0 0                      
           Page 7                  GAO-05-408R Student Aid Need Determination 

              Texas                   0               0                     0 
              Utah                    5               4                     4 
             Vermont                  4               3                     3 
            Virginia                  4               3                     3 
           Washington                 0               0                     0 
          West Virginia               4               2                     2 
            Wisconsin                 5               4                     4 
             Wyoming                  0               0                     0 

Source: 1993, 2003, and 2004 Federal Registers.

Note: This enclosure corresponds to table 2, found on page 13 of our
January 2005 report.

Enclosure III

Difference between Prior Allowance, Published in 1993, and Education's
2004 Updated Allowance and Estimated EFC Impact, by State

Percentage point change in Estimated Average EFC, in Estimated the state
and other tax percentage of dollars, under the average EFC allowance
students with prior allowance dollar increase an increase in for those
with an for those with State Families a Individualsb their EFCc increase d
an increase e

Alabama -2 -1 61 $ 7,602 $ 319

Alaska -1 0 62 16,350 274

Arizona -2 -1 67 9,014 328

Arkansas -3 -1 63 6,898 430

California -1 0 46 10,180 209

Colorado -3 -1 75 11,408 578

Connecticut +1 +2 0 10,230 70

Delaware -4 -2 77 10,583 858

District of Columbia -3 -1 61 8,938 484

Florida -2 -1 66 8,311 310

Georgia -2 -1 68 9,994 388

Hawaii -4 -2 70 9,118 763

Idaho -2 -2 69 7,902 351

Illinois -1 0 59 11,915 238

Indiana -2 -1 74 10,299 415

Iowa -3 -2 78 9,751 632

          Kansas            -2        -1        76        9,951           397 
         Kentucky           -2        -1        66        8,206           340 
         Louisiana          -2         0        52        13,032          463 
           Maine            -3        -1        79        10,276          630 
         Maryland           -2        -1        76        11,637          473 
       Massachusetts        -3        -1        80        12,357          724 
         Michigan           -4        -1        74        9,873           765 
         Minnesota          -3        -2        81        11,419          706 
        Mississippi         -2        -1        55        6,913           301 
         Missouri           -2         0        60        10,842          445 
          Montana           -3        -2        71        8,156           531 
         Nebraska           -3        -1        78        9,658           580 
          Nevada            -1        +1        49        9,837           195 
       New Hampshire        -3         0        73        13,701          828 
        New Jersey           0        +1         1        16,076           70 
        New Mexico          -2        -1        64        7,514           304 
         New York           -3        -2        69        10,068          653 
      North Carolina        -2        -1        69        8,160           344 
       North Dakota         -4        -1        79        10,155          758 
           Ohio             -2        -1        73        10,286          421 

Percentage point change in Estimated Average EFC, in Estimated the state
and other tax percentage of dollars, under the average EFC allowance
students with prior allowance dollar increase an increase in for those
with an for those with State Families a Individualsb their EFCc increase d
an increase e

Oklahoma -2 -1 65 7,132 300

Oregon -3 -1 69 9,530 536

Pennsylvania -2 0 67 12,073 502

Rhode Island -2 0 63 11,723 490

South Carolina -3 -2 69 9,341 581

South Dakota -3 0 64 9,716 595

Tennessee -2 0 53 9,195 381

Texas -1 0 52 9,341 192

Utah -3 -1 73 6,185 366

Vermont -2 -1 79 10,815 449

Virginia -3 -1 74 10,703 627

Washington -2 0 54 11,440 437

West Virginia -3 -2 68 8,827 564

Wisconsin -3 -1 81 10,830 640

Wyoming -2 0 60 12,275 436

Total USAf N/A N/A 61 $ 9,964 $ 443

Source: GAO analysis of the 2003-2004 Free Application for Federal
Financial Aid (FAFSA) applicant file.

Notes:	This enclosure generally corresponds to table 3, found on pages
17-18 of our January 2005 report. N/A indicates "not applicable." We
assessed the reliability of the FAFSA applicant file by conducting
electronic testing of key variables for obvious problems in accuracy and
completeness, interviewing appropriate Education officials, and reviewing
related documentation, and we determined that the data were sufficiently
reliable for our purposes.

aFamilies are defined to include parents of dependent students and
independent students with children.

bIndividuals are defined to include independent students without children
and dependent students. Dependent students whose state of residence is
different from that of their parents were counted as being from their
parents' state. Since the EFC for a family is based upon both the parents'
and the student's income, the EFC changes reported above for each state
may reflect not only the change in the allowance for that state but also
the change for the state of residence for students attending school in
another state. For example, Connecticut, which has an increased allowance,
may have families with an EFC increase because the children of those
families may be attending school and residing in another state with a
decreased allowance.

cThe sampling errors for the percentage of students with an increase in
their EFC are at or below 5 percentage points for all states.

dThe sampling errors for the average EFC-under the current allowance-for
those with an increase are at or below 5 percent for all states.

eThe sampling errors for the average EFC increase for Connecticut, the
District of Columbia, and New Jersey are above 10 percent. The sampling
errors for Alaska, Delaware, Hawaii, Maine, Montana, Nevada, North Dakota,
Rhode Island, South Dakota, Vermont, West Virginia, and Wyoming are above
5 percent but no more than 10 percent. All other state figures have a
sampling error at or below 5 percent.

fThe total row includes the 50 U.S. states, the District of Columbia,
American Samoa, the Federal States of Micronesia, Guam, the Marshall
Islands, Northern Marianas, Palau, Puerto Rico, the Virgin Islands, and
other U.S. territories.

Enclosure IV

Percentage of Recipients That Will Experience a Decrease in Pell Grant
Awards As a Result of Education's 2004 Updated Allowance, Average Pell
Grant Received Based on Prior Allowance, and Average Decrease as a Result
of Updated Allowance, Including Those No Longer Eligible for an Award, by
State

                            Estimated                     
                                          Average dollar  
                          percentage of        Pell       
                        recipients with a Grant under the   Estimated average 
                                          prior                    Pell Grant 
                         decrease in Pell allowance for   dollar decrease for 
                                          those with             those with a 
          State              Granta        a decrease b       decrease c      
         Alabama               37             $ 1,937           -$ 109        
          Alaska               24              1,401              -65         
         Arizona               41              1,791             -111         
         Arkansas              44              1,933             -145         
        California             21              1,794              -86         
         Colorado              44              1,743             -156         
       Connecticutd             0               N/A               N/A         
         Delaware              54              1,611             -193         
District of Columbia        41              1,874             -154         
         Florida               42              1,816             -108         
         Georgia               43              1,634             -105         
          Hawaii               46              1,893             -210         
          Idaho                47              1,879             -126         
         Illinois              26              1,690              -86         
         Indiana               45              1,728             -119         
           Iowa                55              1,715             -184         

Kansas 48 1,766 -124 Kentucky 40 1,743 -116 Louisiana 33 1,972 -113 Maine
51 1,806 -173 Maryland 47 1,746 -112 Massachusetts 49 1,738 -178 Michigan
47 1,707 -197 Minnesota 55 1,700 -180 Mississippi 36 1,951 -115 Missouri
38 1,770 -119 Montana 48 1,911 -172 Nebraska 50 1,731 -166 Nevada 22 1,573
-76 New Hampshire 52 1,682 -182

e

New Jersey 0 1,530 -93 New Mexico 39 1,767 -110 New York 46 1,978 -171

                      Estimated                         
                      percentage of Average dollar Pell 
                  recipients with a Grant under the         Estimated average 
                                    prior                          Pell Grant 
                   decrease in Pell allowance for those   dollar decrease for 
                                    with                         those with a 
       State           Granta          a decrease b          decrease c       
North Carolina        45                1,898                -118          
    North Dakota         48                1,858                -224          
        Ohio             43                1,692                -116          
      Oklahoma           42                1,834                -113          
       Oregon            41                1,824                -156          
    Pennsylvania         42                1,743                -127          
    Rhode Island         43                1,829                -114          
South Carolina        48                1,870                -159          
    South Dakota         45                1,785                -165          
     Tennessee           36                1,895                -108          
       Texas             24                1,758                 -82          
        Utah             46                1,854                -144          
      Vermont            48                1,687                -130          
      Virginia           49                1,806                -163          
     Washington          34                1,804                -115          
West Virginia         46                1,938                -168          
     Wisconsin           52                1,706                -173          
      Wyoming            36                1,877                -117          

Total USAf 36 $ 1,806 -$ 131

Source: GAO analysis of the 2003-2004 FAFSA applicant file.

Notes:	This enclosure generally corresponds to Table 4, found on pages
19-20 of our January 2005 report. N/A indicates "not applicable."

aThe sampling errors for the percentage of students with a decrease in
their Pell Grant for the District of Columbia and Vermont are just over 5
percentage points. All other state figures have a sampling error at or
below 5 percentage points.

bThe sampling errors for the average Pell Grant-under the current
allowance-for those with a decrease for Alaska and New Jersey are over 10
percent. The sampling errors for Delaware, the District of Columbia,
Hawaii, Maine, Montana, Nevada, New Hampshire, North Dakota, Rhode Island,
South Dakota, Vermont, and Wyoming are above 5 percent but no higher than
10 percent. All other state figures have a sampling error at or below 5
percent.

cThe average reflects the reduction for those with a decrease, including
both those who would have retained and those who would have lost
eligibility. The sampling errors for the average Pell Grant decrease for
Alaska, the District of Columbia, New Jersey, and Vermont are above 10
percent. The sampling errors for Delaware, Hawaii, Idaho, Maine, Montana,
Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Rhode Island,
South Dakota, and Wyoming are above 5 percent but no higher than 10
percent. All other state figures have a sampling error at or below 5
percent.

dNo one in the sample from Connecticut exhibits a decrease in his or her
Pell Grant.

eThe actual figure for New Jersey is 0.1 percent, which rounds to 0
percent for the purposes of this table.

fThe total row includes the 50 U.S. states, the District of Columbia,
American Samoa, the Federal States of Micronesia, Guam, the Marshall
Islands, Northern Marianas, Palau, Puerto Rico, the Virgin Islands, and
other U.S. territories.

Enclosure V

Percentage of Recipients with a Decrease in Pell Award Based on a Change
from the Prior Allowance, Published in 1993, to Education's 2004 Updated
Allowance, by Household Income and Dependency Status

100

90

80

70

60

50

40

30

20

10

     0                                                    
          $25,000 or less          $25,001-$50,000           $50,001-$100,000 
                               Household income (dollars) 
                 Dependents                                  Independents     

Source: GAO analysis of the 2003-2004 FAFSA applicant file.

Notes:	This enclosure corresponds to figure 3, found on page 21 of our
January 2005 report. The sampling errors are all 5 percentage points or
less.

Enclosure VI

Median Percentage Change in Amount of Pell Award for Those with a Decrease
Based on Change from the Prior Allowance, Published in 1993, to
Education's 2004 Updated Allowance, by Household Income and Dependency
Status

0

-5

-10

-15

-20

-25 $25,000 or less $25,001-$50,000 $50,001-$100,000

                         Household income (in dollars)

                            Dependents Independents

Source: GAO analysis of the 2003-2004 FAFSA applicant file.

Notes:	This enclosure corresponds to figure 4, found on page 22 of our
January 2005 report. The sampling errors are all 5 percentage points or
less.

Enclosure VII

Percentage of Students Likely to Have a Change in Subsidized Stafford
Loans Based on Change from the Prior Allowance, Published in 1993, to
Education's 2004 Updated Allowance, by Household Income and Dependency
Status

50

40

30

20

10

0

       $25,000 or less $25,001-$50,000 $50,001-$100,000 $100,001 or more

                           Household income (dollars)

                            Dependents Independents

Source: GAO analysis of 2004 CEAD STAB data.

Notes:	This enclosure corresponds to figure 5, found on page 24 of our
January 2005 report. The sampling error for independents with household
income of $100,001 or more is just over 5 percentage points. All other
figures have sampling errors of 5 percentage points or less. We assessed
the reliability of the CEAD STAB file by conducting electronic testing of
key variables for obvious problems in accuracy and completeness,
interviewing appropriate Education officials, and reviewing related
documentation, and we determined that the data were sufficiently reliable
for our purposes.

Enclosure VIII

Framework for Evaluating Options Identified to Change the State and Other
Tax Allowance relative to the Prior Allowance

Strategy II alternative data sources Strategy III

Updated Strategy I Updated 2005-2006 tables SOI with revised methodology a

CPS (ASEC)c ITEPd

                                    Standard

                         allowance (4%)e BEA / Censusb

f Change in federal Pell - $0.3 billion - $0.1 billion - $0.05 billion -
$0.2 billion + $0.2 billion - $0.2 billionGrant expenditure

Percentage of students

facing a reduction in 36.0 23.9 18.6 33.8 2.3 28.5 Pell Grant award

Percentage retaining 34.5 23.0 17.8 32.5 2.2 26.9eligibility

Percentage not

retaining eligibility 1.5 0.9 0.8 1.3 0.1 1.6

(number of students (81,000) (46,000) (45,000) (72,000) (4,000) (88,000)
affected)g

Average dollar change
in Pell Grant award for - $131 - $108 - $142 - $123 - $94 - $175

h

those with a decrease

i Change in expected + $3.2 billion + $1.7 billion + $1.0 billion + $2.8
billion - $2.8 billion + $3.0 billionfamily contribution

Percentage of students

facing an increase in 60.8 46.8 35.4 60.2 4.7 48.4 EFC

Average dollar change

in EFC for those with an + $443 + $308 + $477 + $391 + $261 + $633
increasej

Source: GAO analysis.

Notes:	This enclosure corresponds to table 9, found on page 37 of our
January 2005 report. All alternatives are based on information that would
have been available to Education as of June of 2004 for publication in the
December 2004 Federal Register. We assessed the reliability of the BEA,
Census, CPS, and ITEP data by reviewing information available online from
the associated websites, interviewing relevant officials, and reviewing
related documentation, and we determined that the BEA data were
sufficiently reliable for our purposes in this analysis. However, we were
unable to determine if the Census, CPS, and ITEP data were reliable for
our purposes.

aThe SOI with Revised Methodology figures are based on the Internal
Revenue Service's (IRS) 2002 Statistics of Income (SOI) data and were
calculated for each income band by dividing the aggregate total taxes paid
deduction by the aggregate adjusted gross income for families and by
dividing the aggregate state and local income taxes by the aggregate
adjusted gross income for individuals.

bThe BEA/Census figures are based on 2003 Bureau of Economic Analysis and
U.S. Census data and were calculated by dividing the sum of property
taxes, general sales and gross receipts taxes, and individual income taxes
from the U.S. Census by personal income from the BEA for families and by
dividing the sum of general sales and gross receipts and individual income
taxes from the U.S. Census by personal income from the BEA for
individuals. Note that BEA and U.S. Census data are not provided
separately by income band.

cThe CPS figures are based on the Current Population Survey's (CPS) Annual
Social and Economic Supplement (ASEC) and were generated based on a 3-year
average of the median effective tax rate, by state, across 2001, 2002, and
2003 CPS (ASEC) data, as prescribed by CPS documentation for the study of
state-based information in the CPS. The median effective tax rate reflects
the median across households of the sum of state income taxes paid and
household property taxes divided by total personal income for families and
of state income taxes paid divided by total personal income for
individuals.

dThe ITEP figures are based on the Institute on Taxation and Economic
Policy's (ITEP) analysis of tax data, which presents tax rates that
already take personal income into account. ITEP figures were calculated
for each income band by summing general sales tax rates, other sales and
excise tax rates, property tax rates, and personal income tax rates for
families and by summing general sales tax rates, other sales and excise
tax rates, and personal income tax rates for individuals. As explained in
the GAO report Student Financial Aid: Need Determination Could Be Enhanced
through Improvements in Education's Estimate of Applicants' State Tax
Payments, GAO-05-105, Washington, DC, January 21, 2005, we were unable to
determine the reliability of the ITEP data.

eThe standard allowance of 4 percent is based on an estimate of the median
household across states using CPS data.

fThe estimated expenditure of the Pell Program in award year 2005-2006 is
about $13 billion under the current allowance.

gThe sampling error of those not retaining eligibility for ITEP is above
10 percent. All others have a sampling error of 5 percent or less. Figures
for the number of students not retaining eligibility are rounded to the
nearest $1,000.

hThe estimated average Pell award for award year 2005-2006 is about $2,430
under the current allowance, which was published in the 1993 Federal
Register.

iThe estimated sum of EFCs across all FAFSA applicants in award year
2005-2006 is about $82 billion under the current allowance, which was
published in the 1993 Federal Register.

jThe estimated average EFC in award year 2005-2006 is about $6,850 under
the current allowance, which was published in the 1993 Federal Register.

Enclosure IX

Simulation of Tax Allowances under Various Options, by State-Families with
Adjusted Gross Income of $15,000 or More

Prior Updated Strategy I Strategy II

State

 Tables published in 1993 Updated 2005-2006 tables SOI with revised methodology
                                  BEA / Census

CPS / (ASEC)a ITEP

            Alabama              4        2       3       5       3         7 
             Alaska              2        1       2       1       1         2 
            Arizona              5        3       4       5       4         7 
            Arkansas             5        2       4       7       5         8 
           California            7        6       7       6       5         8 
            Colorado             6        3       5       4       4         7 
          Connecticut            5        6       7       6       4         8 
            Delaware             7        3       4       4       6         5 
      District of Columbia       9        6       7       9       8         8 
            Florida              3        1       2       4       1         5 
            Georgia              6        4       5       5       5         8 
             Hawaii              7        3       5       9      13         8 
             Idaho               6        4       5       6       5         8 
            Illinois             5        4       5       4       4         8 
            Indiana              5        3       4       6       4         8 
              Iowa               7        4       5       5       6         8 
             Kansas              6        4       5       6       4         9 
            Kentucky             6        4       5       7       5         8 
           Louisiana             3        1       2       5       2         7 
             Maine               8        5       6       6       6         9 
            Maryland             8        6       7       5       6         8 
         Massachusetts           8        5       6       5       6         8 
            Michigan             8        4       5       6       5         8 
           Minnesota             8        5       6       7       6         9 
          Mississippi            4        2       3       6       3         7 
            Missouri             5        3       5       5       4         8 
            Montana              7        4       5       5       6         6 
            Nebraska             7        4       5       6       5         8 
             Nevada              2        1       2       5       1         4 
         New Hampshire           6        3       4       3       2         4 
           New Jersey            7        7       7       5       6         9 
           New Mexico            5        3       4       6       3         8 
            New York             10       7       8       5       7         9 
         North Carolina          7        5       6       6       5         8 
          North Dakota           5        1       3       5       2         6 

                     Prior     Updated    Strategy I         Strategy II 
                       Tables  Updated     SOI with                      
                    published 2005-2006    revised    BEA /     CPS /    
        State         in 1993   tables   methodology  Census   (ASEC)a   ITEP 
        Ohio           7          5           6         5         4         9 
      Oklahoma         5          3           5         5         5         9 
       Oregon          9          6           7         5         8         9 
    bOther areas       3          2           3         4         3         6 
    Pennsylvania       6          4           5         5         4         7 
    Rhode Island       8          6           7         6         4         9 
South Carolina      7          4           5         5         5         8 
    South Dakota       3          0           1         4         2         5 
      Tennessee        2          0           1         4         1         5 
        Texas          2          1           2         4         1         5 
        Utah           7          4           5         6         6         8 
       Vermont         7          5           6         7         5         8 
      Virginia         7          4           6         5         5         7 
     Washington        3          1           2         6         1         6 
    West Virginia      5          2           3         7         4         8 
      Wisconsin        9          6           7         6         8        10 
       Wyoming         2          0           1         4         0         4 

Source: GAO analysis.

Notes:	This enclosure corresponds to appendix IV, found on pages 55-56 of
our January 2005 report. Under strategy III, the standard allowance would
be 4 percent for every state, based on the median family in the CPS.

aThe CPS (ASEC) tax rates were generated based on a 3-year average of
2001, 2002, and 2003 CPS (ASEC) data.

bOther areas includes American Samoa, the Federal States of Micronesia,
Guam, the Marshall Islands, Northern Marianas, Palau, Puerto Rico, the
Virgin Islands, and other U.S. territories.

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