General Principles of Professional Judgment

• The focus of a professional judgment adjustment should be on how the special circumstances affects the family's ability to pay.

• Any inconsistencies, inaccuracies or conflicting information must be resolved before any professional judgment adjustments can be made.

• Professional judgment decisions should be based on a review of the family's complete financial situation and not just the specific circumstances that lead them to request a review. Sometimes there are offsetting changes in the family's financial situation.

• The expected family contribution or cost of attendance that results from a professional judgment adjustment must be used for all Federal student aid funds awarded to the student, including Pell, Perkins, Stafford, PLUS, and campus-based programs.

Subjectivity of Professional Judgment

• Professional judgment is applied on a case-by-case basis after individual review of the student's situation. It is a subjective process. There is no requirement than the financial aid administrator reach the same decision in similar cases, so long as there is no discrimination. A financial aid administrator may be completely arbitrary in reaching a decision to deny an adjustment. For example, it is acceptable for a financial aid administrator to deny an adjustment because he or she feels the parent was impolite or too aggressive, or because he or she believes that the family is being dishonest or attempting to game the system. However, to the extent that similar special circumstances would normally lead to a similar conclusion, an ethical approach would dictate reaching a similar decision, all else being equal. Financial aid administrators should strive for consistency in their professional judgment decisions.

• Data element adjustments are permitted for conditions that distinguish a student from among a class of students, as opposed to conditions that exist across a class of students. The conditions do not necessarily need to be rare, merely special circumstances. In contrast, the conditions for a dependency override are required to be unusual circumstances (i.e., rare or uncommon).

• Decisions made by one school (e.g., a dependency override) are not binding on financial aid administrators at another school.

• Professional judgment decisions must be revisited each year, to verify that the special circumstances that lead to the decision are still in effect.

• Professional judgment is optional and not mandatory. There is no requirement that the financial aid administrator make any professional judgment adjustments. Schools are permitted to make adjustments when there are special circumstances, but not required to do so.

• Professional judgment is more art than science. It combines common sense with compassion and economics with ethics.

Trial Runs

• Financial aid administrators might want to check whether the special circumstance will affect the student's EFC before going to the effort to consider a professional judgment adjustment. For example, if the family qualifies for the simplified needs test, assets are disregarded, so it is pointless to consider a professional judgment review of the treatment of an asset. Likewise, if the student qualifies for automatic zero EFC, adjustments to income usually have no effect. For automatic zero EFC cases, however, the financial aid administrator may want to consider increasing the cost of attendance.

• Some financial aid administrators will do a trial run before making an adjustment to see if there's an impact on the EFC. If the adjustment does not result in a significant change in EFC (i.e., more than $400), they do not allow the adjustment. Some financial aid administrators will make the adjustment regardless of the impact on EFC, simply to satisfy irate parents. Others will only make adjustments for significant changes in EFC, in order to discourage nitpicking by parents.

Limitations of Professional Judgment

• Financial aid administrators are not allowed to use professional judgment to circumvent the intent of the law or regulations or to change the formula or tables used in the Federal need analysis methodology or to change the EFC directly. Only the inputs to the formula may be changed, and then only to the extent dictated by the special circumstances. Adjustments are not permitted to correct a real or perceived problem in the tables or methodology, such as a lack of regional adjustments in the Income Protection Allowance, a lack of fairness in the state tax allowances (e.g., a failure of the state tax allowances to consider differences in local income taxes), or an error in the asset protection allowance tables.

  Moreover, when a specific situtation is not addressed by the letter of the law or the regulations, financial aid administrators should avoiding rendering professional judgment decisions that are inconsistent with the spirit of existing law, regulations and guidance.

• Professional judgment may not be used to change eligibility requirements or selection criteria. For example, financial aid administrators may not change a student's enrollment status to full time if the student is enrolled less than full time.

• Professional judgment may not discriminate on the basis of race, religion, sex, national origin, age, color, creed, or disability status. This is based on prohibitions against the discrimination on the basis of race, religion, sex, national origin, or age in the awarding of federal funds (Section 111(a) of the Higher Education Act of 1965; Title IX, Section 1681 of the Education Amendments of 1972; Age Discrimination Act of 1975) or on the basis of race, color, national origin, religion, creed, sex, marital status, age or disability status in the awarding of education loans (Sections 421(a), 439(e) and 479A(c) of the Higher Education Act). The regulations relating to loan certification also prohibit discrimination on the basis of income or the selection of a particular lender or guaranty agency (34 CFR 682.603(e)). Note that it is permitted to make adjustments for disability-related expenses, as that is specifically allowed by the statute.

• Although the regulations cannot preclude a financial aid administrator from exercising professional judgment to make adjustments to data elements relating to need analysis, financial aid administrators should tread lightly when an adjustment would violate an existing regulation or published guidance from the US Department of Education. Professional judgment operates under a "reasonable person principle", and it is unlikely that a decision which contradicts current law would be considered reasonable. Only when there is a clear oversight in the regulations, such as a special circumstance not foreseen when the regulations were drafted, can a financial aid administrator consider acting in opposition to existing regulations. In such circumstances it is best to seek the advice of colleagues to make sure that there is widespread agreement that the proposed decision is reasonable. Note also that professional judgment decisions cannot represent a change to the need analysis formula.

  A good example might be when the student's marital status changes because the student's spouse has entered into a persistent vegetative state. A financial aid administrator could make a case for updating the student's marital status in such a situation despite the regulations in 34 CFR 668.55(a)(3) because the spouse's health situation is a special circumstance orthogonal to the realm of the specific regulations.

• Since student aid is not normally available to pay prior year charges, it is generally not acceptable to make adjustments based on unusual circumstances that relate to a prior award year. The circumstances must either affect the prior tax year (upon which the EFC is based) or the current award year.

  Some schools will allow adjustments for such expenses, however, when the adjustment is restricted to increasing eligibility for private student loans. Some private student loans can be used to pay for a prior year's charges. Some schools will also allow adjustments when there were extenuating circumstances that prevented the student from submitting a request for PJ during the affected award year.

• If a special circumstance spans both the prior tax year and the current award year, it is usually not acceptable to make an adjustment for the expenses from both years. The purpose of need analysis is to estimate the ability to pay during the award year. Including expenses from more than one year is contrary to that goal. One must use one year, or the other, or an average of the two years, but not both.

  If one has a choice of years, one should generally prefer the expenses from the award year as those are more likely to reflect the family's ongoing financial situation. However, if the expenses are likely to be volatile from one year to the next, it is often better to use an average of the two years (or even the past three, four or five years) to smooth out the volatility.

  If the expenses from the two years span a contiguous 12-month period ending on about the date of the special circumstances review, and are likely to continue during the rest of the award year, it is ok to use the expenses from both years, to the extent that they are limited to the 12-month span. For example, if a dependent student's parent suffered a serious illness starting in July of the prior tax year and is unable to work, it is ok to adjust based on the July-June period, even though it spans two years.

  Ultimately, the financial aid administrator needs to focus on selecting a set of expenses that are predictive of the family's ability to pay during the award year. So long as one can make a reasonable argument that the overall result represents a good estimate of the family's income and assets during the award year, it does not matter as much whether the adjustments are based on one year or the other.

Principles Concerning Expenses

• Is the expense discretionary in nature, or was it involuntary?

  The non-discretionary principle is not a hard and fast rule. It is neither necessary nor sufficient that the expenses be non-discretionary in nature. For example, unusual capital gains and job loss can be discretionary in nature and still merit an adjustment, because they don't reflect the family's ability to pay. Likewise, mandatory bankruptcy payments ordered by a court are non-discretionary in nature, but might not merit an adjustment if they derive from debt that would not have been considered by the Federal need analysis methodology prior to bankruptcy, such as consumer credit card debt. Nevertheless, the discretionary nature of an expense is still a good rule of thumb for distinguishing expenses that might or might not merit professional judgment. Necessities are much more likely to merit an adjustment than lifestyle choices.

• Is the expense already considered by the need analysis formula (i.e., as a component of the income protection allowance), and to what degree? For example, 11% of the income protection allowance is for medical expenses, and should be subtracted from medical and dental expenses before making an adjustment. Financial aid administrators should take care to prevent double-dipping.

• Adjustments may not be made for expenses that occur after the student has graduated, such as professional licensing exam fees or other post-enrollment expenses.

Principles Concerning Income

• Is the income representative of the family's typical annual income, or is it a one-time event that is not reflective of their ability to pay? Unusual capital gains from sale of securities and real estate, insurance proceeds, worker's compensation buyouts, employer reimbursements for moving expenses, signing bonuses, personal injury settlement and even lottery winnings are all examples of one-time events.

  Financial aid administrators often refer to such one-time events as double counting, since the money counts as both income and asset, even though the money will only be present as an asset during the award year.

  Income earned during the prior tax year that is subsequently invested by the family is not considered double-counted, even though it is present as both income and asset, because the prior tax year income is used as an estimate of award year income. The award year income is not really counted as an asset because it is a proxy for future income, and the assets are reported as of the application date. To the extent that a one-time event will not be repeated during the award year, financial aid administrators may use professional judgment to exclude the event from income.

  The typical treatment of such one-time events is to make an adjustment to income while still counting the money as an asset. The usual income adjustment for capital gains is to replace it with the average of the last three years worth of capital gains, although some financial aid administrators will eliminate it entirely from income. (The reasoning for replacing unusually high capital gains with an average is that capital gains usually represents real income, so it shouldn't be disregarded entirely. Using an average smoothes out the volatility, replacing an unusual amount with an amount that is more likely to reflect performance during the award year. The argument for excluding it entirely is that parents often liquidate investments to pay tuition bills, and so are being penalized for using their savings for educational expenses.) The usual income adjustment for an inheritance is to eliminate it from income. (Inheritances usually show up as untaxed income on Worksheet B, since usually the estate and not the beneficiary pays the taxes. Most wills include clauses requiring the estate to pay all taxes. The main exceptions are for income earned by the estate after the date of death, inherited pensions and IRAs, and capital gains from selling property that was inherited.) The usual income adjustment for a worker's compensation buyout is to exclude of it from income. Some financial aid administrators would include the portion that would have be paid this year had there been no buyout.

  The usual income adjustment for a personal injury settlement or court-awarded damages is to exclude it from income. Some financial aid administrators will also reduce the amount counted as an asset by any amounts intended to pay for future medical expenses.

  Insurance settlements for fire or theft do not count as income, as they represent compensation for loss. If the family indicates an intention to use the settlement to replace the property (i.e., rebuild a home destroyed by fire), the financial aid administrator may want to exclude the settlement as an asset, since the settlement represents only a temporary increase in the family assets that are considered by need analysis.

  In most situations where the financial aid administrator makes an income adjustment for double-counting, there is no adjustment to assets (i.e., the money still counts as an asset).

  Although someone with a windfall is better able to pay for college than someone without a windfall, limiting the impact of the windfall to assets adequately assesses the difference in ability to pay. Counting a windfall as an asset but not as income will not make the family unfairly Pell eligible. If a family receives a $100,000 life insurance settlement, treating it as an asset will add $5,640 to their EFC, eliminating Pell eligibility. (A financially savvy family, however, might invest it in an annuity or use it to buy a home or prepay a mortgage, preventing it from counting as an asset as well.)

• Professional judgment decisions can increase income figures in addition to decreasing them. For example, when an independent student receives financial support from a parent, professional judgment may be used to include that income as untaxed income on the worksheets.

• If an adjustment is made to shift income from prior tax year income to award year income, similar adjustments should be made to other income and expense figures. For example, if a child support agreement terminated during the prior tax year, and the financial aid administrator is allowing an adjustment to income from prior tax year to award year for some other reason (say, anticipated layoff), the financial aid administrator should also adjust the Worksheet C amount for child support paid to reflect the anticipated child support payments during the award year.

• When using estimated income instead of base year income, it is better to use an estimate of award year income than an estimate of income in the current calendar year or some other twelve month period (say, starting at the date of the change in income). The focus of need analysis is to identify the family's ability to pay during the award year.

• When the wage-earner's occupation has variable income, it is acceptable to use an average of their income during the past three years when making an adjustment for unusually high income during the prior tax year. Examples include real estate brokers, waitresses, attorneys, salespeople, taxi drivers, overtime variability, self-employment, and other occupations where income is based largely on tips and commissions. A longer horizon (say, five or seven years) can be used when the annual income is extremely volatile.

Principles Concerning Taxes

• When an adjustment is made that reduces income, one usually does not make a corresponding adjustment to taxes paid, as the taxes paid represents a real expense to the family, regardless of any change in the financial aid treatment of the income. Reducing taxes paid would increase the EFC since it increases the available income figure. Only when an adjustment to income reflects an anticipated reduction in taxable income during the award year should a corresponding adjustment be made to taxes paid.

  However, it is very difficult to decide how much to reduce taxes paid. The existence of Alternative Minimum Tax (AMT), for example, can complicate the process of identifying how a change in income or deductions will affect taxes paid. Financial aid administrators are not required to be tax accountants. Adjusting taxes paid is a fine-tuning adjustment that often results in a very small change in EFC as compared with the overall adjustment that lead to a change in predicted taxable income.

• When tax tables reflect a lower amount of tax than what the family actually paid, use the family's actual tax liability. Since the amount of taxes paid represents an allowance against income, a higher amount of taxes paid will make the family eligible for more student aid.

• In some cases using the tax tables to project the family's tax liability will be significantly inaccurate. For example, US citizens who live and work abroad often have a significantly lower tax liability due to the foreign income exclusion (IRS Form 2555).

• The taxes paid figure on the FAFSA is prone to error. Common errors include reporting the total withheld or the total due, as opposed to the tax liability. Sometimes families incorrectly include self-employment taxes (i.e., the employer's share of FICA taxes) in the total. When conducting a professional judgment review, the financial aid administrator should compare the FAFSA figure with the income tax returns to verify its accuracy.

  Self-employed parents often argue that the FICA taxes should be included in the taxes paid figure. However, the employer's half of FICA is allowed as an adjustment to income for self-employed individuals, and so is already accounted for in AGI. It is therefore inappropriate to include FICA taxes in the taxes paid figure, since doing so would be redundant, counting them twice.

• Schedule A of the income tax return reduces taxes but not adjusted gross income (AGI), so adjustments for items that are itemized on Schedule A may be justified, as they are not already excluded from AGI.

Documentation Requirements

• A decision concerning a special circumstance should be backed up with written documentation relating to the specific student's special circumstances. The decision should identify the specific special circumstances upon which the decision was based.

• The documentation should not only support the existence of the special circumstance, but should also support the amount of the adjustment.

• The documentation must relate to the special circumstances that are connected to the data element adjustment or dependency override. In other words, both the documentation and the amount and nature of the adjustment must relate to the same special circumstances. Financial aid administrators cannot use one special circumstance to justify an adjustment in an unrelated data element, and financial aid administrators cannot use a special circumstance to justify an adjustment without backing up that special circumstance with documentation.

• Documentation should be in writing.

• Documentation should be verifiable.

• Documentation can include statements from a neutral third party, such as a teacher, guidance counselor, social worker, physician, court-appointed child advocates, member of the clergy, operator of a women's or family shelter, and other adults (e.g., the parents of the friend with whom the student is staying). Documentation can also include copies of tax returns, bank and brokerage statements, pay stubs, letters from employers, court documents and police reports.

• When documentation from a neutral third party is not available, a signed statement from the family describing the special circumstances is acceptable.

• Documentation should be sufficient to convince a "reasonable person" that the professional judgment decision was appropriate, based on sound reasoning, and not extreme.