This is for those who thought that the wealthier people in the country already had an advantage in getting their kids through college. A new study by a couple of academics concludes that even financial aid gets a boost from already having enough money to put into a house and retirement savings.
You could go to Matthew 25:29 in the New Testament, but the song “God Bless the Child” by Billie Holiday and Arthur Herzog Jr. makes it even clearer: “Them that’s got shall get; them that’s not, shall lose. So the Bible said, and it still is news.”
In that sense, economic systems are often biblical in nature. Those who have tend to get more and those who don’t are left behind. Society does make some attempts to help even the potential for the future. One is college, which is horrendously expensive.
That’s why the federal and state governments and schools themselves, as well as some philanthropic institutions, offer various types of financial aid. Whether scholarships or grants (which often are actually discounts from advertised rates), or availability of loans at what are supposed to be lower interest rates but which have often seemed relatively high, according to the historical list on the site SavingForCollege. Sometimes insanely so. From the 2008-2009 academic year to 2012-2013, unsubsidized Federal Stafford loan rates were 6.8%. The subsidized ones ranged between 3.4% and 6%. But still, the country and world had just come out of a spine-shaking economic meltdown.
Millions of students need help, and you might think that those whose families are in worse overall shape would get the better deals. A new study at the National Bureau of Economic Research, however, says that, once again, there’s an advantage that students from wealthier families get.
Yes, the more money you have, the better a chance you might get at obtaining financial aid supposedly meant for those whose families lack. Here’s where the study comes in.
Phillip B. Levine, the Catherine Coman and A. Barton Hepburn Professor in the Department of Economics at Wellesley College and Dubravka Ritter, a research fellow at the Consumer Finance Institute at the Federal Reserve Bank of Philadelphia, are both associated with the Brookings Institution, published a working paper through the National Bureau of Economic Research. They looked at intersections of racial wealth gaps and student financial aid at colleges and universities. They also produced a more accessible blog post on the topic.
It’s been obvious in the tax system that home ownership and retirement savings favor those with money to put into them. These are subsidies that tilt toward wealthier people, which also means a bias towards whites and away from minorities. Levine and Dubravka show that a similar effect happens in financial aid.
Readers preparing a Free Application for Federal Student Aid, or FAFSA, can look at the form and see that when it asks for assets, it specifically excludes retirement savings and the equity value of a home that is a primary residence.
“Families that own more of these ‘uncounted’ assets have greater financial resources than families that do not,” the two wrote. “Yet at similar income levels and other asset holdings, families that own their home or have retirement savings are given the same level of financial support for college as those without. We show below that white families are far more likely to own these uncounted assets and at higher levels, which generates racial disparities in college affordability.”
The two authors split the family annual income into two categories where the disparities are strongest: $75,000 to $125,000 and $125,000 to $250,000. In either category, median asset holdings are significant higher for white families than black and most of the assets are excluded by the FAFSA.
In the $125,000 to $250,000 category, median white families have $284,000 in uncounted assets and $66,800 in counted ones. Black families at the median have $67,700 uncounted and $16,400 in counted. The ratio of uncounted to counted is about 4 to 1. The median implicit subsidy that white students get is $9,400 a year compared to the $2,200 that black students have.
In the $75,000 to $125,000 range, the ratio of uncounted to counted is more like 2.5 to 1. Again, white families have significantly higher asset holdings. Students from white families get a median implicit subsidy of $3,400 a year, twice the $1,650 that students from black families get.
The implicit subsidy comes from the amount that doesn’t have to be paid out of the shielded assets. The result, white students get higher amounts of aid compared to their families’ actual full net worth than black families. The less in grants or scholarships a student gets, the more someone has to borrow
The principle of not looking at home or retirement savings value makes sense on one level. You might not want people to borrow against a house or pull money out of retirement savings because that disrupts at a fundamental level.
However, as with tax deductions, it provides an inherent advantage to those that got and can invest and a disadvantage to them that’s not. One family paid rent over the period the FAFSA covers? Sorry, chum, those are the breaks. But a second family made mortgage payments and a greater and greater portion over time goes to their equity, which is something they keep. And yet, from the view of the formulas, both families are even.
Similarly for retirement savings. The money isn’t available in an IRA for 401(k) getting special tax treatment—unless the reason is for an allowed use, like a first-time home purchase or qualified college educational expenses. However, from the view of the FAFSA, it doesn’t exist. You’d have to pay taxes, but such is life. And if you have retirement savings outside of one under tax regulations of one sort of another, you could even potentially use the account as collateral for a personal loan.
The structure, while understandable, also shields financial assets of those who have the resources to develop them. A family that had a similar amount of money in stocks or a normal bank account would have to contribute more toward a child’s education, reducing the financial aid they were eligible to receive.
While they were specifically looking at racial disparities between white and black families, there is an impact on more general income inequality as well. The authors do mention that for family incomes below $75,000, racial disparities are small. The less money you make, the more you’re affected by the disparity.
For those who might argue that if the value is locked up in a house or retirement account, it’s largely unavailable for anything. That is true, but it also means there’s wealth that is protected for the future, which continues to expand the gap between racial groups.
In addition, a point the authors didn’t make in this sense but that is important to acknowledge is the degree to which having resources and ways of shielding them provides strategies to manipulate the system.
A family with higher income might hear from a financial advisor that they should boost contributions to their retirement accounts for a few years before sending a kid to college. There are great tax deductions to be had, and they reduce your adjusted gross income (AGI) dollar for dollar, according to H&R Block
A solution the authors suggest is to lower the share of all income and assets that families are expected to contribute. “This would make college less expensive for those with fewer assets (disproportionally Black students) and increase the cost for those with more assets who currently receive the larger implicit subsidies (disproportionally white students),” they wrote.
If the Bible offers one explanation, a piece of modern literature by Joseph Heller is a fitting bookend. “That’s some catch, that ‘Catch-22,’” said Yossarian, the protagonist in Catch-22.
It’s the best there is.
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