For those who thought that the wealthier people in the United States already had an advantage in getting their kids through college: you were right. But a new study by a couple of academics shows a previously invisible advantage. Even financial aid provides a boost to those who already have 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 wealth tend to get more and those who don’t are left behind. Society does make some attempts through social legislation to help even out the potential for the future. One example is college, which is horrendously expensive.
That’s why 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 colleges’ advertised rates), or loans that are supposedly available at lower interest rates, but often have seemed relatively high (sometimes insanely so), according to the historical list on the website Saving for College.
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 families in worse overall shape would get the better deals. A new study from the National Bureau of Economic Research (NBER), however, says that, once again, there’s an advantage for students from wealthier families.
Yes, the more money you have, the better a chance you might get at obtaining financial aid supposedly meant for those whose families lack resources. 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 — both associated with the Brookings Institution — published a working paper through the NBER. 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 long been obvious that the tax system favors homeownership and retirement savings — and those with enough money to put some toward those goals. These are subsidies that tilt toward wealthier people, which also means a bias toward whites and away from nonwhite families. 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-$125,000 and $125,000-$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 in 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 do Black families. The less in grants or scholarships a student gets, the more someone has to borrow.
The principle of not looking at home values or retirement savings makes sense in a way. You might not want people to borrow against a house or pull money out of retirement savings because that can be disruptive.
However, as with tax deductions, this principle provides an inherent advantage to those who have and can invest and a disadvantage to those that don’t. 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 in an IRA or a 401(k) getting special tax treatment can’t be withdrawn before retirement without a penalty, unless it’s for an allowed use. In the case of an IRA, that includes qualified college educational expenses. You’d have to pay taxes, but such is life. Or, you could borrow from your 401(k) for college expenses and pay it back over time. However, from the view of the FAFSA, these accounts don’t exist, so it becomes additional money that doesn’t increase what a family is expected to contribute.
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 the researchers specifically looked at racial disparities between white and Black families, they recognized 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.
Some 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 that the authors didn’t make but 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 the years before sending a kid to college. The income you’ve shifted reduces your taxes and increases the size of your retirement account that isn’t considered for financial aid purposes.
If you keep contributing when it is time to file a FAFSA, the form does have you add those amounts back into your income. But you’re specifically told not to include any employer’s contributions, which keeps adding to the retirement accounts and provides even more money to help cover educational costs.
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.