It’s for those who thought the richest people in the country already had an advantage in taking their kids to college. A new study by a few academics concludes that even financial aid gets a boost from already having enough money to put into a home 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: “Those who have shall obtain; those who are not will lose. That’s what the Bible says, and it still is.
In this sense, economic systems are often biblical in nature. Those who tend to get more and those who don’t get left behind. The company is making some attempts to help even the potential for the future. One is college, which is horribly expensive.
This is why the federal and state governments and the schools themselves, as well as some philanthropic institutions, offer different types of financial aid. Whether it’s scholarships or grants (which are often actually discounts from advertised rates), or the availability of loans at supposedly lower interest rates, but which often have seemed relatively high, according to the historical list on the SavingForCollege website. Sometimes madly. From the 2008-2009 to 2012-2013 academic year, Federal Stafford unsubsidized loan rates were 6.8%. The subsidized fluctuated between 3.4% and 6%. Yet the country and the world had only just emerged from a spine-shaking economic meltdown.
Millions of students need help, and you might think those with less healthy families would get the best deals. A new study from the National Bureau of Economic Research, however, indicates that once again, students from wealthier families have an advantage.
Yes, the more money you have, the better your chances of getting financial aid that is supposed to be for those whose families are short. This is where the study comes in.
Phillip B. Levine, a Catherine Coman and A. Barton Hepburn professor in the economics department at Wellesley College, and Dubravka Ritter, a research fellow at the Consumer Finance Institute at the Federal Reserve Bank of Philadelphia, both associates at the Brookings Institution, published a working paper through the National Bureau of Economic Research. They examined the intersections of racial wealth gaps and student financial aid at colleges and universities. They also produced a more accessible version blog post on the subject.
It is evident in the tax system that home ownership and retirement savings favor those who have the money to invest in them. These are subsidies that lean towards the wealthier people, which also means a bias towards whites and away from minorities. Levine and Dubravka show that a similar effect occurs 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 home equity which is a Principal residence.
“Families who own more of these ‘innumerable’ assets have greater financial resources than families who don’t,” the two wrote. “Yet at similar levels of income and other assets, families who own their homes or have retirement savings receive the same level of financial support for college as those who do not. We show below that white families are much more likely to own these innumerable assets and at higher levels, generating racial disparities in college affordability.
The two authors divide annual family income into two categories where the disparities are the strongest: $75,000 to $125,000 and $125,000 to $250,000. In both categories, median assets are significantly higher for white families than for black families, and most 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 assets. Black families at the median have $67,700 uncounted and $16,400 counted. The ratio of uncounted to counted is about 4 to 1. The median implicit subsidy that white students receive is $9,400 per year, compared to $2,200 for black students.
In the $75,000 to $125,000 range, the ratio of uncounted to counted is closer to 2.5 to 1. Again, white families have significantly higher assets. Students from white families receive a median implicit grant of $3,400 per year, double the $1,650 that students from black families receive.
The implicit subsidy comes from the amount that does not have to be paid out of the protected assets. As a result, white students receive higher aid amounts relative to their families’ actual net worth than black families. The fewer grants or scholarships a student receives, the more someone has to borrow
The principle of ignoring the value of home savings or retirement makes sense on one level. You may not want people to borrow against a house or withdraw money from their retirement savings, because that is disruptive on a fundamental level.
However, as with tax deductions, this offers an inherent advantage to those who have and can invest and a disadvantage to those who do not. A family paid rent over the period covered by the FAFSA? Sorry, mate, it’s the breaks. But a second family has made mortgage payments and more and more over time goes to their capital, which they keep. And yet, from the point of view of the formulas, the two families are even.
The same goes for retirement savings. Money is not available in an IRA for 401(k) with special tax treatment—unless the reason is for permitted use, such as a first-time home purchase or qualified college expenses. However, from the perspective of the FAFSA, it does not exist. You would have to pay taxes, but that’s life. And if you have retirement savings outside of one under tax regulations of some sort, you could even potentially use the account as collateral for a personal loan.
The structure, while understandable, also protects financial assets from 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 to a child’s education, which would reduce the financial assistance they were eligible for.
While they looked specifically at racial disparities between white and black families, there is also an impact on more general income inequality. The authors mention that for family incomes below $75,000, racial disparities are small. The less money you earn, the more you are affected by the disparity.
For those who might argue that if value is locked up in a home or a retirement account, much of it is unavailable for anything. True, but it also means that there is wealth that is protected for the future, which continues to widen the gap between racial groups.
Moreover, a point that the authors did not make in this sense but that is important to recognize is the extent to which having resources and the means to protect them provides strategies for manipulating the system.
A family with a higher income might hear from a financial advisor that they should increase contributions to their retirement accounts for a few years before sending a child to college. There are great tax deductions to be had, and they reduce your adjusted gross income (AGI) dollar for dollaraccording to H&R Block
One solution the authors suggest is to reduce the share of all income and assets that families are expected to contribute. “This would make college cheaper for those with fewer assets (disproportionately black students) and increase the cost for those with more assets who currently receive the largest implicit grants (disproportionately white students),” they said. they wrote.
If the Bible offers an explanation, a piece of modern literature by Joseph Heller is an appropriate bookend. “It’s a catch, this ‘Catch-22’,” said Yossarian, the protagonist of Catch-22.
It’s the best there is.