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Institutional Aid

The 2013 Tuition Discounting Study

July 18, 2014
The tuition discount rate (institutional grant dollars as a share of gross tuition and fee revenue) for first year students at private, non-profit, four-year institutions has increased to 44.8% for the 2012-2013 academic year and is predicted to rise to over 46% in 2013-14, according to a recent report from the National Association of College and University Business Officers. Colleges and universities use tuition discounting strategies as a way to aid students who might otherwise be unable to pay the “sticker price” to attend. Tuition discounting is also a strategy that is used to increase enrollment and attract talented students.  It has recently become especially important as 17% of institutions saw a drop of more than 10% in their freshmen enrollment from Fall 2012 to Fall 2013.

Among the report’s other noteworthy findings:
  • 87.7% of freshmen received an institutional grant in 2012-13, a figure that is projected to grow to 88.9% in 2013-14.
    • The average institutional grant in 2013-14 is projected to cover over half of tuition and fees.
    • 80% of institutional aid is going directly to help meet students’ demonstrated financial need.
  • Due to high discount rates, the average growth in tuition revenue per freshman has only grown 1.7% in 2012 and is expected to decrease -0.5% in 2013 (both numbers adjusted for inflation).
    • Over the last 13 years, institutions as a whole have experienced relatively flat net tuition revenue (0.4%) which according to the report, means that gross tuition revenue and other fees have primarily gone back to students in the form of aid.
  • Among the institutions who responded to the survey (over 400), undergraduate enrollment had decreased at half of them. Reasons cited include families and students having a higher price sensitivity, colleges dealing with increasing competition from other institutions and the decreasing pool of traditional students.
    • Institutions with increases in enrollment cited better marketing and recruitment strategies as keys to their success.

Why George Washington U. is Doing Low-Income Students a Favor

October 29, 2013
Over the last two weeks, George Washington University has been all over the news for lying to its students about its admissions policies. For years, GW has said that it is “need blind” when in fact it isn’t. Every year the university chooses not to admit a certain percentage of students not because of grades or test scores or what admissions officers see as being a “good fit.” Rather they don’t admit these students simply because their families are low-income.

Most of the news coverage has been critical of the school for doing financially needy students a disservice. But, in fact, the opposite is true. GW is actually doing these individuals a tremendous favor since the school does such a lousy job supporting the small share of low-income students that it does enroll.

GW does not come close to meeting the full financial need of the low-income students it admits. Instead, it leaves these students with substantial funding gaps – forcing them to take on hefty debt loads. In 2011-12, GW students from families making $30,000 or less faced a daunting average net price – the amount students pay after all grant aid has been exhausted – of nearly $21,000 per year. That means low-income families have to pony up the equivalent of 70% or more of their annual income for their children to attend GW.

Now it’s true that GW has a relatively small endowment for its size. But this isn’t just a question of money. It’s also one of priorities. The university is a very active participant in the “merit-aid” wars. According to data the school provided the College Board, 19 percent of freshmen had no financial need yet received “merit” scholarships from the university in 2011-12, with an average award of over $17,000. Meanwhile, only 12 percent of GW freshmen received Pell Grants, which go to the most financially needy students.

GW is clearly more interested in recruiting, enrolling, and funding wealthy students than financially needy ones. For that reason, the low income students that GW passes over should know that they dodged a bullet.

The Dark Side of Enrollment Management

October 28, 2013
Publication Image The dark side of enrollment management keeps rearing its ugly head.

Last week, The George Washington University was forced to admit that it has been lying for years about its admissions policies. While the school has long claimed to be “need blind,” it turns out that a student’s ability to pay is factored into its admissions decisions.  The best way to get off a wait list at GWU (and other colleges and universities that follow the high-tuition/high-aid model) isn’t to list your latest achievement or write another essay, but to say you don’t need to be considered for financial aid. This is enrollment management at its darkest—the university enrolls rich students to maximize its revenue, while leaving students from low- and moderate-income families out of luck simply because they lack the resources to pay full-freight.

That’s bad enough. But today, we learned about another trick that enrollment managers have up their sleeves. According to Inside Higher Ed, “Some colleges are denying admissions and perhaps reducing financial aid to students based on a single, non-financial, non-academic question that students submit to the federal government on their [FAFSA].”  The FAFSA asks students to identify the colleges they wish to attend. Colleges then get that information and can see the order in which they were listed by the student.

The problem is that enrollment managers and management firms like Noel Levitz have discovered that students tend to list colleges in preferential order. In an example from Inside Higher Ed, Augustana College found that 60 percent of the students that list the school first on the FAFSA end up enrolling, as do only 30 percent of those who list it second and 10 percent of those that list it third. In a world of maximizing revenues and yield, why admit, or offer a generous financial aid package to, someone who lists your institution third? Don’t forget, that the FAFSA also contains a family’s financial information and Expected Family Contribution—data that allow a college to better understand just how needy a student is. So if you have a Pell-eligible student, who lists Augustana third, honestly, tough luck for that student.

Apparently, this behavior has been going on for a while. But this type of policy should never be the industry standard. It makes the admissions and financial aid process even more opaque to students, especially first-generation college-goers who have no idea that this policy even exists. Such a policy takes choice away from students. It takes away their ability to freely list the colleges they’d like to attend, without fear of repercussion. It assumes that students only care about their first choice school.

When I worked with students at The College Planning Center in Boston, I saw firsthand that low-income, first generation students did list their first-choice college first on the FAFSA. But oftentimes what separated first and second and third ordering of colleges was negligible. They were excited to be going to college, period. For them, the financial aid package was more important than whether they got into their first-choice school. This policy prevents students from receiving financial aid offers that will help them choose a college that meets their needs both academically and financially.

It’s hard to know how many low- and moderate-income students have fallen victim to this policy, but there is, however, an easy solution. The FAFSA should either not allow institutions to see where students have applied or it should list the institutions in alphabetical order. The College Board and ACT should follow suit with the score reports they send to institutions. These score reports also list institutions in the order chosen by students. The admissions process is already opaque enough, putting low-income and moderate-income students at a disadvantage.

It’s becoming increasingly obvious that “need-blind” and “need-aware” policies rarely exist in the truest form. Instead, they allow institutions to hide behind a policy that sounds welcoming to low- and moderate-income families, when really all they’re doing is trying to maximize their revenues and yield rates. 

Merit Aid: Not Just for the Middle Class

October 3, 2013

Supporters of “merit aid” often defend it as being a middle class benefit. When articles appear that are critical of non-need-based financial aid, they are typically greeted with responses such as this (taken from a forum on College Confidential):

I think that it is ridiculous to cut merit aid. The middle class will be in even more of a bind. The only reason I will be able to afford to go to a good school is if I get merit aid. I'm in the typical middle class FA situation- too "rich" to get FA but too poor to afford college.

Newly-released data by the U.S. Department of Education's National Center for Education Statistics (NCES) show that a student’s chances of receiving merit aid increases as his or her family’s income rises. In fact, students from families making more than $250,000 a year are more likely to receive merit aid than those making less than half of that.

The data in question come from the latest edition of the National Postsecondary Student Aid Study (NPSAS), a nationwide survey of college students that the NCES conducts every four years. The survey provides the most comprehensive information available on how students and their families pay for college.

Overall, one in five students with family incomes of over $250,000 a year obtained merit aid from their colleges in the 2011-12 academic year. That’s compared to about one in seven students from families that make between $30,000 and $65,000, and one in six from families with annual incomes between $65,000 and $105,000.

These results are not entirely surprising. As I’ve written in the past, four-year colleges, both public and private, are increasingly using their institutional aid dollars to compete for students who can otherwise pay full freight. This strategy has been particularly appealing to public colleges and universities of late as a way to make up for declining support from their states.

Indiana University professor Donald Hossler, who served as IU’s vice chancellor for enrollment services for many years, recently explained this strategy to ProPublica. “One of my charges was to go after what I would call pretty good out-of state students,” he said. “Not valedictorians, not the top of the class. Students who you didn’t have to give thousands and thousands of dollars to in order to get them to enroll.”

It’s certainly true that students from middle-income families are benefiting from merit aid. But that shouldn’t obscure the fact that a significant share of recipients are coming from very wealthy families who can certainly afford to send their children to college without the help.

What Might Ratings-Based Financial Aid Look Like?

September 18, 2013

Last month, President Obama stood before a crowd at the University at Buffalo to propose a new higher education affordability initiative. The plan calls for the U.S. Department of Education to rate colleges prior to the 2014-15 academic year. Then the Department would tie financial aid to those ratings by 2018 – a carrot-and-stick approach to college quality. But we wonder if the Department’s version will really have the teeth to penalize bad actors, and how feasible it really is.

So far, there’s not much information on the White House’s plan. For the most part, all we have to go off of is a White House fact sheet that summarizes the plan. According to the fact sheet,

“Over the next four years, the Department of Education will refine [the ratings], while colleges have an opportunity to improve their performance and ratings. The Administration will seek legislation using this new rating system to transform the way federal aid is awarded to colleges once the ratings are well developed. Students attending high-performing colleges could receive larger Pell Grants and more affordable student loans." [emphasis added]

There are a few items of note here. First, the White House acknowledges that any such effort will require congressional approval. That means that, at least without a sea change in the political environment, this may never come to fruition. But second, and more interestingly, the White House’s examples look at only the “carrot” side of the carrot-and-stick – more available aid for high-performing schools, without any clear punitive measures for poor-performing ones.

Of course, it’s far too early to say what implementation would look like. But it closely resembles an idea that the New America Foundation first published in Rebalancing Resources and Incentives in Federal Student Aid, and which Senior Policy Analyst Stephen Burd dug into deeper in Undermining Pell. Our proposal included both the “carrot” and the “stick” – a Pell bonus for high-performing schools that enroll a larger share of low-income students, and a Pell matching requirement for wealthy schools that divert aid away from low-income students.

The New America Pell Grant bonus differs somewhat from the administration’s. The administration plans to use a ratings system that will likely include a broad range of quality metrics; we would give the bonuses to public and private four-year schools that enrolled large shares of low-income students or to community colleges with strong student outcomes. Our Pell Grant bonus would be double the size of the maximum grant (currently $5,550).

We used data from the Federal Education Budget Project to calculate the costs and estimated the Pell bonuses alone (without the baseline costs of the Pell Grant program at these eligible schools) at $23.6 billion over 10 years for public and private four-year schools and $34.9 billion for community colleges. Those figures include schools that qualified for the proposed bonus based on 2010 data, as well as schools on the cusp of qualifying, which we assume would be willing to work a little harder for a substantial payoff.

At four-year schools, we found that the federal government already disburses $1.2 billion in Pell grant funding to already-qualifying schools,  and another $344 million to the 86 near-qualifiers. That made the math pretty easy – for the additional costs of the program over the baseline, we simply rounded up to provide a conservative estimate, and then counted up 10 years with built-in inflationary increases.

At community colleges, the math was a little trickier. We wanted to use quality metrics, a more simplistic version of those the Department of Education might use under a new rating system. It’s tough to see how community colleges are performing, though, because of limitations in the data. For example, the Department collects graduation rates only for first-time, full-time students, but public two-year colleges serve largely nontraditional students who don’t meet those qualifications. And students who transfer from a two-year to a four-year college without an associate’s degree are only marked as transfers, with no way to track them through the rest of their educational experiences.

Recognizing the data were so prohibitively absent as to keep us from finding a great measure, we calculated a combined graduation-and-transfer rate as a proxy. If the schools had a combined rate of at least 50 percent, they were eligible for a bonus. Many of the schools didn’t have good enough data for us to even arrive at a figure, but of the remaining schools, 262 were eligible, with Pell disbursements totaling $1.5 billion. We found another 120 who were close enough to qualify if they stretched a little further, and added their $1.2 billion in existing Pell money. We rounded up to $3.0 billion to account for missing and not-yet-successful institutions, baked in an inflationary increase, and added up the five- and 10-year costs. Again, those costs are in addition to, not including, the amount of Pell money that already goes to those schools.

Obviously, the New America proposal is not identical – or even similarly oriented – to the White House’s proposal. Ours focused on the needs of low-income students, not the quality of institutions (though with better data on colleges, a stronger focus on quality could be a rising tide that lifts all students).

But our proposal is instructive in a few ways. For one thing, the plan is going to be expensive. New America’s proposal, taken in total, is deficit-neutral, and we made up for the costs of the plan with savings from other proposals. Congress won’t be so lucky, and given the ongoing fiscal debates lawmakers are having, a plan that has one-year costs of upwards of $5 billion won’t be the most popular one. For another, the careful wording in the White House fact sheet means there’s no clear protection against bad behavior, at least in this part of the plan – just an incentive for good behavior. That may arguably be less effective than having both.

Any plan to tie financial aid to ratings is a long way off, and even the ratings system is a few years down the line. By 2018, we’ll have a different president, many different members of Congress, and undoubtedly new approaches to reforming higher education. It remains to be seen whether the plan will be strong enough to survive all that, or whether the 2018 political climate will actually be more amenable to these types of proposals. In the meantime, the New America Foundation will be watching for signs of life with this proposal, as well as the president’s other ideas.

How Vodka, Bed, Bath, and Beyond, and Rocky IV Explain Private College Pricing

September 17, 2013

Thirteen years ago, Ursinus College in Pennsylvania increased its tuition by nearly 18 percent. The next admissions cycle it received 200 more applications and the student body grew by 35 percent in four years. Similar moves occurred throughout the country with varying degrees of brazenness (the University of Richmond said raising its price would stop “leaving money on the table” by being cheaper). The message from consumers was clear—price hikes were not scary because greater expense equated with higher quality. But these individuals weren’t discerning customers—they were the people who favor top shelf vodka over the identical rail product—Absolut suckers.

Jacking prices to lure more applicants is not a long-term success strategy, though. There’s a finite supply of rich people with money to throw around, and the evaporation of familial assets during the great recession meant the pool was shrinking. And so we’ve ended up in the Bed, Bath, and Beyond world of college pricing. Just as you’d be foolish for buying something at the popular home goods store without having one of the ubiquitous $5 or 20 percent off coupons, so too are many students now attending private nonprofit colleges where basically everybody is getting a discount. It’s the old adage “only suckers pay retail” brought to postsecondary education.

As Inside Higher Ed reported on Monday, two private liberal arts colleges are trying to break out of the Bed, Bath, and Beyond model by cutting out the coupon and slashing the price accordingly. Both Ohio-based Ashland University and Converse College in South Carolina trumpeted proposals that claimed to cut tuition by over $10,000. Of course, as Ry Rivard notes, these cuts only appear to be so on paper. Instead “the colleges have reduced their sticker prices to about what most students are paying already, given all the scholarships and aid that colleges give to lure students to high-priced colleges.” The college basically cut out the middle step charade of having to argue for the coupon. It’s like finally grabbing that $6.99 cupcake corer for $1.99 but being told you can’t use any coupons.

Detractors of the policy noted in the Inside Higher Ed article that there’s a corporate analogy for this new strategy as well—the failed strategy of Ron Johnson at J.C. Penney. A former Apple executive, Johnson proposed to stop offering continuous sales for customers at the department store and instead just offer prices that were about 40 percent lower than the previous listed price, but would not be discounted. The strategy, however, backfired stupendously. Sales at J.C. Penney cratered in the end of 2012 (one commentator even called it “the worst quarter in retail history”) and Johnson was out by April of 2013. It turns out people liked getting discounts and the old store style.

Colleges certainly operate in a very different marketplace than the store where you grab a sweater and pair of pants. Universities have an additional advantage in that most families purchasing their goods will only do it a handful of times at most, so there’s less room for ingrained price expectations. And consumers are at a distinct disadvantage, since just touring a college cannot tell you anything about its value the way that picking up an article of clothing does.

But whether this strategy of making bare the unnecessarily inflated prices consumers were paying anyway will only work on two conditions. First, colleges have to be willing to save themselves from themselves. Part of what drives the discounting game is that trying to throw some so-called merit aid at people who do not need the assistance is seen as a way to lure in students that will either boost the academic profile or cut a check for most of the sticker price (see the excellent ProPublica piece on aid games this week for more). This plays right into the sophisticated modeling of enrollment management, which many institutions employ as a way to keep the proper balance of enrollment and revenue, which mean there are a host of vendors and ingrained interests against going to the simpler model.

Families also need to change their own inclinations. If they have truly become more price conscious and are willing to accept that the $30,000 item really only does cost $16,500 with no changes, then maybe the strategy works. But if they are like the J.C. Penney customer used to those price breaks, then the colleges could be in trouble.

That isn’t to say many of these institutions aren’t already in tenuous shape. Many are getting squeezed on multiple fronts. They need to keep enrollment up because they are highly dependent upon tuition and have little to no endowment funds to provide a cushion against budget shocks. But what’s the value proposition of an expensive liberal arts college with no brand name recognition to families that are worried about college costs? So instead, many have entered a world where the price they list has no meaningful connection to what anyone is actually paying. But rather than bringing stability, pricing games can lead to their own tuition discounting spiral, where the average coupon keeps growing with tuition.  The result is a situation where miscalculations in enrollment or the type of class enrolled can quickly spell financial disaster.

In that light, it’s not surprising to see some colleges try to do away with the discount. From a more cynical take, it could very well be the last ditch attempt to break the very mold they rode to applicant growth in the past. (It’s basically like hoping for the end of Rocky IV.) But colleges, like companies, have their own ingrained cultures that are hard to alter. And consumers have their own accustomed norms too.  We’ll have to wait and see whether both will be able to change. 

2011–12 National Postsecondary Student Aid Study (NPSAS:12): Student Financial Aid Estimates for 2011–12

September 3, 2013

The U.S. Department of Education recently released a report on how students are financing their college educations using data from its National Postsecondary Student Aid Study (NPSAS), a comprehensive survey of more than 100,000 undergraduate and graduate students. Data from the 2011-2012 academic year show that a majority of students at both the undergraduate and graduate level received financial aid to pay for their postsecondary education. The last NPSAS surveyed students in 2007-2008.  

Among the report’s findings, for the 2011-2012 academic year:

  • 71% of all undergraduate students received any type of financial aid (federal, state or institutional).
    • 59% received some type of grant.
    • 42% took out some type of loan.
    • 6% received aid through a work study job.
    • 4% received veterans’ benefits.
    • 5% had parents who took out a federal Parent PLUS loan.
  • Of those undergraduates who received any type of financial assistance in 2011-2012, the average amount of aid received was $10,800.
    • The average grant aid was $6,200.
    • The average amount borrowed in loans was $7,100.
    • The average work study award was $2,300.
    • The average veterans’ benefit was $7,500.
    • The average amount borrowed by parents through federal Parent PLUS loans was $12,100.
  • 57% of all undergraduates received federal financial aid in 2011-2012. 15% of all undergraduates received state-funded aid, and 21% of all undergraduates received institutional-funded aid.
    • The average total federal financial aid was $8,200.
    • The average total state-funded aid was $2,700.
    • The average total institutional aid was $6,500.
  • Looking at federal Title IV undergraduate student aid alone in 2011-2012:
    • 41% of students received a Pell grant with an average grant award of $3,400.
    • 11% received some form of campus-based aid program assistance with an average award of $1,700.
    • 40% borrowed through a federal Direct Loan with an average loan amount of $6,400.
  • 70% of all graduate students received any type of financial aid (federal, state or institutional).
    • 36% received some type of grant.
    • 15% received some type of employer-provided aid.
    • 12% received assistance through an assistantship.
    • 45% took out some type of loan.
    • 43% borrowed through a federal Direct loan.
    • 10% borrowed through a federal Grad PLUS loan.
  • Of those graduates who received any type of financial assistance in 2011-2012, the average amount of aid received was $22,000.
    • The average grant aid was $10,800.
    • The average employer-provided aid was $8,200.
    • The average assistantship was $14,600.
    • The average amount borrowed through any type of loan was $21,400.
    • The average amount borrowed through a federal Direct loan was $17,000.
    • The average borrowed through a federal Grad PLUS loan as $18,600.


July 31, 2013
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When I was a grad student in Boston, I worked at the College Planning Center as an education advisor. Every day predominantly low-income, first generation students would come to the center to get free advice about the college application process. Although we never knew what students would ask, their questions and concerns almost always had to do with financial aid. For most students, this meant helping them understand and complete the FAFSA—the free application for federal student aid required by almost all colleges and universities. The FAFSA can be complicated enough for most students and families, but some students were also required to complete the College Board’s CSS Profile, an even-more complex, onerous, and expensive application.

Over the past few years, the Department of Education has been simplifying the FAFSA, which has been seen as an impediment to college enrollment—especially for low-income, first generation students who may be unfamiliar with the form. The Department has reduced the amount of questions, employed skip logic for the online FAFSA, and introduced an IRS data retrieval tool to help auto-populate a significant portion of the form. These efforts have significantly reduced the average time students and families take to complete the application (from 34 to 23 minutes), it has also increased the overall amount of applications submitted.

But the simplification of the FAFSA coupled with the “high tuition, high aid” model has pushed many institutions to require the PROFILE. In this model, the listed sticker price of the institution is high, but they publicize that they offer significant financial aid packages to low- and moderate-income students. Thus, the PROFILE is used by selective, high-priced institutions to determine institutional aid eligibility. Since FAFSA simplification has removed some questions regarding a family’s assets and savings, institutions have adopted the PROFILE to understand exactly how many assets a family owns before giving them aid. But the PROFILE asks way more questions than the FAFSA ever did.  

While the 2013-14 FAFSA has 101 possible questions, the PROFILE has at least 160 (much of them duplicating information required by the FAFSA), in addition to six worksheets and supplemental questions required by each institution where the student applies. Compared to the FAFSA, many of the questions on the PROFILE are mind-numbing in their complexity.  Take this question as an example:

Enter the total current value of this parent's tax-deferre retirement, pension, annuity, and savings plans. Include IRA, SRA Keogh, SEP, 401(a), 401(k), 403(b), 408, 457, 501(c) plans, etc. (Question PD-175A)

The PROFILE is also expensive, costing a student $25 for the first college listed, and $16 for each additional college.  While there are some fee waivers available, the student doesn’t know whether they qualify for one until they are finished filling out the time-consuming and complicated application. In my experience working with low-income students, only a couple qualified for fee waivers despite the fact that they came from families making less than $35,000. The first letter of the FAFSA stands for free, and for good reason. The last thing you want to do is add a fee onto a financial aid application.

It may be an institution’s prerogative to require a separate application for institutional aid, but many of the institutions participating in the PROFILE indicate that both the PROFILE and FAFSA are required forms to be awarded financial aid. This is misleading since all federal student aid funds are based on the FAFSA only. Not only that, the PROFILE is an extra roadblock for students, especially low-income, first generation students, who may not realize they have to complete an additional form to get their financial aid package. And if they do realize they need to jump through extra hoops, they may not be able to complete the form because it’s too complex, or may not be able to pay the $25 or more to submit the form.

Many of the colleges and universities that require the PROFILE claim that they want diverse student bodies and offer great financial aid packages to ensure that low- and moderate-income students are able to afford a world-class education. But requiring the PROFILE is an unnecessary burden on exactly the families that elite colleges and universities say they want to serve. The FAFSA should be the only required initial financial aid application for students. Once completed, depending on the information provided, an institution could ask a student to submit a CSS PROFILE for more information regarding institutional aid determination. If a student filled out the FAFSA and received an auto-zero expected family contribution (indicating the student is particularly needy), they shouldn’t have to go through the rigmarole of the PROFILE. 

Ideally though, if there has to be a financial aid application there should only be one—the FAFSA. The benefit of simplification for students should outweigh the institution’s desire to know a family’s exact monthly home mortgage payment (question PE-150A) or the amount of untaxed social security benefits they received (question PI-165A) or dozens more questions beyond the scope of the FAFSA.

Upcoming Event: Saving Financial Aid

July 11, 2013
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The Asset Building Program is looking forward to hosting an event this coming Monday morning in collaboration with the Assets and Education Initiative (AEDI) at the University of Kansas. Join us on Monday, July 15th at 9:30 am here at our office in D.C. or live online. The event, Saving Financial Aid: Expanding Educational Opportunity and Reimagining the Way We Pay for College by Promoting Children’s Savings, will explore the relationship between savings and educational outcomes, the potential for policy to support the savings of lower-income Americans, and the importance of including an assets-perspective in the higher education financial aid conversation.

The Mythical College Savings Penalty

July 8, 2013

Richard Vedder has a column over at Bloomberg View today exposing what he labels the "stealth tax" on family savings. Citing uncited "considerable anecdotal evidence," Vedder claims that savers pay almost three-quarters of their earnings for college, a much higher rate than a family of comparable wealth with no savings. It's an alarming argument, but it's also a largely unsourced account, lacking lacking any information about how savings and their treatment in financial aid calculations actually work.

Most Families Save Through Mortgages or Tax-Advantaged Accounts...

Financial aid formulas do not treat all savings as the same. Most middle-income families today save money either though building up home equity or making use of tax-advantaged retirement savings vehicles like 401(k)s, Individual Retirement Accounts (IRAs), Roth IRAs, etc. Someone under 50 can contribute $17,500 to the 401(k) and $5,500 to the IRA, netting them $23,000 in annual savings plus whatever they are building up through a mortgage. And since accounts are for individuals, a married couple with two incomes could potentially double those amounts. It's after these limits that folks would likely turn to other investments that do not have special tax treatment.

 ...And the Federal Government Doesn't Touch Them for Student Aid Calculations

The Free Application for Federal Student Aid (FAFSA) does indeed ask students (and parents if the student is a dependent) for information on their assets. But the instructions for the form (see page 2) explicitly exclude: the value of the home the parents/student live in, retirement plans, such as 401(k)s, non-education IRAs, pension plans, annuities, etc., and life insurance In other words, before the family has entered a single cent, the form already excludes the predominant savings vehicles used by most families. 

Remaining Assets are Heavily Discounted

Knocking out retirement plans and main residences still leaves behind other assets, such as stocks or mutual funds held outside of tax-advantaged accounts or other real estate holdings. But what remains is then heavily discounted by the formula the federal government uses to calculate aid eligibility. The federal formula immediately assumes about 45 percent of the assets do not exist thanks to an asset protection allowance. It then only considers 12 percent of that already reduced amount to generation a contribution from assets that is functionally pennies of every dollar in assets. And even after that, only about 40 percent or so of parents' combined income and assets are used to generate the actual contribution. The result is that $100,000 in non-retirement savings adds at most a few thousand dollars to the expected contribution. (If you want to follow the whole process yourself check out page 9 here or put in different values into the Department of Education's FAFSA4caster.)

You Get Credit for Assets, But Not for Most Debts

Another suggestion in Vedder's argument is that free-spending is actually rewarded. But apart from non-business real estate, where the amount counted is the value minus remaining debts, balances on credit cards, auto loans, etc. are not deducted treated as "negative" assets. And the contribution from assets cannot be negative, so you can't use being underwater on a second home to try and offset contributions from income.  Heavy debts may reduce the amount of cash in checking and savings accounts treated as assets, but the large protection allowance probably makes that meaningless. 

So how much is that savings penalty really?

Vedder's example for the savings penalty involves two otherwise identical families that both make $125,000 a year, with one having $100,000 in savings and the other having nothing. If the $100,000 is held entirely in retirement accounts, then there's no difference in the expected contribution for the thrifty versus free-spending families. If those additional savings are held in assets that are counted, then the contribution for the saver is about $4,000 higher. Yes, that's a bigger contribution, but the family also has $100,000 more in assets to make paying for college easier and avoid debt. If anyone thinks that's an unfair trade and would like to trade me $100,000 for $4,000 feel free to contact me. 

A Glimmer of Truth in Institutional Aid

While Vedder's argument falls apart with respect to federal aid, it's nearly impossible to evaluate his claim with respect to institutional aid.  That's because many of selective, private nonprofit institutions rely on additional documentation through the CSS/Financial Aid Profile to calculate aid based upon a completely opaque and customized "Institutional Methodology." There is no public base formula and it varies by school so there's no way to compare it to the federal formula. (The Financial Aid Journal has a summary here and a less clear brochure from College Board is here.) The institutional formula does include houses, so it's possible that those who save though their homes could be hit more than non-savers, but it still relies on a very low share of assets--between 3 and 5 percent depending on the level.  

Wrong Argument, Mostly Right Conclusion

The irony is that while Vedder's arguments on the savers' tax are dubious, his conclusion that aid determinations should rely largely on income alone makes a lot of policy sense. At this point, getting rid of assets is the next logical step in FAFSA simplification, as that section  presents a lot of questions that take much more time to answer than those related to income and make little difference in the end result. It would also lay the groundwork for experimenting with awarding aid based upon older income information straight from the IRS or other changes that could make it even easier for students to get aid. Sure it might have some small effect on contributions for richer people, but probably not enough to offset the gains at the other end of the income spectrum. 

Simplifying the federal formula will go a long way, but it won't do enough as long as a select group of colleges keep relying on additional information and opaque formulas to generate aid estimates that are wildly different than what the federal government suggests. Such machinations in the name of rooting out every last little false positive do nothing to help lower-income students understand what college is actually going to cost and likely increases confusion for everyone about how their aid packages really work. And that's before colleges start deviating from the expected contribution through so-called merit aid, tuition discounts, gapping, and the like. When it comes to stealth penalties, the issue isn't taxing savers, but what schools are doing for low-income students and how they get there.

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