Savings Are Up, but Pensions Are Still a Mess

September 17, 2009, 08:07 AM ET

Wasting Financial Aid on Rich People

The Brookings Institution held an event Wednesday afternoon focused on the new book Crossing the Finish Line. It was a good discussion; Bill Bowen in particular did a great job of describing the book's findings. In addition to the under-match/over-match/affirmative action stuff that I wrote about last week, there were also important findings about the relationship between college costs and graduation rates. In short: there is one, but only for low-income students. Bowen1 As the net price of college increases for low-income students along the horizontal axis on the chart above, their graduation rate declines. In the book, the authors note that "Our estimate is that an increase in annual net price of $1,000 is associated with a decline of 3 percentage points in the four-year graduation rate for students in the lowest income group."

For well-off students, it's a different story: Bowen2

For the wealthiest students, the authors found "essentially no relationship between net price and graduation probability." This is unsurprising. Every student or family has some price at which they're either unable or unwilling to pay for college. For wealthy students, that price is far above what college actually costs. Poor students, by contrast, live near the margin, and every price increase pushes some students over the line, causing them to stop attending college altogether or enroll part-time, get a side job, or otherwise do things likely to delay graduation or cause them to drop out entirely. As higher education gets ever more expensive, more and more low-income students will be affected this way.

Which makes it all the more regrettable that our country wastes an enormous amount of money providing college financial aid to wealthy students. Some of it comes through programs like 529 college savings plans that are deliberately designed to disproportionately benefit the wealthy. Others, like the popular Georgia HOPE scholarship and its various clones, give everyone the same amount of money but have no eligibility restrictions for income. (The same is true for subsidized tuition generally.) And colleges themselves have been directing greater proportions of their institutional aid to well-off students, as this chart from a recent Education Sector report attests: CYCT_StudentAidChart10

In 1993, private colleges were much more likely to give financial aid to students in the bottom income quartile than to those in the top quartile. That gap has been steadily closing over time, and the average amount of aid given to the two groups is virtually the same.

The findings in Crossing the Finish Line suggest that we could achieve a net increase in overall graduation rates by redistributing existing financial-aid dollars away from wealthy students toward poor students. Yet for the better part of 20 years, federal, state, and institutional policy makers have been doing the opposite. It's a shame.

Comments

1. stonecreek - September 17, 2009 at 08:31 am

What are the income levels for the quartiles? One of the problems with these kinds of analyses, is that they do not look at what is happening on the ground and assume that today's college costs are "affordable" for those at certain income levels. That may be true for the truly wealthy, but at $50,000 per year, most families with a couple of kids will find private colleges unaffordable. Talk to parents and you will hear about the great middle-class squeeze-- not poor enough for financial aid, not wealthy enough to afford these costs.

2. 11223140 - September 17, 2009 at 08:48 am

The first commenter (stonecreek) makes a valid point that, depending upon the income grids we might agree upon for what might constitute lower, middle, and upper income quartiles, the "middle" face challenges. Yes, private college might in fact be unaffordable for "middle quartile" families, without the commitment to borrow a lot of money. However, that is not the real issue of the discussion being held here -- the discussion is about impacts on graduation rates as net price increases to the three quartiles. Having worked in financial aid at several expensive private schools, affordability of same to middle quartile students and their families is a huge issue, but persistence to graduation from any type of college or university is an even greater concern for the social fabric.

3. bdr8y - September 17, 2009 at 08:57 am

You preach the gospel Kevin Carey. Thank you.

4. bdr8y - September 17, 2009 at 08:57 am

You preach the gospel Kevin Carey. Thank you.

5. cwinton - September 17, 2009 at 02:12 pm

Lumping all of the upper quartile together as wealthy is asinine. As of 2006, the bottom rung of the upper quartile was around $100,000 per year family income. Do the math. If a sustainable debt load is 2.5 or 3 times family income, housing alone would put most families who fall within this author's implied scale of being wealthy in serious financial straits if their kids were to attend the typical private college. I find it ironic that the family living behind me, by virtue of being less well off, was able to send 3 kids to exclusive private schools while mine were limited to public institutions made affordable only because of subsidized tuition and our state's version of the HOPE scholarship plan, which this author decries. I've seen enough of the arbitrary nature of needs tests to view anyone advocating that approach with a jaundiced eye.

6. rtanderson - September 19, 2009 at 12:45 pm

The last chart would look much different if you disaggregated the middle two quartiles. Middle income persons seem to get the least support. Let's accept the premise that we should not be funding students in the highest economic categories and then work down to the most reasonable point. Each state would have different economic levels.

7. dannistories - September 20, 2009 at 03:15 am

Those who have more money might be going into debt for luxuries. I think any criteria for financial need should look at certain kinds of debt; basic living expenses, medical bills, funeral expenses, business failure, this sort of thing. A college education often means the difference between getting out of poverty or staying in it. A family with several students in school is going to feel the crunch, but bottom line, financial aid should send one through at a time to effectively be fair to everyone. It doesn't seem fair that a college would give an affluent family with two students but frivolous debt aid over a poor family with one student barely getting basic needs. The lower and middle class families should get the lion's share of aid, because they are most of this country. I think all aid should be needs-based, except for scholarships. There are plenty of academic scholarships for those who are willing to keep their grade point average up. However, a student who is having to work and put his or herself through school is most likely not going to make a 4.0 average. From one who put herself through school, and her health gave out before she finished. I had a good 3.3 average, and it was not nearly enough for scholarships available at the time. Now, scholarships are easier to find, and some would've put me through if I had known about them/known how to find them. Also, the article doesn't address that availability of financial aid can change drastically from school to school. Schools with more low-income students have more financial aid available than those that cater to the affluent. Low-income folks who don't know that can win a scholarship to a top school, only to find they can't get enough aid to go.

8. riheaa1 - September 21, 2009 at 08:56 am

Nice to see you've gone from lengthy attacks on the 529 industry to taking gratuitious, unsubstantiated passing shots on college savings plans. When you had the audacity to say that 529 plans are "deliberately designed to disproportionately benefit the wealthy", I figured the link would go to something that backs up such a brash statement. Instead, you link to another article you wrote which failed to substantiate your critique of 529s. Let me play editor, since it is painfully obvious you are desperately in need of one--if you are unable to support such overheated and empty-headed rhetoric with facts, your best bet would be to leave such utterings on the cutting room floor where they belong. I guess the pressure to fill space on this blog is just to great sometimes.