The Financial Aid "Kill Zone" in America - A Model

Paying for College
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<p>I posted a shorter version of this model deep in a college admissions forum specific to one school, and then realized it made as much or more sense to post it in the FinAid forum. So here goes:</p>

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<p>The income "bar" at which aid drops off is currently set too low, and is based on an outdated algorithms or stale assumptions. Any attempt to deny folks who have income of, say $20K or $30K, a college education simply perpetuates the low-income trap they live in for the next generation. College aid for those folks has always been, and rightly so should remain, available. But a family living on an income of $120K or $150K, while once well able to afford the cost of a college education, is now not in a position to pay $45K or $50K a year out of pocket.</p>

<p>Over the past number of years, college costs have risen unabated, some years at rates up to 3x or 4x the rate of inflation, while incomes have stayed static or even dropped relative to inflation. So that a college like Georgetown which not too long ago cost only in the mid-$30K range, is now close to $50K. </p>

<p>This has created a "kill zone" for some households -- middle class "rich" people being priced out. And it is exacerbated by a recent (cynical) political trend toward labeling, as "rich", families earning $150K/yr. </p>

<p>A MODEL:
Consider three families, each with a smart motivated child who gets accepted to the same elite university. </p>

<p>"Poor" guy
Annual Income = $40,000
FinAid @ Georgetown = $50,000 in grants, which (assuming 30% combined fed/state tax bracket) equals a gift of equivalent $72,000 income
TOTAL: $40,000 + $72,000 = $112,000/yr in cash and income-equivalent service (in the form of tuition)</p>

<p>"Rich" guy
Annual Income = $150,000
FinAid @ Georgetown = zero
Pay out of pocket to Georgetown = $50,000/ year, which assuming same 30% tax bracket as above, meaning he must earn $72,000 to take home that $50,000 for payment to Georgetown, so we are essentially saying he now "earns" $150,000 - $72,000 = $78,000 / yr in cash and income-equivalent service</p>

<p>"Super Rich" guy
Annual income = $300,000
FinAid @ Georgetown = zero
Pay out of pocket to Georgetown = $50,000/ year, which assuming same 30% tax bracket as above, means he must earn $72,000 to take home that $50,000 for payment to Georgetown, so we are essentially saying he now "earns" $300,000 - $72,000 = $228,000 a year in cash and income-equivalent service</p>

<p>So...
We've taken the guy who earns $50,000 and given him a "raise" of $72,000 equivalent gross income, via a transfer of fed dollars to his grants, and raised his effective income to $112,000.
We've taken the guy who earns $150,000 and told him he must allocate $72,000 of his earnings to cover the cost of the education, and reducing his effective income to $78,000.</p>

<p>The "poor" guy now makes $112K.<br>
The "rich" guy now makes $78K.
The "super rich" guy now makes $228K.</p>

<p>And before anyone starts getting up on the political correctness stump and starts posturing, I am <em>not</em> passing judgement on the "poor" guy or the "rich" guy or the "super rich" guy --- none of them is a derelict or a deadbeat or undeserving. They all get up, shave, and go to work and work hard to make livings for their families every day. And they all deserve to be able to afford to send their children to the best college possible. </p>

<p>It's just that you cannot point at the model above and in any way say it is fair for the "rich" guy stuck in what I call the "kill zone". That is, unless you subscribe to a belief system that advocates rampant redistribution of wealth. </p>

<p>It's ok to say to me "yeah, well, you just got unlucky that your family income falls into this zone at this point -- and it only lasts for 4 years -- and you could just as easily be one of the poor or the super rich, and if things had been different you may be not posting here". All true. I admit completely that my position on this is focused on ME, and focused on why my situation leaves my family paying a larger percentage of our income than anyone on either side of us. I think it is unfair, and I think it will over time lead to an imbalance in who gets educated at the top colleges in this country. Unfortunately, the backlash on this will not come in time to help me and my family.</p>

<p>By the way, I am a senior and admitted to a bunch of good schools (one mentioned above) and not sure at this point that I can afford to go to any of them. My parents have two other kids at home and it's actually coming down to a choice between me going to Georgetown, Brown, Emory, etc, or them being able to let my little brothers continue to play sports and such. Which sucks.</p>

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<p>I agree with you on this, and will add (at the risk of being skewered) that I don’t understand why the “poor” guy’s kid, armed with a debt-free degree from one of the top universities in the world, is not expected to pay back some of his grants in order to enable the poorer rich guy’s kids to go there, too.</p>

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<p>Do keep in mind that the financial aid models assume that families and kids alike SAVE over time for their college.</p>

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<p>Wow you are very perceptive for a senior! It is a shame that our education system is stacked against folks of “average” means.
cptofthehouse might have forgotten that even those who have saved may have lost 40% on of their 529 plans last year</p>

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<p>Also, one did not necessarily earn 150k for 20 years. Perhaps one worked up the pay scale, or only had a more successful business over the last few years. Also, 150k in a city or suburb of places like LA, NYC, Boston are not the same as a 150k income in the suburbs of High Point, NC, or Toledo, OH in my opinion. I have read that this is taken into account when completing FA forms, but somehow it just does not work out for the person living in a high cost of living area. All the complaining really does not do any good. The system has been broken for years. Oh, and remember that “nobody” is entitled to a private school education (just another mantra that is played over and over again). Most middle class folks in my area cannot afford the COA at our instate Us/colleges either. As I said, the system is broken!!!</p>

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<p>Duke–excellent analysis. </p>

<p>I’ve been arguing this point, without the math as you have done, on the Vanderbilt forum:</p>

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<p>^^cptofthehouse: Exactly. The financial aid model assumes that my parents started saving a few hundred dollars a month from the day I was born. I have no idea what my father earned in 1991 (I know my mother was not working until maybe 1999 or 2000?) so which I am assuming they did not have extra in 1991-2000 to save. And anything saved since about 4 years ago would be gone anyway due to the market crash since the Fall elections.</p>

<p>^^northeastmom: I did not know about the geographical adjustments. I am outside Boston. Guess it didn’t really help in my case.</p>

<p>^^kentuckymom: I see from your quote blocks that somewhere you got accused of insulting lower-income people. It’s hard to argue this point wihtout getting drawn into a class-warfare argument. Usually by people who (rightly so) got aid and are afraid that if we rock the apple cart (is that even the right expression, oh w/e) then we will end up jeopardizing their gig. So I see their point. The people in charge of FA are so undisciplined and capricious that if they end up getting ME my aid, they could possibly (though not probably) take it away from someone else. they have alrady proven that they are incapable of getting it right. At least my version of right.</p>

<p>^^Momasita: Thank you for your kind words, but it is pretty basic math, and it is certainly math that I would hope maybe Congress gets around to doing someday, once they have finished giving money to ppl on Wall Street who deserve it less than I do ;-)</p>

<p>I think I also read somewhere (on CC?) that the FAFSA uses some old household budget assumptions from old census data, from back when the FAFSA first came into usage back in the late 1970’s. So they assume the average household pays like 1% of their income to healthcare, and one car, and has no cell phone bills, or cable bills, or school bus fees ($250 per kid in my town) and school sports and activities fees ($300 per sport per kid in my town) and mortgage is like 10% of income instead of maybe 50% of income, and the milkman drops the milk bottles on the back porch every morning, etc. </p>

<p>Anyway, like I said, it’s too late for me. I am really hoping I can pull off one of my schools, but it’s looking like state school for me.</p>

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<p>I am not sure about the geographic adjustment. I had read about it on cc. If it exists, it really does not put a dent into the difference between 150k in Boston vs. 150k in Des Moines.</p>

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<p>The model also does not account for situtations where some parents could not bank a few hundred per month for the last 4 years because pehaps they were a part of the sandwich generation and needed to help an 85 y/o parent financially. Professional judgement allows for taking this into account if the grandparent requires help in the year you are looking for aid. What about if parents needed to help support grandparents for the last 5 years and the grandparents passed away a year ago? I don’t think this is looked at.</p>

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<p>Duke, I truly believe one can get as good of an education at other, less-expensive schools, or schools that place a greater emphasis on merit aid–the achievement and potential of the students vs. the past success of their parents. And I wonder if future career prospects are really so much better at schools like Vandy or Georgetown that they are worth such a huge investment. </p>

<p>As far as my daughter is considered, these schools have indicated who they really want to attend, in the form of packages they awarded (or didn’t!). They must not be truly interested in kids like her, or they wouldn’t have such a negative incentive structure. They seem to be more interested in the wallets of her parents and spreading around their wealth.</p>

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<p>TheDukeofEarl and everyone else, I am having the same exact problem. College costs are simply unaffordable for middle class families who are expected to pay with no financial aid. Theoretically parents in the middle class should have been saving all of this time, true, but in cases such as mine where my dad has been out of work 3 times in the past 8 years this has been absolutely impossible. My family had to move to a less expensive location a few years ago. I agree that people from all income brackets are equally deserving of going to the schools that they have worked for and are qualified for. I wish that people’s ability to attend was also made equal.</p>

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<p>I too was impressed with Thedukeofearl’s anaylsis. However, without sounding harsh, I think this is why the Parent Plus loans were invented. Parents who have good salaries (no matter where they are located) who may not have saved all of the tuition for all four years can take out these loans. This is how we funded my older daughter’s education. It’s not ideal, but it is manageable. Each family has to make a decision as to whether it is worth it to accumulate debt to finance a college education. I’m sure colleges would love to help everybody, but they can’t. So they perform a kind of triage, and give to those who do not have the salary or the assets to finance an education. But those who are lucky enough to make more money should be expected to pay more than those who cannot. Given that, the formulas used to determine how much to give are most likely flawed, given the degree of disappointment on these threads about the financial aid packages awarded. It does appear that the middle class is being pushed out of the world of private education and that is a shame.</p>

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<p>My aunt and uncle have 3 children. Two of my cousins have been through college, and one more is finishing soph year. I just found out from my mother last summer (she let it slip) that they got divorced right before the first cousin applied to college, and she and the second one are now out of college and once the third one graduates, my aunt and uncle will get back together. They still live together and I think nobody knows they are divorced - maybe not even my cousins. </p>

<p>So his income does not get on the FAFSA. I don’t know if this is right (I mean, a correct retelling of the story, not is it moral or immoral), but that’s what it has come to.</p>

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<p>BGapplicant, I am sorry that you are going through this too. You brought out an excellent point about how unemployment from years past perhaps depleted savings.</p>

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<p>This analysis is wrong. Assuming that attending Georgetown is worth $72,000, the poor guy gets his $40,000 in income plus getting to go to school = $112,000. The rich guy gets his $150,000-$72,000 in tution plus getting to got to school, still equals $150,000. The analysis you conducted above only works if the rich guy has to pay, but doesn’t get to go to the school, or if the poor guy gets to go to the school and gets $72,000 in cash.</p>

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<p>^^benjaminx:</p>

<p>Good point, and one I cannot argue, given that both parties are, as you said, getting the value of (let’s assume) 4 years of education out of it. OK so what you’re saying it is really:</p>

<p>“Poor” guy = 40,000 + 4 yrs of school (free) = 40,000 + 4 yrs of school
“Rich” guy = 150,000 -72,000 + 4 yrs of school = 78,000 + 4 yrs of school</p>

<p>So we’ve essentially just transferred the “rich” guy’s 72,000 to the “poor” guy – in rough terms, I mean – or more accurately, we have laundered it through the school so that they can use it to subsidize the poor guy. </p>

<p>So we do penalize people for earning more, but not the extent I said originally.</p>

<p>Still seems unfair. The “poor” guy incurs no impact whatsoever on his standard of living; the “rich” guy takes a 50% hit on his. This is still an unseemly redistribution of wealth, in my opinion. But like I said, I am on the receiving end of this bone job, so that’s my perspective.</p>

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<p>duke, oh but you see how this is rationalized: </p>

<p>The claim that is made by schools is that everyone is receiving a discount, because if the sticker price is 50k, the true cost of education for the full paying student might be 60k! The school is just discounting the the full cost to the full paying student as well. Everyone is then being gifted money.</p>

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<p>This statement is important. When an EFC of $50,000 comes in, that money is not expected to come out of a $150,000 yearly salary. Even though FAFSA takes savings into account, it does not really matter if they ARE actually savings. It is assumed that someone with a $150,000 income has been forward-looking in order to stash some money away. That person, if they choose to pay for their child’s education, is also expected to make sacrifices. It may or may not be fair, but there are certain responsibilities that are assumed. Someone who makes $35,000 a year is able to live on $35,000 a year, even if he has little or no savings. Someone who makes $150,000 (baring NY or parts of CA) could easily have a comfortable living at $50,000, therefore stashing away $100,000. That part is assumed. When families buy a home and make certain decisions, they should do so with savings (and not just college savings!) in mind. I’m not saying its fair. And it doesn’t work for every family situation. But there are responsibilities that the middle class has.</p>

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<p>By the way, at least at the schools I’ve read about - American and GW - tuition does not contribute to financial aid. Financial aid comes from the school’s endowment, the federal government (federal aid), the state (for state grants), and alumni contributions.</p>

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<p>There are income taxes on the 150k, so you could not stash away 100k. Yes, someone who earns 150k has responsibility to pay taxes, but how many times should they be taxed on the same 150k, and their wealth redistributed?</p>

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