America’s financial aid framework wouldn’t look much different if it were crafted by the late Paul Ehrlich, the false prophet who warned of overpopulation and mass starvation.
Ehrlich wanted the tax code to discourage large families: the dependent exemption should apply only to the first two children, and a luxury tax should be levied on all cribs and diapers.
The federal student loan program seems to have been created in the same spirit.
Federal subsidies have driven up the cost of college, and those subsidies are slanted in favor of having only one child — or at most two children spaced far apart.
Large families, or any families with children close in age, suffer under the current system, and last year’s changes to the federal financial aid formula made it worse for anyone with more than one child.
The 2020 law that simplified the Free Application for Federal Student Aid formula also created something of a One Child Policy.
Under the old system, you would enter your income and your assets (mostly your cash savings), and the U.S. Department of Education would calculate how much you could afford to pay for college — your “Expected Family Contribution.” Ideally, every dollar above that expected contribution would be fulfilled by financial aid, from Uncle Sam, the state, and the college.
The new system asks mostly the same question and does mostly the same calculation, but at the end of that calculation, when it determines how much you can afford for college next year, it expects you to pay that much for each child in college.
“Yes, Mr. and Mrs. Johnson, your after-tax income was just above $110,000, and so we estimate you can afford $20,000 in tuition next year. With three kids in college next year, that will come out to $60,000. Any questions?”
Why would they do this?
“Equity” is part of the answer, of course.
The National Association of Student Financial Aid Administrators, for instance, praised the law for creating a “more equitable formula,” because it abolished the “sibling discount.”
The “sibling discount” was not an explicit discount for students with siblings. Instead, it is the result of basic math: If a family can afford $20,000 in tuition in one year and that family has three children in college, the family can afford about $6,667 per child. Each student in this family gets more financial aid because he has siblings in college.
This violates some notions of “equity,” because it means a family with more college-going children might get more aid per child than a smaller family with the same available income.
More specifically, under the old system, parents with children born closer together received more financial aid over their lifetime compared to similar parents with children spaced further apart.
For instance, a family with twins would get more aid than a family whose two children are four years apart in school.
It’s fair to consider this discrepancy. Why should these two families be treated differently if they have the same income?
For starters, their economic needs are different. Having a massive cost concentrated in four years is more of a burden than having that same cost spread over eight years. The family with twins in college really does experience greater economic hardship than the other family, so a federally run aid program is justified in aiding one family more than another.
Defenders of the new law say that big families or families with children overlapping in college can deal with that hardship by borrowing, or just saving more than other families.
But it’s a bit perverse to tell families to borrow to cover the added costs of this new formula because this very formula determines whether the student is eligible for subsidized student loans. Parents can instead take out PLUS loans, whose interest rate is currently set by the Education Department at 9.07%.
It’s also a bit odd to tell parents they should have saved for college, considering the ability-to-pay formula also counts their savings against them.
But let’s compare those two-child families head-to-head.
The Thompsons have twins, and the Spaceys have their children spaced. Imagine the two families have the same income, the same taxes, and the same savings. They both have an expected family contribution, or SAI, of $20,000, so the Thompsons pay $40,000 per year for four years while the Spaceys pay $20,000 per year for eight years.
The Spaceys’ entire needs are met each year, and so they don’t have to borrow. They pay $160,000 in total.
The Thompsons, though, are expected to pay yearly twice what they are deemed able to pay, and so they borrow half of that, at a 9.07% interest rate. If the parents took out a PLUS loan each year and paid them off over the standard 10 years, that would add up to more than $40,000 in interest — increasing the total cost of college for the twins from $160,000 to $200,000 when you count the interest.
That 25% premium for having twins is called “equity.”
The alternative, that the Thompsons should have saved more aggressively than the Spaceys, has an unstated premise: Those twins are the only children the Thompsons will have.
Look closely enough, and you will see it’s not about equity. The new law, and the folks who defend it, are unconsciously advancing a particular worldview. They just think you should have only one child, or at most two, and not too close together.
As an added bonus, the formula slightly favors those who have children later (by allowing older parents to shield more of their assets than younger parents) and two-income families over breadwinner families with the same finances. You can begin to see the pattern.
Our laws and regulations, even those that seem neutral, generally reflect an unstated worldview. The worldview expressed in our financial aid program is the one that dominates our elite class: Be parsimonious planners on family matters.
THE KNICKS’ GAMES START TOO LATE
To the extent the new formula does reflect equity, it is equity that considers only the individual, not the family. Dana Kelly, a vice president at the National Association of Student Financial Aid Administrators, put it succinctly: “Rather than looking at the family as a whole, they are looking at each student individually.”
This individualistic, less-familial worldview results in a financial aid system that drives up the price of college, and then tilts financial aid away from larger families.
Tim Carney is the senior political columnist at the Washington Examiner and a senior fellow at the American Enterprise Institute.