Monday, July 21, 2003

And more progressive aid plans 

Liberal bloggers are breathing heavily over the news that the Pell Grant formula that determines how much student aid people get is probably going to reduce aid by $270 million and eliminate aid for 84,000. This is the evil Bush at work, they say. Two points. As Highered Intelligence points out, financial aid is a sop to universities. It's a very old assignment we give in public finance: Two goods, x and y, with a budget constraint, and let's call x "higher ed". Now we subsidize one of the goods. Of course, there's more spending on that good, which goes to the universities. There will be more spending on the other good as well, which is "all the other stuff we consume". Financial aid is food stamps for middle class parents with late-teen kids. I know, I have one.

Michael gets an 'A-' for his analysis; he only forgot that the fungibility of financial aid means some of the money leaks out to other uses. I recall a young student on a cellphone to her friend saying, "I'm getting my financial aid money today. Want to go shopping?" (Really.)

The other point is this: The Pell grant formula is just that, a formula. The formula has been around for awhile, The issue, according to this article (and thanks to the Accidental Administrator for this link) is that the formula requires using IRS data on state and local tax collections that are three years old. Since those taxes have gone up substantially since then, the numbers are probably understating the true cost of local and state taxes on households. Tax cuts were the rage three years ago, and since the cuts were for middle-income families more than the poor, the impact of the new formula seems to be on middle income families.
The department has yet to come up with its own figures, but an analysis was conducted by Human Capital Research, an Illinois-based consulting firm that helps universities set enrollment and aid. Its methodology was vetted by financial aid officers, and the Education Department described it as generally sound.

In the 2004-2005 academic year, when the changes first take effect, parents in places like New York, Pennsylvania, Massachusetts, Oregon, and Washington, D.C., who earn $50,000 a year may be expected to contribute $700 or so beyond what they are already paying, according to the analysis. Those earning about $25,000 may owe only an extra $165 or less, while families earning $80,000 could be expected to pay an additional $1,100 or more.

Families in Florida and California should experience a smaller increase, probably less than $500 for those earning $50,000 and about $750 for those earning $80,000. In other states like Michigan, Delaware, South Carolina or Wisconsin, the burden will likely be greater. Families earning around $25,000 may be expected to contribute an extra $220 or less, those earning $50,000 may owe $940 more, while their counterparts with $80,000 incomes may be obliged to part with an additional $1,500.

Again, like the progressive tuition plan post down two from here, the issue is not a poverty issue -- the formula changes focus on taxes, and the tax changes have had the greatest impact on those from higher-income families. Those 84,000 cut off, if that materializes, will not be 84,000 single mothers from the inner city.