Monday, April 02, 2007

Should savings influence the net price of college? 

I've been puzzling over Richard Vedder's post "Tyler's lament", on whether those who save for college for their children are penalized by university financial aid offices by a reduction in scholarship and loan offers. Vedder writes:
I was struck by Tyler's main point: his family was responsible and saved for college, and as a consequence receives little financial aid. Other kids from families with similar financial circumstances get more assistance -- often because their families were less responsible, spending more through the years and doing less saving for college for their children. Tyler, in effect, said, "my parents are being punished for being responsible." Tyler, of course, is right.
I asked a colleague over the weekend who has a very bright son applying to selective colleges, and who by his own admission is probably not the least profligate parent. He reported back that there was no such effect in his case; his impression seemed to be that income was more important than savings.

My complaint about FAFSA, the common form parents fill out to help their children get financial aid (created by the US Dept. of Education, mind you), is that it is a revenue-creating device that provides every school identical information, likely to be more truthful and more invasive of your financial situation, and allows schools to determine one's ability-to-pay. Savings is perhaps not as relevant. You may not save in accounts specifically for your children, but the net present value of your stream of labor and capital income can be borrowed against to finance the child at any rate. If you view savings as a smoothing mechanism for lifetime consumption, the lump of wealth you have in the kid's education IRA is not a big determinant of your ability to pay.

What about willingness to pay, though? A quick thought experiment: You can use student loans repaid by parents as a way of transferring income to your children. You have two goods to consume -- a good you consume yourself, and the benefit you receive from transferring goods to your children (that I assume you care about.) You do this over a lifetime. Student loans make possible transfers that smooth out the budget constraint -- you can transfer more future income (at lower cost, if student loans have subsidized interest rates) than you might be able to otherwise.

This argument abstracts from any benefit from the education itself. It could be a transfer of income to the kid who will view college as a four-(plus!-) year party. If there is a return benefit to the parent of the child's education, that makes the problem stickier but I don't know if it changes the story. If you think otherwise, comments are most welcome!

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