An article written by Marian Wang on Pro Publica poses the sticky question in the title above. To receive financial aid, a student and their family must undergo a thorough investigation into their financial lives. To quote from the article:
Many universities have access to comprehensive financial profiles, sometimes down to the type of cars a family drives. Some analyze patterns and interpret even the most subtle indicators from students, such as the order in which schools are listed on the federal financial-aid application, or even how long a student stays on the phone with an admissions officer.
However, information transfer is not a two-way street. Universities, even the most charitable, generally consider the metrics used to offer financial aid packages to be in the same category as state secrets. Again from the article:
Take Newman University, a Catholic liberal-arts college based in Kansas.
What are the actual criteria the college uses to determine who gets aid and how much? “That’s proprietary information,” said Pam Johnson, Newman’s interim dean of admissions and financial aid. “It’s part of our competitive strategy.”
The full article is well worth your time.
In a recent New York Times article, Shaila Dewan wrote that “Encouraging low-income people to borrow money, and then to get a credit card enabling them to borrow more, may seem counterintuitive or even a little risky.”
It’s not at all counterintuitive if you realize that credit is doled out based on a version of the famous marshmallow test: those disciplined souls who can refrain from using the credit that they have are worthy of more credit. Or: much shall be given to those who have their needs and desires under a tight rein. I recently learned that if you use 15-45% of the credit that you have, your FICO score goes up. Now, some people will be able to game this really easily. You can shut down a credit card if you are low in the “approved range.” You can open another credit card account if you’re a little on the high side. These are just cosmetic changes and can’t have any real bearing on your power to repay any additional debt. All the same, I’m fairly confident that it will turn out to be true that those who have the wherewithal to manage their spending to stay in the credit usage band will turn out to be more financially successful and able to repay debts in the long run. Consider the following reasons:
- Their needs and their income are reasonably matched, so they are in a pretty sustainable pattern. (That is, most of them probably don’t have to consider that the marshmallows lying on the table may be the only way to feed their kids today.)
- They get really inexpensive credit and so they can buy a house, get a boat, start a business, and so on, without taking scary risks, like poor people with low credit scores have to do.
- The probability that a health-related expense will have brought them to their knees is probably also quite a bit lower, as they are more likely to be in jobs with decent health plans attached. (Perhaps the Affordable Care Act will rejigger the equations a little bit here.)
Given the financial regime we live under, getting poor people to improve their credit rating by showing that they have the discipline to leave the marshmallows on the table makes perfect sense. They probably are a better bet to repay whatever credit they use than the poor devils who are daily trying to figure out which bill they can pay this week and whether they have enough gas to swing by the food pantry.
I suspect that it’s nevertheless highly “counterintuitive” (as per Dewan) because there is something very squirrelly about the ethics of the case. It is cruel to dangle money in front of folks who desperately need it and then reward them for not spending it. It is just another example of levying a surcharge on poor people for being poor. Punishing and further impoverishing the poor doesn’t sound quite right to most of us, even if we are willing to concede that the logic of the financial institutions getting wealthier by this mechanism have a corner on the publicly recognized logic.
I think this is why the vast majority of parents fail to raise their kids by the general principles brought to bear by the financial institutions that rule much of our lives. I have only ever run into one person, an Ethiopian, who had received parental training that prepared him for this reality. His parents gave him an allowance in the same spirit that we receive credit cards–if he spent it, he would be grounded. While this young man thought that he had learned something useful from his frequent punishments, he didn’t think he would raise his own kids that way.
We may bow to the power of the banks in the management of our financial affairs and in our social judgment, but our intuition tells us pretty clearly that setting traps for the most vulnerable among us is no way to treat people.
Mehrsa Baradaran, a law professor with an interest in the “social contract” underlying the financial industry, proposes that the post office start offering financial services to the underbanked. It makes sense, she says, because the postal service has a presence in neighborhoods that commercial banks have pulled out of. It’s the best idea I have heard of to apply positive pressure on the subprime financial services industry and change the competitive landscape those services operate in.
In a New York Times op-ed on the self-reinforcing nature of inequality, Robert Frank writes “perhaps the most import new feedback loop shows up in higher education. Tighter budgets in middle-class families make it harder for them to afford the special tutors and other environmental advantages that help more affluent students win admission to elite universities. Financial aid helps alleviate these problems, but the children of affluent families graduate debt-free and move quickly into top-paying jobs, while the children of other families face lesser job prospects and heavy loads of student debt. All too often, the less affluent experience the miracle of compound interest in reverse.” (See full article, The Vicious Circle of Income Inequality.) What does that mean for higher education? Frank proposes that “we’ll want to think more creatively about public policies that might contain” any of the feedback loops that increase inequality. How about a little more self-scrutiny and creative thinking on the part of institutions of higher education?
The New York Times ran an interesting op ed on the new rating system Obama has proposed to subsidize higher education for lower income students based on the “value” a particular school offers students: The Wrong College Ratings
Economists suggest college is a great value, as every year of higher education translates on average into 6% more pay every year (see Part I). But if you ask the American public, the answer is not so rosy.
A Pew Research Center survey from 2011 shows that the majority of Americans think college is less than a good value. This raises the question of what informs that judgment. Is it that tuition has gone up without a concomitant rise in quality of the education offered? Is there an underlying perception of unfairness? Do people see other avenues to getting a higher wage? Does the hardship of coming up with the funds during college cause so much pain that future earnings don’t feel like adequate compensation? Do people really think they are subsidizing research that doesn’t actually improve the quality of the education one receives?
Gaining a better understanding of what the real answers are would probably make a big difference to the overall college experience and to the way that colleges can market their services.
Bob Samuels of the AFT has calculated the cost to society of free public higher education. His magic number is a cost of $127 billion annually, a figure offset by a variety of savings. (For instance, we’d see a significant reduction in the cost of student loan programs. And we could reap more taxes by ending tax breaks on on education-related investments, which turn out to be a handy tax shelter for the rich.)
By my calculations Samuels’ total cost, never mind the offsets, would be approximately the same amount of taxpayer money as the cost of war since 2001.
I haven’t got a clue how to calculate the total social benefit of free college tuition at all public institutions of higher learning in the U.S., but I am pretty sure we’d get more out of it than we get out of the war in Afghanistan.
Freakonomics has two related podcasts on the benefit (part I) and the cost (part II) of going to college, and it comes to the conclusion that, yes, it is totally worth it. Every year of education adds 8% to your income every year, so those 4 years of college would result in 32% additional income every year. People with more education retire later, meaning that the years in college with little to no income are canceled out on the back end. (This is not to speak of the fact that people with more education are happier and healthier, presumably because their work is not nearly so unbearable.) In other words, higher education turns out not to be too expensive, after all, right?
Well, maybe not. Steve Dubner doesn’t dwell on this, but he’s undoubtedly reporting averages. And when you think about that, you have to figure that some people get a lot more return on their education than 8% per education year for every year they work. And others get less. What if you’re in a not-so-economically-viable major in a below-average school in a geography with below-average employment opportunities? Is it still worth it then?
Another very reasonable question Dubner forgets to ask is whether it is reasonable for a college education to cost what it costs, considering the social benefit we all derive from having a population of people ready to do the work that needs doing. That the average college grad will see a reasonable return on his or her investment does not mean that it is “priced” correctly or fairly. In fact, the cost of higher education is thoroughly irrational, especially in view of the fact that it is not entirely clear what creates the value. Is it what you learn? Is it just the piece of paper–the reputation of the degree? Is it the network you become part of?
About 20 years ago, I taught at Chicago State University–an institution where the question of whether it is worth it should be very seriously considered by all prospective applicants–nearly all my students said that, if given the option, they would buy their degree outright and skip the bit about learning. At the time, this merely struck me as a very sad commentary on the quality of the education that lay within their reach, and I gave it up and lit out for the territories as soon as I could. Now I fear they understood something about the real world which I was way too naive to appreciate.
In their book Scarcity, Sendhil Mullainathan and Eldar Shafir blame the apparently irrational act of taking out a payday loan (and taking out a second one to pay off the first, etc.) by poor people on the mindset induced by scarcity–that is, being poor makes it difficult to think about anything but getting money, the sooner the better. An interesting proposition.
In our research, we found some indications that talking about one’s financial straights leads to smarter decision-making, which would mean that if Mullainathan and Shafir are correct about the tunnel vision imposed by poverty, then talking to another person about the issue counteracts scarcity’s tendency to focus the mind on the getting of abundance ASAP.
The National Bureau of Economic Research recently released a study of the impact of contingent faculty at Northwestern University on student outcomes, concluding that they did better than their tenure-track counterparts. “We find consistent evidence that students learn relatively more from non-tenure line professors in their introductory courses,” the authors write. They also found that students in classes taught by contingent faculty are more likely to take another class in the same subject. Most interestingly, these differences “are particularly pronounced for Northwestern’s average students and less-qualified students.”
A couple of data points are in order:
1, There are more contingent faculty than tenured and tenure-track faculty in American universities, and they account for the overwhelming majority of courses taught.
2. At many universities, contingent faculty make at or even below the minimum wage. They typically receive a set amount per course–a pittance more often than not–that bears no relationship to the work required to do the work.
Bully for them that they are actually better teachers, and bully for the students that this be so. But exactly how does it compute that tuition has been going up by leaps and bounds year after year even as teaching happens more and more on the dirt cheap?