Earlier this week, I got my most recent copy of the Journal of Policy Analysis and Management in the mail. This journal is published by the Association for Public Policy Analysis and Management, and it is one of the most frequently cited journals by policymakers.
In the most recent edition, there was one article that caught my eye. The study focused on college admissions and the difference between wealth and income. My colleague Rob Moore wrote recently about some ways we can address the wealth gap, but this paper was focused on one specific disparity created by wealth inequality.
The article is titled The racial wealth gap, financial aid, and college access, by Philip Levine from Wellesley College and Dubravaka Ritter from the Federal Reserve Bank of Philadelphia.
These authors found that because wealth assets such as retirement savings and home equity are not included in financial aid calculations, the potential students who come from families with these assets get a significant subsidy compared to those that do not. Essentially, colleges and universities are underestimating the capacity that families with these uncounted assets have to pay for college.
One argument against counting these assets in financial aid calculations is that because they are relatively illiquid, they don’t actually have much bearing on a family's ability to afford tuition. While this is true to some extent, research has shown that families with these assets, particularly home equity, are able to leverage their wealth to smooth their consumption under certain conditions. Essentially, they can spend more now because they know they’ll have money down the road.
Conversely, families that don’t have these assets don’t have the luxury to spend now because they don’t have money waiting for them later on. If someone doesn’t have a retirement savings account or home equity to liquidate later, then they have a lower ability to consume in the short run knowing that they’re going to need to have something once they're done working.
The equity concern created by this system is that white families are more likely to have illiquid sources of wealth than other racial groups. This means that relative to other racial groups, white students receive a subsidy when they apply for financial aid.
This is an interesting finding in and of itself, but the authors went further and quantified the impact of this subsidy. Specifically, they found that this particular feature of the financial aid system explains between 10 - 15 percent of the gap in educational advancement and student loan levels between racial groups.
From a policy perspective, considering all wealth assets available to a family is a fairly simple way for colleges and universities to promote more equitable outcomes through their financial aid processes. It will take some careful consideration to properly adjust the formulas for these types of assets, but these authors have shown that not accounting for them at all is a mistake.
The goal of financial aid in colleges and universities is to reduce the monetary barriers that prevent families with fewer resources from pursuing higher education. Right now, the formula isn’t benefiting the people who need aid the most, it’s benefiting the people who have generational wealth. If colleges and universities want to ensure their financial aid process is fair and equitable, they’ll have to rethink how they account for certain assets.