December 17, 2007

Financial Aid and Financial Independence

Harry Brighouse linked to an interesting paper by Matthew Smith, Michael McPherson, and Sandy Baum, “Financial Independence and Age: Distributive Justice in the Case of Adult Education” (pdf). I think this paper asks important questions about the distributive consequences of financial aid, and how they can reinforce class structures, but that it buries its more important proposal. My comment at Crooked Timber below:

On a quick reading, it seems to me that SM&B are focusing on the wrong part of the financial independence rule, even given their own examples.

A quick recap: They discuss two 25-year-olds, Mary and Mark. Mary comes from a wealthy family; she made very little money last year because her parents were subsidizing her artistic pursuits; since she is considered financially independent and has no income, she gets a generous grant. Mark comes from a poor family; he has been working full-time in his own business for seven years before deciding to go back to college; because his income from last year is very high, he gets no funding, even though he's not going to be making nearly as much (since he has to give up his business to return to college).

It seems pretty clear to me that the treatment of Mark is much more unjust than the treatment of Mary. And it seems to me that the problem with the treatment of Mark is not that he is declared financially independent (which the SM&B proposal won't change), but that his financial aid calculation is based on his last year's income rather than on the amount he can reasonably expect to make while a full-time student. So the fix is not to tweak the criteria of financial independence, but to calculate financially independent students' contributions based on the expectation that they'll be working part-time. (So Mark's contribution would be calculated as if his income were $8000 or so, rather than the $30000 he made the year before.)

And SM&B seem to basically concede the point; on p. 26, when they discuss how their proposal would help Mark, they say that it would've helped him go to college earlier (but he didn't), and that an "independent reform could also be applied to the percentage independent students are expected to contribute"; which I agree with, but it's independent of the age-limit proposal.

So, as I said, I think that the focus on the age limit and the criteria for financial independence misses the main point.

....Adding to that comment, I'd like to see some numbers for how these scenaris actually work out in practice. If a huge proportion of the financial aid budget were going to Marys, that would be a problem, but I doubt that it is. And it may be hard to distinguish a Mary from someone whose parents have just cut her off.

The main proposal of their paper addresses the Mary problem, by suggesting that students shouldn't be considered financial independent unless they've been making enough to live on their own. Whether we should try to make Mary pay depends in part on the scale of the Mary problem, and who else would be hurt by this proposal. Consider Maria, who's been desperately poor (or possibly a stay-at-home wife who just got divorced) for a few years, and who doesn't have enough income to qualify as independent; her parents' income may not be princely but it's enough to cut her financial aid. Isn't it unjust to place extra burdens on Maria? Whether the proposal is a good idea depends in part on how many Marys there are and how many Marias.

Posted by Matt Weiner at December 17, 2007 08:10 AM

One of my pet peeves is that, for various reasons which are in themselves perhaps valid, most of our society's efforts at redistribution are focused on redistributing income rather than redistributing wealth. This means that people with low wealth/income ratios (e.g. young people, and people who have earned money themselves without inherited property or family support) can often be penalized in favor of people with high wealth/income ratios (e.g. old people, and people with financial support from living relatives or inheritances from dead ones).

The Mark/Mary scenario is an instance of this. So I do have a strong natural sympathy for Mark.

That said, the specific injustice envisioned by SM&B is that Mark doesn't receive a $4,310 Pell Grant in his first year of being a full-time student, though Mary does. (Presumably Mark would receive the Pell Grant in subsequent years if he doesn't work much while in school.) While unjust, this is pretty small beans in terms of a barrier to social mobility. Under the terms of the scenario, Mark is willing to give up on the order of $100K of work income in order to go to school for four years, so it doesn't seem too likely that the lack of a single $4K grant is going to tip the scales and keep him from going.

SM&B: Mark also had no appreciable assets, but because his previous year's income was, say, $30,000, his ability to pay was calculated at $15,000 -- well above the costs of tuition and room and board. Unsurprisingly, he had already spent his previous year's income on the basic living expenses of the previous year.

This is contradictory. Either $15,000 is "well above" the minimum cost of living Mark will experience as a student, in which case it doesn't seem unreasonable for him to save something out of $30,000 the year before he goes to school; or else $15,000 is a gross underestimate and the financial aid equation is hopelessly broken. Either way, everything else SM&B have to say about Mark seems like a waste of breath while this contradiction is left unexamined.

As for Mary: I don't think the minimum-income proposal is a bad idea, but I think SM&B significantly underestimate the likelihood of Mary's parents faking a $20K job for Mary, which may make the test pointless. The job would be a sinecure working for the parents or friends of the parents: probably not 100% fake, just mostly fake.

Posted by: Richard at December 28, 2007 12:01 AM

One of my pet peeves is that, for various reasons which are in themselves perhaps valid, most of our society's efforts at redistribution are focused on redistributing income rather than redistributing wealth.

I'm going to ignore the rest of your comment now, through no fault of your own, and say that this seems right to me -- and that a related problem is that so many measures of well-being measure income rather than wealth. Which leads to an excessively rosy picture of inequality across racial groups, for instance. It's my understanding that the wealth disparity between black Americans and white Americans is much greater than the income disparity, and that this really leads to a lot more unequal social outcomes that aren't caught when you screen by income.

That said, I think that one of the reasons for this is that wealth taxes might be considered unconstitutional given the Sixteenth Amendment (though this is more like something I heard than a serious opinion about the Constitution). Perhaps a more serious objection is that it's harder to measure wealth than income, and easier to shield it, so redistributing wealth might require a truly ridiculously intrusive state and encourage wealth sheltering. It would also probably have weird incentive effects (like, spending money on perishable things like nice meals would suddenly become much more attractive).

But I still think this is a good point!

Posted by: Matt Weiner at December 28, 2007 02:46 PM

I wasn't familiar with the constitutionality question re wealth tax. Interesting.

Of course we do have some wealth taxes. Property taxes, which are state and municipal rather than federal. And there's the federal estate tax...

Posted by: Richard at December 31, 2007 11:06 PM

Happy New Year, Richard! I'm not familiar with the constitutionality question either, it's something I think I might have heard. -- Well, it probably comes from here; not sure how widely accepted the analysis of the constitutional question is. (And I'm definitely not commenting on the concrete proposal at issue.)

Local property taxes are another can o' worms -- precisely because they're local, they entrench inequality, because rich school districts wind up with more money. And this leads to all sorts of distortion in the real estate market too. At least that's the top of my head version of it.

This says some income taxes, and the estate tax, were ruled constitutional even before the Sixteenth Amendment. I think the estate tax might pass muster because it's a tax on a transaction, the inheritance (it's bundled with the gift tax), but I definitely don't know.

Posted by: Matt Weiner at January 2, 2008 01:57 PM
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