Poor Families Pay Half Their Income At Elite Colleges? A Different Perspective

FM and IM—You Say Potato, I like Potahto: But We Can’t Call the Whole Thing Off

Posted by Educational Policy Institute

By Watson Scott Swail, President & CEO, Educational Policy Institute

A recent article published by the Chronicle of Higher Education titled “Are Poor Families Really Paying Half Their Income at Elite Colleges? ,” penned by Beckie Supiano and Soo Oh, reminded me of the old Gershwin tune, “Let’s Call the Whole Thing Off.” The graphic-based brief uses data from the University of Notre Dame to describe the challenges between federal government data collection from students via the Free Application for Federal Student Aid (FAFSA) and the College Board PROFILE, which many private colleges require from students to help them determine the amount of institutional aid.

Before 1992, the PROFILE was used by just about every college in the country. It was the defacto federal financial aid form, primarily because the federal government didn’t have one. But the 1992 reauthorization of the Higher Education Act changed history by creating the FAFSA as a means to (a) take away the College Board’s monopoly on the data business, and even the methodology business, and (b) to make the process free for students. Prior to 1992, students had to pay a nominal-but-real fee to apply for financial aid. In retrospect, most of us would agree that students should not pay to apply for aid—it seems counterintuitive, which was what Congress thought. But the challenge is that the FAFSA has never collected the detailed financial information that the PROFILE collects, and as we continue to strive for simplification of the FAFSA, even less data are supplied.

By law, students must complete the FAFSA to determine their financial aid package. This is determined through use of a formula called the Federal Methodology, or FM, a to determine aid distribution. Students attending private, elite colleges also must use the FAFSA for federal aid determination, but over 350 of these schools  require students to complete the College Board PROFILE to help determine the proper use of institutional aid. For these institutions, the FAFSA never has provided them with the level of detail about a family’s fiscal resources, whereas the PROFILE does. Institutions, like Notre Dame, want a much clearer picture of assets to better distribute valuable and limited institutional aid.

As the Chronicle piece correctly illustrates, institutions that use the PROFILE generally find that some students defined as low income by the FAFSA actually have more assets and are slightly more affluent. Slightly. Conversely, the PROFILE also moves people from middle income to lower-income levels. In essence, the different methodology, called the IM (Institutional Methodology) and created by financial aid officers through the College Board, moves people around the income bands. For low-income students, this generally provides them with more institutional aid, providing them with a lower cost of attendance than what students would get only using the federal methodology. In the Notre Dame example, students who would have had to provide $11,626 of a $60,000/year bill out of pocket through FM would now only provide $4,472 through IM. That’s still real money for families that earn less than $30,000/year. Other income levels changed marginally. The big difference is what is offered to lower-income students.

On one hand this is good news for college access advocates. Low-income students, or Pell-eligible students, can get more funds from elite schools, if they can clear the admissions hurdle. The reality is that most low-income students do not apply to Notre Dame and other elite schools because they either do not think they can qualify for admissions or they think they cannot afford it. Thus, these students are not subject to the PROFILE.

The Chronicle uses this example to showcase the problems that the federal government is going to face in their attempt to provide accurate consumer information about the true cost of college. It all depends, and that doesn’t help consumers very much.

But this is just more proof that our system is rife with issues and complexities that make college somewhere between Pandora’s box and a black hole for students and their families. Finding out the true cost of education is a completely imperfect science due to the nature of funding higher education and the two different methodologies of determining aid, the FM and IM.

There are a few solutions, but none of them are politically viable, which is our problem. The simplest way out, of course, is not to charge tuition and fees at all to students. Then there are no issues with methodologies. Economists, however, are quick to note that this type of fiscal policy is regressive, meaning that it favors more affluent families and students that can afford to pay the going price of college. And second, these policies aren’t refundable, meaning that if a low-income family actually qualified for more funds, the government wouldn’t be cutting them a check. Regardless, no one with any political will or pulpit in the US or Canada is going to support free tuition. In the end, those systems don’t work very well, either. Ask Ireland, a country that would love to get rid of free fees.

A second option is to have an income contingent system. We have one, but it is very limited and still requires students to be awarded a package of federal, state, and institutional grants and loans. Only the federal loans are made contingent on one’s income, of which borrowers pay a percentage of their current income until either their loan is paid off or they reach a 25-year make, at which time the loan is written off (a new law reduces the term to 20 years for new loans as of July 1, 2014). The challenge for students is that these loans are compounding due to interest charges. So, unless borrowers can pay enough to significantly reduce the principle of a small mortgage, it remains a dicey fiscal challenge.

A third option would be to simplify the funding system so that we did not have 4,000+ public and private not-for-profit institutions with variable tuition rates and fees. That just doesn’t work in any respect, but worth the mention. That, in essence, would be a form of price fixing. Either the payer is paying too much, or someone (e.g., the taxpayer) is subsidizing too much.

This doesn’t further our quest to find an answer, but the Chronicle illustrated a very important distinction between the elite colleges and everyone else due to use of IM and the PROFILE.

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