The Agenda

Higher Education Price Discrimination as a Stealth Tax on Savings

Richard Vedder describes financial aid practices at U.S. colleges and universities as a “stealth tax on savings.” Thanks to the Free Application for Federal Student Aid (FAFSA) form, colleges have access to detailed personal and financial information about the families of aid applicants (“income, debts, alimony payments, number of other dependent children and their age, and so on”) and this information greatly aids price discrimination. Expensive private colleges will tend to grant more aid to households with heavy debt burdens than households that have accumulated savings to pay for college, even if said households earn the same income. Vedder proposes that the federal government abolish FAFSA, and that it make it illegal for colleges and universities to solicit private family-financial information — the only thing colleges could do is consult overall income, as reported by the IRS. It’s a clever idea, and I’d be curious to hear the case against. One could argue that Vedder’s approach is unfair, as households that save really do have a greater ability to pay. But of course that is precisely his point: colleges are exploiting savers, and this in turn may well reduce the number of savers and (perhaps) the amount of aggregate savings. I would be open to one slight tweak in the Vedder approach: perhaps colleges could also inquire as to the number of children in a given household, as this information might also be of interest. I’d be comfortable with a scenario in which the parents of only children were obligated to pay more than the parents of, say, three or four children. 

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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