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College financial aid system benefits white students

Families with equal incomes and equal counted assets, like stocks and bonds, would be eligible for the same amount of financial aid even if they had large gaps in uncounted assets, like home equity and retirement savings. But it is well-known that assets are unevenly distributed by race.


Should the college admissions process provide advantages to underrepresented minority students? That is the question asked in the affirmative action cases the Supreme Court will decide this month, so it’s an appropriate time to identify advantages in higher education offered to white students. In recent research, I have argued that financial aid provides one such example. College affordability may be an issue for many students, but the treatment of assets in the financial aid system generates preferential treatment for white students.

Families with lower incomes and fewer assets will have more trouble paying for college than those with higher incomes and more assets. So they should be eligible for more financial aid. The purpose of completing the FAFSA is to calculate the amount a family can afford to pay.


Income is measured comprehensively, but assets are not. The FAFSA requires applicants to list traditional savings and financial investments, like stocks and bonds, and debt. But it exempts home equity and retirement savings. The income tax system similarly favors these assets to encourage home ownership and building a nest egg. These uncounted assets represent the bulk of most households’ assets (if they have any). Ignoring them means that families with equal incomes, but unequal assets, are eligible for the same amount of financial aid.

But it is well-known that assets are unevenly distributed by race. Analysts often attribute it to a variety of structural factors, including redlining, the Fair Labor Standard Act, and the GI Bill.

The median white family with children approaching college age holds $162,000 in total assets. Of that amount, $100,000 comes in the form of home equity and retirement savings. The analogous figures for the median Black family are $13,000 and $0.

Families with equal incomes and equal counted assets would be eligible for the same amount of financial aid despite these large gaps in uncounted assets.


Note that this inequity does not affect lower-income families. They hold few assets regardless of race. By law, students completing the FAFSA with family incomes below $50,000 (increasing to $60,000 next year) are not asked about any asset holdings. This is a sensible policy.

The inequity also is not meaningful in awarding Pell Grants, the main element of federal financial aid that does not need to be repaid. Students eligible for these awards typically have family incomes low enough that they are unlikely to hold enough assets to matter even if they were all counted.

The students who are affected by this issue are those who attend institutions that use their own resources to provide additional financial aid. This group is largely restricted to full-time, dependent students attending public and private four-year institutions who live away from their parents. (Some private colleges have their own need-based forms in addition to FAFSA to vet need.) These students face the highest sticker prices and are eligible for the most financial aid. Overall, almost 1 million students annually may benefit from uncounted assets.

To be sure, nobody expects a family to sell their house or wipe out their retirement savings to send their child to college. But consider one family with $100,000 in income and no assets and another with $100,000 in income and $200,000 in home equity and retirement savings. Suppose both families are asked to pay $15,000 — a typical out-of-pocket payment at a public flagship institution for a family with that level of income. Perhaps that is too much for both families, but that is a different problem. The question is do they really have equal ability to pay that amount?


In the current higher education landscape, it is difficult to imagine families paying for a college education out of their current incomes. Saving and borrowing must be part of the equation. Borrowing from one’s home equity or retirement account is similar to taking out an education loan. But the family that owns those assets in the first place is often better off than the family that doesn’t. Those families still have rent to pay without accumulating home equity. Homeowners who borrow against their homes still have remaining equity. And those with no retirement savings just fall further behind.

This is a sensitive issue in Greater Boston, with its staggering home prices. Owning a relatively modest house for families with modest incomes can lead to substantial home equity — assuming housing prices remain fixed or increase. In fact, political considerations like this contributed to ignoring home equity in the financial aid system. But that still does not change the underlying math. Families that hold those assets are still better off financially than those that do not.

Fixing the problem by simply including home equity and retirement savings in calculating aid eligibility probably does not make sense either, though. That would largely reduce aid white students receive. A better solution would be to count these assets and rebalance the weights placed on income and assets in the formula that determines aid eligibility. In the aggregate, reduced aid eligibility from greater assets could be offset by increased aid eligibility associated with counting less of the income. In combination, low-asset families would be eligible for more aid and high-asset families would be eligible for less aid. On average, aggregate aid eligibility would remain the same.


Education has been labeled the great equalizer because of its ability to improve the circumstances of those who acquire more of it. A college degree contributes to social mobility in a way that is consistent with that view. We live in a society with pervasive levels of racial inequality. Greater access to higher education for underrepresented minority students cannot completely solve this problem, but it can help. Ignoring race in the college admission system and favoring white students in the financial aid system would be counterproductive. For those who favor race-neutrality, it should at least be applied consistently.

Phillip Levine is a professor of economics at Wellesley College and author of “A Problem of Fit: How the Complexity of College Pricing Hurts Students — and Universities.” He also is founder and CEO of MyinTuition Corp., a nonprofit organization that provides colleges and universities with a financial aid calculator.