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July 08, 2013 11:07 AM Colleges’ Stealth Tax on Family Savings

By Richard Vedder

Surprisingly little academic work has been done on this form of taxation, perhaps because college professors indirectly benefit from this policy. While colleges have raised their sticker prices a lot because of the availability of relatively low-cost federally subsidized loans, they have increased actual fees paid by high-saving families through stealth means, exploiting family-financial information uniquely given to them and not to other sellers of goods and services.

In the interest of promoting higher savings (with all sorts of positive macroeconomic implications, such as lower interest rates and greater capital formation), why doesn’t the federal government abolish the Free Application for Federal Student Aid form and make it a criminal offense to solicit private family-financial information? At the minimum, all information on family finances, other than overall income (which could be provided to colleges by the Internal Revenue Service), would be excluded.

In sum, let’s abolish the stealth tax on savings.

Richard Vedder , a regular contributor to Bloomberg View, directs the Center for College Affordability and Productivity and teaches economics at Ohio University.

Comments

  • Patrick D. Larkey on July 08, 2013 11:59 PM:

    So, at long last we learn that the decline in savings rates is due to the increasing costs of higher education and modes of financing it... The argument is flimsy beyond belief. Competing explanations for the decline abound.

    The Washington Monthly is usually more careful. The editor who published this drivel should be ashamed. Get a few real economists at NBER who have modeled savings rates to comment. Ask Paul Krugman to comment; he always needs a giggle.

  • Michelle on July 09, 2013 12:45 PM:

    You know, I'm generally a big fan of College Guide and regulary send links out to various articles in my newsletter. But your statement today

    My guess, based on considerable anecdotal evidence, is that the student from the free-spending family will get a tuition discount of perhaps $25,000, while Student A will get only $10,000

    leaves a lot to be desired. Never mind the paper you reference is about for profit schools, you've left out so many considerations that your statement has a lot more to do with guess than evidence, ancedotal or otherwise. And assuming the motives for savings for retirement or a house haven't changed doesn't mean that the people would be saving more for retirment if not for that college tuition. In fact, fafsa doesn't look at retirement accounts.

    The FAFSA doesn't even look at home equity. A certain amount of parental savings is protected although the amount has been recently reduced. Colleges that use the CSS profile will look at home equity but CSS schools aren't known for giving discounts to high income families in general no matter how good the grades.

    There are all kinds of problems with college costs and tuition but this post is a missed opportunity. I don't have the command of the facts as I would like but you can probably get a pretty good idea of how much savings actually hurts aid by looking at Lynn O'Shaughnessy's The College Solution Blog.