Monthly Archives: January 2016

The 4 craziest things I learned while coding the college financial aid formula: Part 4 of 4

While designing a webtool that provides potential college students with an estimate of their financial aid, I learned a few crazy things.

# 1 is here. # 2 is here. # 3 is here.

#4: The aid formula is biased toward states like New York and California, and against states like Texas and Florida.

The aid formulas allow applicants to subtract allowances for state and other taxes from their income, similar to deductions on your taxes. Since a higher income will generally reduce aid eligibility, the higher the allowance, the more of your income is shielded from the aid formula. But the allowance varies by state. For example, independent students with dependents other than a spouse in New York generally get to shield 8% of income from the aid formula, and 7% in California. But similar students in Texas and Florida can generally only shield 2% of their income with these allowances.

While unfair to all residents in states like Texas and Florida, this unfair treatment is especially problematic when it interacts with the minimum Pell grant discontinuity highlighted in part 1.

To see this, starting from the default settings of the webtool, select this year, increase age to 30, select married with spouse not attending college, with 2 children, then increase income to 70,300. This student (who lives in California) would receive a $600 Pell grant and have an EFC (EFC stands for Expected Family Contribution, and it is what the government thinks your family can afford to pay for college) of $5,200. This same family in Texas would have an EFC of $6,200 and a Pell grant of $0.

The only difference between these two families is that one lives in California, and one lives in Texas. Yet the California student gets a $600 Pell grant while the Texas student gets $0 in Pell grant aid.

Right now, the federal aid formulas are effectively discriminating against students in Florida and Texas, and giving more aid to students in New York and California. The easiest solution to this problem would be to apply a universal state tax allowance regardless of state of residence.

The 4 craziest things I learned while coding the college financial aid formula: Part 3 of 4

While designing a webtool that provides potential college students with an estimate of their financial aid, I learned a few crazy things.

# 1 is here. # 2 is here.

#3: Marriage is rewarded.

One somewhat surprising finding is that the financial aid formulas reward marriage. To see this, from the default settings of the webtool, select this academic year and then decrease parent income to $40,000. This two parent family would have an EFC (EFC stands for Expected Family Contribution, and it is what the government thinks your family can afford to pay for college) of $4,200 and a Pell grant of $1,600. But if you change this to a one parent family, EFC increases for $4,700 and the Pell grant declines to $1,100.

This quirk is caused by giving married students and students from households with two parents a larger asset allowance (essentially shielding more of their assets from the financial aid formulas). I think encouraging two parent households is probably a good idea, but I’m not sure financial aid eligibility is the right place to be doing so. I’m also not sure this is fair to single individuals. If you’d like to fix this, the clearest solution is to allow for the same asset allowance regardless of marriage status.

David Beckworth and Ramesh Ponnuru on how the Fed’s tight money caused the Great Recession

David Beckworth and Ramesh Ponnuru:

What the housing-centric view underemphasizes is that the housing bust started in early 2006, more than two years before the economic crisis. In 2006 and 2007, construction employment fell, but overall employment continued to grow, as did the economy generally…

It took a bigger shock to the economy to bring the financial system down. That shock was tighter money… This point is easy to miss because the Fed lowered interest rates between September 2007 and April 2008. But raising rates is not the only route to tighter money…

when the economy weakens, the “natural” interest rate — the rate that keeps the economy on an even keel — falls. By staying in place, the Fed’s target interest rate was rising relative to that natural rate…

Market indicators of expected inflation fell sharply that summer, a sign that the economy was getting weaker and monetary policy tighter…

It was against this backdrop of tighter money that the financial stress of 2007 turned into something far worse in 2008…

the timeline is a better match for the theory that the Fed is to blame. The economy started to tank not right after housing began to fall, but right after money tightened…

It took decades for the Fed’s responsibility for the Great Depression to be widely accepted and it may take that long for most people to see its responsibility this time around. The Fed of 2008 feared inflation too much and recession too little… If these mistakes go unrecognized, they could well be repeated.

Beckworth offers some additional commentary on his blog:

the Fed contained the fallout from housing crisis for almost two years…

the Fed tightened policy in 2008 and did so in two phases. First, beginning around April 2008 the Fed began signalling it was planning to raise interest rates…

The second stage, as we note, in the Op-Ed occurs in the second half of 2008. Here the natural interest rate is falling fast and the Fed fails to lower its target interest rate until October 2008. This is a passive tightening of monetary policy…

The 4 craziest things I learned while coding the college financial aid formula: Part 2 of 4

While designing a webtool that provides potential college students with an estimate of their financial aid, I learned a few crazy things.

# 1 is here.

#2: Student earnings and assets are “taxed” at an unreasonably high rate by the aid formula.

It should be fairly uncontroversial that saving money for college is a good thing. Similarly, working over summers to earn money for college should be thought of as a good thing. Yet the aid formula discourages both too much.

This is easiest to see with independent students without any dependents, say a 25 year old enrolling in college for the first time.

To see how work is discouraged, starting from the default settings of the webtool, select this year, increase the student’s age to 25, and then increase earnings to $16,000. Such a student would have an EFC (EFC stands for Expected Family Contribution, and it is what the government thinks your family can afford to pay for college) of $2,000, a Pell grant of $3,700, and a price after aid of $100. If the student earns an extra $800, EFC increases to $2,300, their Pell grant is reduced to $3,400, and their price after aid increases to $500.

In other words, the student’s is rewarded for earning an extra $800 by having their Pell grant cut by $300 and having their price after aid increase by $400. This discourages such a student from working to earn that extra $800.

To see how saving for college is discouraged, from the default settings of the webtool, select this academic year, increase the age to 25, and increase assets to $12,500. Such a student would have an EFC of $1,900, and a Pell grant of $3,900, and a $0 price after aid (student loans cover the rest of the cost). Now increase assets by $1,000 to $13,500. The student now has an EFC of $2,100, a Pell grant of $3,700, and a $200 price after aid. This means that there is essentially a 20% tax on student assets (every $5 increase in assets will reduce aid eligibility by $1). A 20% tax may not seem that high, but remember that it is applied each year. Assuming the student pays the extra $200 in price after aid out of assets, there is $800 of the original $1,000 left the second year, and this will reduce aid eligibility by $160 for the second year. There would be $640 left in the third year, reducing aid in year three by $128. The $512 left in year four would reduce aid eligibility by $102.40.

To sum up, students like this are “rewarded” for saving an extra $1,000 with a reduction in Pell grants over four years of $590.40.

Since these high “tax” rates discourage working and saving for college, the financial aid formulas should be modified to tax these activities at a much lower rate.

The 4 craziest things I learned while coding the college financial aid formula: Part 1 of 4

While designing a webtool that provides potential college students with an estimate of their financial aid, I learned a few crazy things.

#1: There are very unfair differences in aid due to auto-zero EFC and the minimum EFC cutoff for Pell grants.

Federal financial aid is thought of and portrayed as being fair in the sense that students in similar situations receive similar financial aid. That is true for the most part, but there are two bright line cutoffs that severely violate this principle.

The first is the auto-zero EFC cutoff. EFC stands for Expected Family Contribution, and it is what the government thinks your family can afford to pay for college. To simplify the aid application process, students whose parents make less than $24,000 qualify for an auto-zero EFC, meaning that the government thinks the family can’t afford to pay anything for college, which will increase the amount of aid those students are eligible for.

The webtool easily illustrates how this bright line cut-off results in similar students receiving very different financial aid. Starting with the default choices, choose this academic year, and change parent income to $24,000 and you’ll see that the student is eligible for a Pell grant of $5,800. But if those parents made $26,000 instead, Pell grant eligibility declines to $3,800. In other words, parent income increased by $2,000, and the Pell grant decreased by $2,000. That’s a 100% “tax” rate on that extra income, with every extra dollar in earnings resulting in a dollar less of financial aid. You don’t have to be a Laffer curve enthusiast to think that a 100% tax rate really distorts incentives for work.

The other big discontinuity in the aid formulas concerns the minimum EFC for Pell grant eligibility. This year the minimum Pell grant is $600 (technically $587, but rounded up). This creates a discontinuity around that cutoff, with similar students receiving very different aid offers.

Starting from the defaults in the webtool, if you increase the student’s age to 24, and then increase their income to $23,800, the student is eligible for a Pell grant of $700. Yet if that student earns $24,200 instead, they would not be eligible for a Pell grant at all. In other words, by increasing their income by $400, the student’s Pell grant is reduced by $700! This is, to use a technical term from economics, insane.

These two bright lines – the auto-zero EFC and the minimum EFC for Pell grants – result in treating similar students very differently. The clearest solutions would be 1) to simplify the FAFSA enough so that auto-zero EFC is no longer needed, and 2) reduce the minimum Pell grant to say $100.

George Selgin on how interest on reserves is restrictive monetary policy

George Selgin:

1. IOR was implemented in October 2008 for the avowed purpose of checking bank credit expansion in response to the Fed’s creation of fresh bank reserves.

2. In fact, IOR contributed to the fall 2008 wholesale credit crunch…

3. Once the rate of IOR exceeded the yield on Treasuries and other low-risk assets, as it did shortly after the program began, banks had an incentive to accumulate excess reserves instead of attempting to acquire such securities.  Thus the normal process of bank balance-sheet expansion and deposit creation in response to reserve injections was short-circuited.

4. IOR also contributed to the relative decline in risky bank lending by increasing the marginal opportunity cost of such lending.  This portfolio effect of IOR on risky lending was very small relative to that of increasing regulatory burdens, including capital requirements, especially after 2008.  But as at least some banks had both surplus capital and surplus reserves, capital constraints alone did not prevent IOR from also having some influence.

5.  Fed officials, including Bernanke, who would deny that IOR had the consequences I have just outlined, are at least obliged to reconcile their denials with the justifications offered for implementing the program in the first place.

Ken White on gun control

Ken White:

If we had the “reasonable gun control” I keep hearing about, what guns would be limited? I’m arguably not a complete idiot, but I can’t figure it out…

That’s because there’s a terminology gap. Many people advocating for gun control mangle and misuse descriptive words about guns… you get the term “assault weapon” thrown about as if it means more than whatever we choose to make it mean, which it does not...

imagine we’re going through one of our periodic moral panics over dogs and I’m trying to persuade you that there should be restrictions on, say, Rottweilers.

Me: I don’t want to take away dog owners’ rights. But we need to do something about Rottweilers.
You: So what do you propose?
Me: I just think that there should be some sort of training or restrictions on owning an attack dog.
You: Wait. What’s an “attack dog?”
Me: You know what I mean. Like military dogs.
You: Huh? Rottweilers aren’t military dogs. In fact “military dogs” isn’t a thing. You mean like German Shepherds?
Me: Don’t be ridiculous. Nobody’s trying to take away your German Shepherds. But civilians shouldn’t own fighting dogs.
You: I have no idea what dogs you’re talking about now.
Me: You’re being both picky and obtuse. You know I mean hounds.
You: What the fuck.
Me: OK, maybe not actually ::air quotes:: hounds ::air quotes::. Maybe I have the terminology wrong. I’m not obsessed with vicious dogs like you. But we can identify kinds of dogs that civilians just don’t need to own.
You: Can we?

Because I’m just talking out of my ass, the impression I convey is that I want to ban some arbitrary, uninformed category of dogs that I can’t articulate. Are you comfortable that my rule is going to be drawn in a principled, informed, narrow way?

Entangled Solutions’ view on measuring college quality

Entangled Solutions has a new framework for evaluating the quality of higher education. From their manifesto:

What We Believe

1. Quality assurance should focus on outcomes, not inputs.

2. Standards should be open, and findings should be transparent.

3. No organization should have a monopoly on quality assurance.

4. Students’ opinions matter, particularly after they have had time to evaluate their experience.

5. Learning outcomes should be judged on a value-added, or individual growth, basis.

6. The metrics used should encourage institutions to innovate to better serve students.

The devil is always in the details with these things, but they’ve got their eye on the ball to a greater extent than just about any other organization looking at this issue. If it works, it could supplement/replace accreditation.

Greg Forster on school choice

Greg Forster

There are now 59 private school choice programs in 28 states plus Washington, D.C., serving hundreds of thousands of students.

This has brought school choice new allies—allies who aren’t yet completely comfortable with the idea… they still worry. Is it really safe to take our hands off the wheel and let parents be in charge?

It has also meant that the limitations of school choice in its current form are becoming more visible. Existing programs are badly limited and hindered by many unreasonable regulations. This has made it difficult to attract educational entrepreneurs who create radically reformed schools; unfortunately, the programs we have now mostly just transfer students from public schools to existing private schools, which are marginally but not radically better. The correct response is to push on towards universal choice in order to attract more entrepreneurial schools, but many people see the moderate results and think that more controls are needed to improve quality…

parents do need information to make good choices. And two centuries of government monopoly have prevented the emergence of the normal processes for getting people information…

Better information, not tighter regulation, is the best way to let parents improve school quality.

Why is Louisiana’s voucher program hurting students?

There are many studies that show school vouchers work in the sense of raising student achievement. But a new study by Atila Abdulkadiroglu, Parag A. Pathak, Christopher R. Walters finds that the Louisiana voucher program is not working:

We evaluate the Louisiana Scholarship Program (LSP), a prominent school voucher plan… LSP participation substantially reduces academic achievement. Attendance at an LSP-eligible private school lowers math scores by 0.4 standard deviations and increases the likelihood of a failing score by 50 percent. Voucher effects for reading, science and social studies are also negative and large. The negative impacts of vouchers are consistent across income groups, geographic areas, and private school characteristics, and are larger for younger children… LSP-eligible private schools experience rapid enrollment declines prior to entering the program, indicating that the LSP may attract private schools struggling to maintain enrollment. These results suggest caution in the design of voucher systems aimed at expanding school choice for disadvantaged students.

Matthew Ladner offers his thoughts on why this voucher program isn’t working:

a very poorly designed program in Louisiana with the release of a new study on the first year results. They look**ahem** decidedly negative.

there have always been concerns that voucher programs would become overly regulated. The response has always been that if this were to occur, that private schools would choose not to participate. Well lo and behold Louisiana’s heavily regulated voucher program comes along, 70% of private schools choose to sit it out, including a large majority of Catholic schools in Orleans Parish. Catholic schools have a long history of putting up with a lot of red tape around the country and around the world, but their choice to pass on the Louisiana Scholarship Program speaks volumes.

What do we know about the 30% of private schools who did participate? Well now we know that their students had a very rough first year and we also know from the study:

[Quoting the original study] Survey data show that LSP-eligible private schools experience rapid enrollment declines prior to entering the program, indicating that the LSP may attract private schools struggling to maintain enrollment. These results suggest caution in the design of voucher systems aimed at expanding school choice for disadvantaged students. [End quote]

So…..many of the desperate on their way to folding schools decided to grit their teeth and participate in the program. We can also infer from the contrast between this evaluation and all the others that a disproportionate number of stable and successful Louisiana private schools read over the red-tape of the program and decided “thanks but no thanks.”…

Tragically in designing to keep bad schools out, they ironically kept the good schools out and invited the bad schools in…