At face value, there is nothing about the college financial-aid system that would indicate that it generates racial inequities. Families input their income and assets onto the FAFSA, and that information is used to determine their financial-aid award. Those with lower income and fewer assets pay less. The form does not even ask about race.
Appearances can be deceiving, though. It turns out that the financial-aid system advantages white students over Black students.
The problem is that the FAFSA does not ask about home equity in a primary residence or retirement savings. These assets are “uncounted.” Other forms of assets, like stocks and bonds, are “counted.” Some institutions also require students to complete the CSS Profile, which requires families to report home equity. Many of those institutions, though, cap its value, and most students attend institutions that rely on FAFSA anyway.
Families that have more counted assets are eligible for less financial aid. Two families with equal incomes and counted assets would be eligible for the same amount of financial aid. This would be true even if one of those families had considerably more uncounted assets. But this is unfair: The family with more uncounted assets has access to greater financial resources, and so college would be more affordable for that family.
Racial inequities occur in this context because of the racial wealth gap. White families are more likely to hold assets, and in greater quantities, than Black families. This is true for all forms of assets, including home equity and retirement savings. Ignoring some forms of assets increases financial-aid eligibility. Effectively, that represents an implicit subsidy — and these subsidies are larger for white families because of the racial wealth gap.
This is not an issue for students who are dependents (for tax purposes) from lower-income or high-income families (and independent students rarely have sufficient assets for this issue to be relevant). Lower-income families have limited asset holdings, regardless of race. High-income families generally do not qualify for financial aid. For middle- to upper-middle-class families, though, many hold assets and are still eligible for financial aid at four-year institutions. They are the ones most likely to benefit from the current system of ignoring certain forms of assets.
My research estimates the value of these uncounted assets by race for families with children approaching college age and with income between $75,000 and $200,000. Home equity and retirement savings represent most of their net worth. White, non-Hispanic families, though, have uncounted assets that are two-and-a-half times as large as Black, non-Hispanic families. Their median values are $166,000 and $67,000, respectively. Across all students who are likely to benefit from this treatment of uncounted assets, white students receive an implicit subsidy that is $2,200 per year, on average, more than Black students. Over the four years of students’ college careers, that would amount to $8,800.
These racial differences in college affordability have the potential to contribute to racial differences in college outcomes, including whether to attend, what type of institution to attend, and debt levels associated with college attendance. My recent research provides empirical evidence suggesting these effects occur.
The results are clear. The structural features of the federal financial-aid system combined with the underlying racial wealth gap provide a meaningful advantage to middle- to upper-middle-class white students, relative to Black students, in the American higher-education system. Those gaps likely contribute to racial inequality in educational outcomes.
What should we do about it? The simplest solution is to count the assets that are currently uncounted. That would make college more expensive to all, increasing revenue for colleges and universities. But that is not a desired outcome. The intention is to increase equity, not revenue.
Racial differences in college affordability have the potential to contribute to racial differences in college outcomes.
Indeed, we can offset those increases in the cost of college by lowering the rate at which income and assets are “taxed” by the financial-aid system. This would be the equivalent of a revenue-neutral tax reform that lowers tax rates while broadening the tax base. Those with limited uncounted asset holdings would pay less for college. Those who own larger amounts of currently uncounted assets would pay more. These changes would be more likely to benefit Black students relative to white students, reversing the inequality that currently exists.
Ultimately, the goal of the financial-aid system is to facilitate academic achievement regardless of financial resources. I acknowledge that changing the treatment of uncounted assets does not address the fundamental problems of that system: College pricing is too complex; students and parents think that it is more expensive than it is; and yet it is still too expensive for many, particularly for students from lower-income families. These problems need to be addressed.
The treatment of assets and its differential racial impact is a distinct issue, largely because lower-income students are unaffected by it regardless of their race. They largely do not own assets. And I certainly support the continuation, or perhaps even the extension, of the Simplified Needs Test, which enables lower-income families to skip the asset questions altogether.
But reducing racial disparities in college access among middle- to upper-middle-class students still has important social value through its effect on wealth. A college education has the ability to catapult students from lower-income families to higher incomes as adults. Moving up the wealth distribution, though, is difficult. It can take decades, or even generations, to occur. It is precisely those middle- to upper-middle-class students who may be most likely to do so. Reducing racial inequity in college access is a vital part of this story and is one more way higher ed can help reduce the racial wealth gap.
