By Richard Vedder
Conventional wisdom holds that high college costs lead people to save more, to help them overcome rising postsecondary educational expenses. The proliferation of tax preferred college savings plans is evidence of this trend.
I am not so sure. Why, for example, has the national personal savings rate fallen dramatically over the past 30 years, precisely the period of sharply rising college costs? Taken by itself, this almost implies a negative relationship between college expenses and personal savings.
Some exploration of income and financial aid data in the latest postsecondary.org newsletter suggests that people pay a significant marginal "tax" rate on their income in the form of reduced college financial assistance. If you save a lot and have a high income, you pay full tuition. Black students on average come from families with $25,000 less income than for the population as a whole (based on 2004 data), but receive almost $2,800 more in financial aid. For every dollar of added income above the $45,988 average earned by blacks, 11 cents less financial assistance was given by colleges (up to $71,000 in income). This is on top of conventional marginal tax rates of perhaps 30 or more percent. The high combined tax/reduced financial aid burden may be a significant deterrent to savings in the U.S., which, if true, has significant adverse macroeconomic implications for the nation. More and better data, for individuals, is needed to confirm this, but "need based" aid probably on balance is a deterrent to savings. Moreover, past savings lead to reductions in aid based on assets that go beyond the income-based determinants of aid discussed above.