I spent last night reading Coming Clean: A Memoir. The author comes from a middle-class family with a lot of challenges. Emerson College here in Boston extracts every possible dollar that she and her family can come up with:
In mid-July, a letter came from the Emerson financial aid department. I had a small trust in my name from an accident I’d had as a child that was set up so that I wouldn’t be able to access the funds until I was twenty-one. But because that trust existed, the school decided that I no longer qualified for financial aid. Without financial aid, I couldn’t go back to Emerson. I couldn’t take out the kinds of loans necessary to pay for the pricey private school. I was majoring in theater, and even at eighteen, I knew that I would never be able to pay back that kind of debt on a waitress’s salary. I called the school and tried to explain, but the financial aid officer professed that until those funds were utilized they wouldn’t be required to give me any need-based aid. But I wouldn’t be able to touch that money until halfway through my senior year of college.
(Translate “financial aid” to “discount off an insanely high list price.”)
It seems that Obama has given up a plan to kill off the 529 college savings plans (nytimes). Aside from further plunging Americans into a tangle of paperwork and government-approved vendors (not just anyone can offer a 529 plan! It has to be a financial institution that is somehow a crony of a state government), I wonder if 529 plans actually help anyone other than colleges. If parents on average save more for college because the government encourages them to set up 529 plans, won’t colleges just raise their prices to absorb the newly available funds?
One of our students at MIT this week provided an illustration of this. He was in a one-year MBA program at MIT. Over the lunch break I said “That’s great compared to the two-year program since you’ll be saving $50,000.” [The real number is $63,750 per year for tuition.] He responded “Actually the price is about the same as for a two-year MBA program.” In other words, the price has no relationship to marginal cost and instead MIT can charge whatever it is worth to the customer (monopoly pricing power ). This led to a group discussion about how a lot of people might be willing to pay the full cost of a two-year MBA program for a two-week MBA and imagine what kinds of profits could be earned from that.
So while it is painful to pay taxes on savings (which is why we should spend all of our money on McMansions and SUVs and let the Chinese do the saving for us), I think Obama may have been on the right track. American’s university system does not need new sources of easy money. Unless we think that the U.S. is spending too little on its higher education system, why does putting money aside to save for college get more favorable tax treatment than putting money aside to save for an investment in a business?