Slowing down American economic growth with income-based government financial aid to colleges

The government provides financial aid to colleges based on the income of students’ parents based on a FAFSA form. “A Chance to Boost Financial Aid for Today’s High-School Sophomores; Strategic moves by Dec. 31 may help some families reduce the income to be reported on the Fafsa form for the freshman year of college” is a Wall Street Journal article on what parents can do to minimize their own payments. (Given how colleges raise tuition in response to the availability of government handouts, this aid is properly understood as going to colleges (“aid for colleges” not “aid for students” (because they and their parents pay about the same as they would if there were no government aid)).)

To me the article is helpful in understanding why American economic growth is so anemic compared to times when the government operated a smaller share of the economy. The article talks about parents and financial advisors spending a lot of time engaged in activities that shift money from one tax year to another and can’t possibly result in more economic activity or sustainable growth. Here are some examples:

If families were contemplating actions in 2016 that might boost their taxable income, they should consider accelerating those moves into 2015 instead. And they may want to look for other opportunities to shift 2016 income into this year and delay deductions—contrary to the standard tax-planning strategy of trying to delay income and accelerate deductions.

Deborah Fox, founder of Fox College Funding LLC in San Diego, advised the business-owning mother of one high-school sophomore to wait until 2016 to establish and contribute to a simplified employee pension plan. She also recommended the woman delay deductible computer purchases until next year and speed up her company’s billing so she receives as much income as possible in 2015.

Ms. Fox advised the family against prepaying their January mortgage and property-tax bills in December as they had planned. And she told the father to see if he can receive his bonus by Dec. 31 instead of in early January.

Obviously people spending time optimizing FAFSA can explain only a small portion of why we are stagnating, but I think it has the same character as a lot of other stuff that goes on in the U.S. economy. Whereas 50 or 100 years ago you’d write a check or hand over some bills and walk away, today there are hours of planning and thinking and filling out forms and talking to paid consultants and bureaucrats. Not to mention the agony of trying to correct errors.

Related:

• post about spending weeks trying to correct a single letter typo in an airline ticket passenger name field
• “Universities and Economic Growth” (college itself may contribute to the slowing economy)