College financial aid distributed on the basis of need consistently fails to assess that need accurately because of two key omissions, says a new study from the Federal Reserve Bank of Philadelphia. The formula to calculate how much a family can afford to pay for higher education unfairly excludes “retirement savings and home equity” according to The Racial Wealth Gap, Financial Aid, and College Access, a paper by Wellesley College economics professor Phillip B. Levine and Dubravka Ritter of the Federal Reserve Bank of Philadelphia.
Those two omitted assets — retirement savings (like 401K plans) and home equity — tilt the financial aid advantage significantly toward white families, which “are more likely to own those assets and in larger amounts.”
Omitting these two important measures of wealth and financial stability from the common financial aid formula results in “an implicit subsidy worth thousands of dollars annually to students from families with above-median incomes.”
Because of their more common possession of these assets, “white students,” the study says, “receive larger subsidies relative to Black students and Hispanic students with similar family incomes.”
Levine and Ritter correlate this inequity with commensurate disparities in educational advancement, saying the omission of home equity and retirement accounts from the financial aid calculus “may explain 10 percent to 15 percent of white students’ advantage in these outcomes relative to Black students and Hispanic students.”