YOU CAN CLAIM A DEDUCTION IF …
Generally, you can claim the deduction if all of the following requirements are met:
•Your filing status is any filing status except married filing separately.
•No one else is claiming an exemption for you on his or her tax return.
•You are legally obligated to pay interest on a qualified student loan.
•You paid interest on a qualified student loan.
Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c.
www.irs.gov
WHAT YOU NEED TO KNOW
Department of Revenue and Taxation officials offered the following information on what tax payers need to know about this year’s tax season. If you have tax questions you’d like answered, email them to news@guampdn.com.
•Employers should have distributed W2s to employees by Jan. 31. Failure to meet that deadline could mean a fine. If you haven’t received your W2, ask your supervisor or your company’s accounting office when you can get it. Some employers may have mailed the documents — and as long as they mailed them by Jan. 31 they would have met the requirements — but that means employees might not have received it yet. If you ask your employer and they’re not able to answer your question, however, call Rev and Tax.
•Deadline to file tax returns is April 17. Extensions also should be filed by this date. Extensions are for six months.
•One of the biggest changes to this year’s tax season is that the Make Work Pay Tax Credit is no longer available. You can call Rev and Tax to see what tax credits or other changes you need to be aware of this year.
•Rev and Tax assists the elderly — ages 55 years and above — with tax filing but only for simple returns.
•Revenue and Taxation can be contacted at 635-1842/0.
TAX Q&A
Pacific Daily News readers sent in questions that were answered by local tax experts. See the questions and answers below:
Question: Can I get earned income tax credit from social security payments and retirement disability?
Answer: If I understand the question correctly, your income does not qualify for the earned income tax credit. The earned income tax credit is calculated on “earned” income. Earned income means wages, salaries, tips and other employee compensation, plus any net earnings from self-employment. It does not include social security payments or retirement benefits. — Joe Arnett, partner-tax services at Deloitte and Touche LLP.
Q: My refund was garnished last time because my husband owed the government of Guam, and I filed as “married and filing jointly.” How can I avoid this situation from happening again? Should I file this year as “married, but filing separately?”
A: The Tax Code provides a simple procedure you can follow to make sure you receive your portion of the tax refund, even if your spouse owes back taxes. This program is referred to as Injured Spouse Relief. In order to take advantage of this program, you must complete and file Form 8379, Injured Spouse Allocation, at the time you file your joint income tax return. The Department of Revenue & Taxation will use the Injured Spouse Form to determine the portion of the refund that should be allocated to you. The Department of Revenue & Taxation may then refund the appropriate funds to you and apply the remaining refund to your spouse’s back taxes. Certain conditions apply. Another alternative is for the innocent spouse to file an amended W-4 with their employer that reduces their tax withholding in an amount that equals their refund. More money is received by the taxpayer during the year in an amount that would have been refunded some time later. After all, a tax refund is not the government’s money, it is yours.– Joe Arnett, partner-tax services at Deloitte and Touche LLP.
Q: My son is 41 years old and is on permanent disability. He receives $783 monthly and was told by the Department of Revenue and Taxation not to file any more tax. Is he qualified to receive tax credit? He receives GHURA Section 8 assistance.
A: This requires additional information to provide a much more accurate response. Taxpayers who are under retirement age and receiving disability benefits (from a former employer’s plan) will have to report the income as earned income until the taxpayer reaches retirement age. So, it really depends on the type of income to determine if the taxpayer is required to file. — Arthur Murphy
Q: My son left on March 2011 for Air Force basic training, so he stayed with us for only for three months last year and took a vacation for a month on October of 2011. Can I still put him on my tax return as a dependent?
A: My guess is your son can no longer be claimed as a dependent on your personal income tax return. To be sure, review the five tests that an individual must pass to be claimed as a dependent.
First, the individual must bear a qualifying child relationship to the taxpayer (i.e. son, daughter, step children, etc.). Second, the individual must have the same principal place of abode as does the taxpayer for more than one-half of the taxable year. Third, the individual must meet the age requirements (under 19 years of age at the end of the taxable year). Fourth, the individual must not have provided more than one-half of his or her own support for the calendar year in which the taxable year of the taxpayer begins. And fifth, the individual must not file a joint return, other than a joint return filed solely as a claim for refund, with the individual’s spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins.
It appears tests three and four will be the most difficult to satisfy. Even if the son is still 18 at the end of 2011, the support test may be difficult to satisfy if the son has been serving with the US Air Force since March of 2011. Note that for test two, an exemption is granted for persons serving in the Armed Forces. Those days a potential dependent serves in the Armed Forces away from the principal abode are not counted. Remember, to claim a dependent as an exemption on your personal tax return all five tests must be satisfied. — Joe Arnett, partner-tax services at Deloitte and Touche LLP.
Q: My friend is 77 years old and is on a fixed income from social security. He receives $830 per month. He has a house and property (for) which he pays property tax. He lives in that house. Does he qualify for tax credit?
A: Based on the above scenario the taxpayer will not be required to file if social security benefits are his only source of income — there would be zero taxable income. However, in some cases social security recipients who elect to have federal tax withheld from their benefits and would file ONLY to claim a refund. Additional note: Every taxpayer has to meet established gross income filing requirements, which will determine whether a return is required to be filed. — Arthur Murphy, district manager and enrolled agent for H&R Block on Guam.
Q: Can I claim my brother as my dependent? My brother did not earn much last year. He is very sickly and has been staying with me in my house for more than seven years. I provide medicine, food and housing for him. My brother has no insurance and no money for medicine and hospitalization.
A: A dependent either can be a “qualifying child or qualifying relative.” In this case, your brother must satisfy four tests to be claimed as a qualifying relative:
•Relationship of member of the household– Sister, brother, or qualifying child;
•Gross income — Individual must have gross income of less than exemption amount $3,700 for 2011;
•Support — Taxpayer must provide over one-half of the support for an individual to satisfy test to be a qualifying relative; and
•Not a qualifying child — The individual must not be the qualifying child of the taxpayer or of any other taxpayer.
Based on your question, your brother meets the relationship test. However, without more information it is difficult to determine whether he satisfies the other three tests to be claimed as a your dependent.– Arthur Murphy, district manager and enrolled agent for H&R Block on Guam.
Q: I have phoned the IRS three times and cannot seem to get an answer to this question. We have been told three different things. My husband had a switch of company in April. He is a contractor for a mainland company. He has an overpayment of social security withholding. Do we file a special form? What is the form? Where do we file it? Are we owed by social security administration, Government of Guam or mainland IRS? If you could answer this so we can get our taxes filed we would appreciate it very much.
A: For residents of Guam, a refund of excess social security tax payments can be claimed on form 1040SS. This form is used primarily to report earnings from self-employment, but also can be used to claim a refund of excess social security payments. Complete the taxpayer information for the individual claiming the refund and insert the excess amount on line 7. See the instructions for line 7 to compute this amount. Attach the appropriate W-2′s and sign the return. The return is filed with the IRS Service Center in Austin, Texas. See the instructions that accompany the form. The form and instructions can be downloaded from the IRS website at www.irs.gov. — Joe Arnett, partner-tax services at Deloitte and Touche LLP
(MoneyWatch)
A few weeks ago, I outlined several financial moves to make now that could help increase the financial aid for your student this year.
Since most folks need financial aid for college costs each year, it can also pay to think about financial planning now: Doing so can increase financial aid when you complete and file the FAFSA, or federal financial aid application, in future years.
The concepts here are simple enough: use financial strategies that can reduce your base year income and reduce includable assets. If your base year income is lower, you could be required to make a lower expected family contribution towards college costs and therefore receive more financial aid. In regards to includable assets, an important concept to keep in mind is that depleting assets held by the student first can help to increase financial aid in later years. That’s because assets in accounts owned by a parent for a dependent student are reported on the free application for Federal Student Aid (FAFSA) as a parental asset. Parental assets are assessed at a maximum 5.64% rate in determining the student’s expected family contribution. For assets owned by the student, a higher percentage of assets, 20%, is required to be used towards college costs.
But making financial moves takes planning so you’ll need to think ahead, as making a few well-timed financial moves can help to decrease your expected family contribution and increase your student’s eligibility for some federal financial aid programs such as federal loans and work study programs.
Financial strategies to make this year that could increase financial aid when you file the FAFSA in the following years can include:
Maximize retirement plan contributions. Since assets in retirement accounts are not includable, making the maximum contributions to 401(k) accounts this year and using your savings outside retirement accounts to pay for living expenses is a viable strategy to reduce includable income and assets.
Spend student’s assets first. If you feel that the student’s assets should be used towards education costs (which was probably the purpose of these savings in the first place) then use up all of the student’s assets towards college costs this year, before using any of the parent’s assets.
Minimize taxable income. Think twice before selling investments in taxable accounts. Realized capital gains on investment sales are included income. Avoid taking taxable withdrawals from retirement accounts and delay exercising stock options. Also, if your employer offers one, use a nonqualified deferred compensation plan to defer any bonus income until a later year, if possible.
Delay gifts to student. Ask family members to hold off on making monetary gifts directly to the student. Instead, make gifts after graduation, which the student can then use towards paying off student loans, etc.
Parents and their students will find that the financial aid process is full of complexity and opportunity. Reading guides like this will help you and your student make the most of it.
(MoneyWatch)
A few weeks ago, I outlined several financial moves to make now that could help increase the financial aid for your student this year.
Since most folks need financial aid for college costs each year, it can also pay to think about financial planning now: Doing so can increase financial aid when you complete and file the FAFSA, or federal financial aid application, in future years.
The concepts here are simple enough: use financial strategies that can reduce your base year income and reduce includable assets. If your base year income is lower, you could be required to make a lower expected family contribution towards college costs and therefore receive more financial aid. In regards to includable assets, an important concept to keep in mind is that depleting assets held by the student first can help to increase financial aid in later years. That’s because assets in accounts owned by a parent for a dependent student are reported on the free application for Federal Student Aid (FAFSA) as a parental asset. Parental assets are assessed at a maximum 5.64% rate in determining the student’s expected family contribution. For assets owned by the student, a higher percentage of assets, 20%, is required to be used towards college costs.
But making financial moves takes planning so you’ll need to think ahead, as making a few well-timed financial moves can help to decrease your expected family contribution and increase your student’s eligibility for some federal financial aid programs such as federal loans and work study programs.
Financial strategies to make this year that could increase financial aid when you file the FAFSA in the following years can include:
Maximize retirement plan contributions. Since assets in retirement accounts are not includable, making the maximum contributions to 401(k) accounts this year and using your savings outside retirement accounts to pay for living expenses is a viable strategy to reduce includable income and assets.
Spend student’s assets first. If you feel that the student’s assets should be used towards education costs (which was probably the purpose of these savings in the first place) then use up all of the student’s assets towards college costs this year, before using any of the parent’s assets.
Minimize taxable income. Think twice before selling investments in taxable accounts. Realized capital gains on investment sales are included income. Avoid taking taxable withdrawals from retirement accounts and delay exercising stock options. Also, if your employer offers one, use a nonqualified deferred compensation plan to defer any bonus income until a later year, if possible.
Delay gifts to student. Ask family members to hold off on making monetary gifts directly to the student. Instead, make gifts after graduation, which the student can then use towards paying off student loans, etc.
Parents and their students will find that the financial aid process is full of complexity and opportunity. Reading guides like this will help you and your student make the most of it.
Home » national » DSI accuses schools of embezzling student loans
Piyanuch ThamnukasetchaiThe Nation February 21, 2012 1:00 am
“I will raise the issue at the upcoming meeting of the special case committee,” Tharit Pengdit, director-general of the DSI, said yesterday.
The committee would be asked to assign corruption cases related to the Student Loan Fund (SLF) and the Income Contingent Loan (ICL) programmes to the DSI because they caused damage to the public sector, hurt youth’s chances for an education, and involved the state budget, he said.
Each year, the government appropriates more than Bt4 billion for the SLF and ICL.
An initial inquiry suggests that 32 state and private colleges as well as universities or their staff might have siphoned money from the loan schemes in 2006 and 2007. “The administrators of these institutions were found encouraging high school students to enrol at their campuses and sign loan applications. Many students later discovered that they owe money to the SLF or ICL even though they have not really furthered their studies at the undergraduate level,” Tharit said.
Hundreds of students have refused to repay loans they said they did not really use. Their debts range from Bt80,000-Bt120,000 each. Last year, a local leader in Narathiwat helped students lodge a complaint against a higher-education institution operating in the Central region after it used the students’ paperwork to seek loans from the SLF programme.
SLF manager Dr Thada Martin said he did not think corruption involving the ICL or SLF was possible. “Students have to sign loan applications on a yearly basis for the loan money to go to the higher-educational institutions,” he said, “The loan money does not go to those institutes automatically.”
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Prepping kids for success in the real world should start in advance of the college-application process.
Graduating from college tends to bring the last snip of mom and dad’s purse strings; grads enter the real world of full-time jobs, rent, taxes, credit cards and,for most, student loans.
To help make the transition easier, parents should use practical, real-life examples to guide their high-school aged teens to financial independence.
“One of the best steps is to teach children about general money management, savings, and budgeting at a very young age so that when they’re interested in credit, there’s a strong foundation,” says Laura Levine, president and CEO at Jump$tart Coalition.
Most schools do not offer money or personal finance classes, so parents’ first step is to gauge how much of an understanding their kids have about finances. As a general rule, “someone’s not ready to borrow until they know how to save,” says Laura Fisher, executive director at ABA Education Foundation. Hands-on experience can be valuable for teens. “The best time for a teen to learn is when they have the safety net of their parents. Finance isn’t intuitive, and parents shouldn’t be afraid to be too basic.”
Parents can use their finances as a teaching tool provided there’s an element of trust. “Your mistakes and successes are great teaching opportunities, and the best time to learn is before teens have trouble and not after,” says Rod Griffin, director of consumer education at Experian.
For more private parents, there are online simulations that can show what financial statements and bills looks like, and other important finance skills.
Teaching Sound Financial-Making Skills
Once a teen understands the value of savings, experts recommend starting conversations about budgeting followed by lessons in loans and interest. “If a child is engaging with you and asking questions, then they’re ready to move onto the next level,” says Jason Alderman, senior director at Visa.
Parents should show their teen the economics of a purchasing decision. At a grocery store, for example, Leslie Linfield, executive director and founder of the Institute for Financial Literacy, suggests parents discuss why they choose one item over another, how to read price tags and calculate discounts.
When using a credit card, be sure to show kids the implications of spending and how the credit process works. “Show them the bill so they can see the charges,” says Linfield. “Explain that you have two choices—to pay off the bill or not—and explain the repercussions of not paying the bill, like finance charges and the affect on your credit report.”
Also detail to kids about loans for homes and cars and how long it takes to save for these big-ticket purchases.
Parents should walk a child through interest calculations using websites to calculate loan payments to show the interest charged on credit cards and loans, and the time needed to pay down debt. “This way, a child can begin to decide whether paying for something with a credit card or loan is really the best option because of the interest,” Linfield says.
Before Getting Behind the Wheel
When a teen is old enough to drive, experts suggests talking about how to buy a car and the ongoing expenses—saving for a down payment, new versus used, how loans work, annual taxes, and insurance—to give a child a complete picture of the financial obligations of car ownership. “Regardless of whether your child is ready to handle a car loan, you can still talk to them about this,” Levine says.
Parents can build on this conversation and create real-world experience. “The easiest way to learn about credit is through a car loan,” says Griffin. “If you borrow money, you have to pay it back even if a family member made the loan. A car loan with a bank might be a good way for a teen to establish credit and learn how to repay debt.”
Although not for everyone, some parents may choose to lend their child money. “As a parent, you have to be disciplined enough to collect on the loan as if you’re a lending institution,” Levine says. “If you’re not disciplined, you might do more harm than good.”
Credit Cards & Kids
Despite what teens may claim, credit cards are not a rite of passage. “Parents should be honest with themselves about whether their child is ready for this responsibility,” says Alderman.
Parents must co-sign on credit cards for a child who’s under 18, and, as part of the Credit CARD Act, consumers between 18 and 21 years old need a co-signer on their credit cards unless they have an independent means to repay the loan. “Parents can co-sign on a credit card to help a child establish a credit history, but parents are on the hook for debt and their credit,” says Fisher.
Regardless of whether a parent decides to give their teen a credit card, Fisher suggests using this opportunity to teach teens habits like organization skills, knowing when bills are due, and paying bills on time.
When a teen is ready for a credit card, experts recommend parents help choose the credit card. “We want to teach children to pick the best option when it’s time to get credit,” says Linfield. “There isn’t one card that works best for all of us. It’s important for all consumers to understand that there are differences, and that it’s important to check them out.”
If a parent gives a teen a credit card, Alderman suggests parents monitor their teen by sitting with them weekly in front of a computer to review purchases and talk through the statement. If there are late fees, parents should talk about solutions and stay involved to know how their teen is using the credit card, he adds.
As an alternative, many parents ask whether prepaid debit cards help to prepare their children for managing credit. “They can be good tools, but they don’t prepare you for credit because you’re spending your own money and not making any payments,” Levine says.
Credit Reports
Griffin encourages parents to share with teens their credit report or a sample credit report from websites like Experian.com. Credit reports include payment histories used by lenders to help make lending decisions. “Credit is a good financial tool, but debt can drag you down,” he says.
Experts agree that teens who understand credit and loans will be better prepared for adult challenges. “If you convey to your child that what you do now will affect their future, it will make lenders want to lend to you at a low rate,” Levine says. “Conversely, if you mismanage your early credit, that history will stay with you and affect whether you can borrow and the rate you can borrow at.”
“If we teach our children now, we’re boosting their personal finance immune system and they’ll be far less likely to catch a financial cold and have significant amounts of debt to dig themselves out of,” says Alderman.
Student loan debt is gradually presenting itself as the next big financial hurdle nationwide.
The average debt students faced from loans exceeded $25,000 in 2010, the highest yet, according to the Project of Student Debt in Oakland.
In a report by the National Association of Consumer Bankruptcy Attorneys, a quarter of the attorneys said that the number of student loan clients has increased 50 – 100 percent.
Students in financial need depend on either federal or private loans to pay for their degree. Federal loans include subsidized and unsubsidized loans. Many students will opt for the unsubsidized federal loan for its lower rate. However, obstacles are making the process harder on students.
“You need to have very good credit to get a good rate,” said Mirna Valenzuela, a financial aid counselor at DePaul University. “Students have to shop around.”
While federal loans are the preferred method, undergraduate students cannot rely on them for all their financial aid.
“Federal government only allows you to borrow so much as an undergraduate,” said Valenzuela, who explained that undergraduates are limited to $5,000-$12,000 in federal loans.
Many undergraduate students must apply for private loans, which have a greater interest rate, and often require cosigners. Parents are commonly the cosigners to private loans, but parents prefer the loans be on the student’s account, so that the debt is not shared, according to Valenzuela.
Stef Gray, 23, a recent college graduate on the East Coast, began a petition against private loan distributor, Sally Mae, after being required to pay a $300 fee for needing to delay her payments because she was unemployed, a process called forbearance. On top of that, she pays a 9.75 percent interest rate because she did not have someone to cosign her loan.
“As an unemployed person desperately looking for work, I need every extra dollar I have to pay for rent, electricity and groceries,” Gray said on her petition website. “But Sallie Mae is preying on people like me and cashing in on the fact that we need more time to find work before we can repay our student loans.”
Gray said that none of the fees went to paying her loan down and her debt continues to grow by approximately $1,200.
Students and staff at DePaul are looking for answers to the situation, but students argue that they need the loans to earn a higher degree to get them the job that they will need to pay off their loans.
“I assume that I will deal with them for the next 20-30 years. However, I think it’s worth it because I had no other options,” said Kelson Fagan, a graduate student at DePaul. “I moved to a new city for school, had no job and even now I can only work part time so I can focus on school.”
DePaul University offers some guidance to students who are completing their degrees and nearing the repayment stage of their loans.
“Every time a student completes their degree, we send out information on exit counseling,” said Karen LeVeque, director of Financial and Student Services at DePaul.
LeVeque urges students to look at DePaul’s Financial Fitness Program, a free service to students that provides money management workshops, one-on-one financial counseling and online resources for making financial choices after college.
On a national scale, President Obama proposed a $10 billion increase in campus-based funds that are aimed to support more financial aid for students. He is also proposing greater aid to colleges that can keep tuition down.
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Fifteen people were indicted Friday on charges they took out federal student loans to attend college for people who never intended to go to college.
The defendants were charged with mail fraud, wire fraud and financial aid fraud, according to the indictment from the U.S. District Court of South Carolina, Charleston Division.
More detailed information on those indicted was not available from the U.S. Attorney’s Office, and Assistant U.S. Attorney Dean Secor could not be reached for comment.
But the indictment states that beginning in 2006, some of the people helped others take out student loans to attend online programs at the University of Phoenix, Grand Canyon University and Capella University.
Student loans are to be used for tuition, fees and educational expenses. Loan checks go directly to the schools, which in turn deduct tuition and fees. The schools then pass on the balances to students.
But the 15 people indicted caused loans and grants in excess of $400,000 to be distributed to individuals who were not eligible to receive them.
Balance checks ranging from $219 to $4,703 were mailed to undisclosed addresses in North Charleston, Walterboro, Green Pond, Ruffin, Fairfax, Yemassee and Cottageville.
WAUSAU (WAOW) – Karlyn Wormuth and her sister Kendal are taking the next step in their education.
With Karlyn already in college, and Kendal on her way, the fear of student loans, bills and financial aid weigh heavy on their minds.
“You don’t want that added stress on your family, and you to make sure you pay everything on time,” Kendal Wormuth said.
That’s why the two headed to Northcentral Technical College for a statewide event. The event offered parents and students assistance in applying for college financial aid. A task that can sometimes be daunting.
“Tuition, books, meal plan…it all adds up,” Kendal said.
Financial experts say, with the growing need for financial aid, students are encouraged to apply early. The first step, filling out a free application for federal student aid. A form that must be completed by every student and can be their ticket to getting money for college.
“Every student doesn’t realize there is so much out there. So much opportunity for them to apply for financial aid and pay for college,” Department of Public Instruction Supervisor Sharon Hunter said.
Financial experts say hundreds of thousands of financial awards are given out every year. in 2011, students at NTC alone received more than 19-million dollars in grants and loans.
“College is so important. In 2013 63% of jobs will require some type of degree beyond high school,” Hunter said.
For the Wormuth sisters, they say they know the value of getting the financial help they need, to live the life they want.
“It’s reassuring to know it’s there,” Karlyn said.
“You want everyone to have the same opportunities as you and this gives all an equal chance,” Kendal added.
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Fifteen people were indicted Friday on charges they took out federal student loans to attend college for people who never intended to go to college.
The defendants were charged with mail fraud, wire fraud and financial aid fraud, according to the indictment from the U.S. District Court of South Carolina, Charleston Division.
More detailed information on those indicted was not available from the U.S. Attorney’s Office, and Assistant U.S. Attorney Dean Secor could not be reached for comment.
But the indictment states that beginning in 2006, some of the people helped others take out student loans to attend online programs at the University of Phoenix, Grand Canyon University and Capella University.
Student loans are to be used for tuition, fees and educational expenses. Loan checks go directly to the schools, which in turn deduct tuition and fees. The schools then pass on the balances to students.
But the 15 people indicted caused loans and grants in excess of $400,000 to be distributed to individuals who were not eligible to receive them.
Balance checks ranging from $219 to $4,703 were mailed to undisclosed addresses in North Charleston, Walterboro, Green Pond, Ruffin, Fairfax, Yemassee and Cottageville.
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The Obama administration acknowledges that student loans could be behind skyrocketing tuition. But the real link between college costs and aid is complicated.
Shutterstock / Thomas Barrat
Financial aid, whether it’s a cheap loan, a work-study job at the campus library, or a grant, is supposed to make college more affordable and accessible for students. But what if, by handing money out to undergrads, the government is simply encouraging schools to spend more and jack up tuition?
Meet “the Bennett hypothesis,” the dismal notion named for Reagan Education Secretary William Bennett, who suggested it in a 1987 New York Times op-ed diplomatically titled ”Our Greedy Colleges.” Generous student-aid policies had “enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase,” he wrote at the time. “Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”
Twenty five years of swelling tuition prices later, Bennett’s critique seems to have received a stamp of bipartisan approval, courtesy of the Obama administration. It’s the driving spirit behind a White House proposal that would condition a small amount of the federal financial aid that colleges distribute to students on their ability to keep a lid on costs. “We can’t just keep on subsidizing skyrocketing tuition,” Obama told a rally audience at the University of Michigan last month as he announced the idea.
True enough. Subsidizing skyrocketing tuition sounds like a supremely poor idea. If only it were clear what the link between student aid and college costs actually was.
PUTTING BENNETT TO THE TEST
Researchers have been examining the Bennett hypothesis for decades, trying to figure out whether it holds water. So far, we don’t know the answer. Nobody has proved, once and for all, that it’s right. But they’ve found pretty good signs that it might be.
Critics of the idea like to point to a 2001 study prepared for Congress by the National Center for Education Statistics. Although some earlier stabs at the topic had detected traces of the Bennett hypothesis in certain areas of higher-ed, the NCES found absolutely no association between the availability of most types of financial aid, including loans and government grants, and tuition costs. Unfortunately, the study had a lot of limitations. In so many words, the report’s authors cautioned that they didn’t have the right data or the right theoretical models to arrive at a solid conclusion.
In the years since, several academics have taken a crack at the problem, and each study has unearthed at slightly different answers. A team from Cornell University, for instance, found that increases in the size of Pell Grant awards, need-based state aid, and the availability of subsidized loans caused public universities to hike up their tuition for in-state students. Out of state tuition, however, wasn’t affected.
Those findings clashed with the results of another study, from the University of Oregon, which looked specifically at Pell Grants, one of President Obama’s favored forms of student aid. The researchers discovered “little evidence” linking increases in the size of Pell Grants to in-state tuition at public universities. Private schools were a different story. There, increases in Pell aid were “matched nearly one for one” by tuition hikes.
Then there’s the for-profit education sector, which may well work on its own set of rules. In a study released this month, professors from Harvard and George Washington University compared tuition prices at for-profit schools where students were eligible for federal student loans to costs at schools where students were not eligible. The researchers estimated that, at schools where the loans were available, tuition was roughly 75 percent higher.
It makes basic sense that if you subsidize something, you’ll get more of it. If you give money to consumers, demand rises and prices follow. We’re learning that painful lesson every year as healthcare costs soar in this country. But because colleges vary so much in their missions, and how the operate, it may be impossible to make a blanket statement about the affect of aid on their costs. Harvard wants to be the most prestigious university in the world, and may willing to spend any extra bit of income to do it, whether the money comes from student aid or alumni donations. The University of Wisconsin at Oshkosh wants to give middle class (or aspiring middle class) students a sound education, and might be more inclined to keep costs low, regardless of how much money the government funnels its way.
The same issue goes for students themselves. Some 18-year-olds and their families might be willing to spend whatever it takes to get a prestigious Ivy League degree. Others just want an education that won’t saddle them with too much debt.
Andrew Gillen of the Center for College Affordability & Productivity has tried to address these issues with a theory he calls The Bennett Hypothesis 2.0. Offering aid to truly needy students isn’t a problem, he argues. But when you offer it to students who might otherwise still be able to pay for a college education, you drive up costs. Unfortunately, because of the way the government collects student aid, it’s hard to put that theory to the test.
So we don’t know if Bennett was 100 percent right, but he might not have been totally off the mark either. It’s too bad it’s taken more than two decades for policy makers to start talking about solutions for a complicated problem.
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