The Tax Code and Financial Aid as Policies

In recent weeks, people across the country have paid quite a bit of attention to tuition resets.These discussions almost always start with a premise about “unsustainable discount rates,” which results in the impression that colleges are giving away too much financial aid to those who don’t need it. I dislike the terms “discounting” and “discount rate” and think those unfortunate terms have done real damage to the purpose of financial aid, the value of financial aid policy and even the perceived value of a college education.

Recently, however, I think I’ve found a way to refresh this conversation in way that could add some value. Unfortunately, my inspiration comes from our tax code -- which has also been receiving a great deal of interest lately, given the GOP plans to reform it.

I heard a segment on American Public Media’s “Marketplace” program about the U.S. tax code and how it’s used to influence behaviors and accomplish goals that go well beyond just fueling our government with the resources it needs to function. I found myself thinking it sounded similar to how financial aid is awarded in higher education. Tax policy and financial aid policy are both complex and not well understood by the public, and are both under fire from various stakeholders. Financial aid and tax breaks both cost their sources (higher ed and the feds) at the outset, and the policies are difficult to change once they are established.

But for the purpose of my question, the most important characteristic they share is that they are both designed to influence behavior.

Americans love a good deal -- which in taxation can translate into a good tax deduction or break, and which in the college decision process often is related to a scholarship offer or need-based financial aid. If colleges suddenly stopped offering financial aid, with an accompanying tuition reset or not, some colleges would be just fine, enrolling the same number of students. But the composition of the student body would be quite different from what it is today and nowhere near as diverse. And that is because higher education uses financial aid to shape the student body in ways that are deemed most beneficial to the college and its students.

This is a valuable observation when one thinks about how the tax code works, too.

Tax deductions, tax credits or tax preferences are designed to accomplish something that is needed or offers value. In the interview on “Marketplace,” Daniel Hemel of the University of Chicago described the tax code as an anti-poverty program, a housing program, a primary way to fund health care and so on. The tax code can incentivize taxpayers to give to charity, save more for retirement, etc. The basic argument is that the tax code supports the things that the government needs and wants to do. If you take away the incentive, worthy efforts suffer.

Similarly, financial aid is designed to influence behavior and accomplish some altruistic goals, too. Financial aid is awarded for many reasons, including making higher education affordable. It is also part of many colleges’ business plans to sustain enrollment.  And financial aid is awarded to accomplish institutional goals and influence the behavior of students and families during the college decision-making process.

So rather than viewing financial aid as discounting the cost to attend college, what if we thought of institutions’ investments in it as advancing affordability, geographic diversity, racial diversity, overall student academic profile, musical or athletic talent, and academic program distribution? By definition, “discounting” implies that colleges could otherwise command those dollars from students, which is very unlikely in many circumstances.

I understand that the anti-taxers will find folly in this argument because they’d like to support only what is needed. And the anti-discounters will want to make similar arguments that discounting jeopardizes the sustainability of our colleges. It may, yet if it done strategically, it might actually be what saves some colleges and enriches the experience for students.

Meanwhile, I believe it would benefit the higher education community to think in terms of how financial aid represents a college’s values -- not in terms of offering families a so-called discount. Perhaps the simplest way would be to actually adopt another term rather than “discount,” and one that’s pulled directly from the language of taxes: “incentive.” This term works transparently for both institutions and families and certainly works for public policy makers. A college or university would communicate that it is offering an incentive to enroll a student to advance its goals, and the student would receive another incentive to apply to that institution.

Whatever the terms we use, we should think about financial aid as something that advances important, strategic and even noble goals -- and that benefits the student and the institution. That could enrich the conversation we are having about the cost of higher education and help us find better ways to address and solve the problem.