Colleges now pulling a reverse Robin Hood: Giving to the rich, screwing the poor

A new report by Stephen Burd of the New America Foundation has been raising eyebrows this week for the depressing implications it uncovers about the American college system. The gist of the study goes like this: While it used to be that colleges charged rich kids the most while giving financial aid to families in need, they now appear to be rerouting a lot of that aid money to rich kids in order to attract top-tier (read: boarding school) students and thus raise their prestige. In the process, more poor families are getting charged way more than they can ever hope to afford.

Bloomberg reported on the story earlier this week and New York Times now has a Q&A with Stephen Burd, the study’s author, on how colleges came to “soak” the poor.

There are two types of financial aid: merit-based and need-based. Merit-based loans ignore a family’s financial situation and grant funds based only on performance—hence they tend to get awarded to rich kids at boarding schools who do extra paid Princeton Review courses before taking the SATs. The percentage of kids receiving merit-based scholarships has nearly doubled from 24 percent in 1995-1996 to 44 percent in 2007-2008.

Yet top colleges like Harvard and Yale have only 11 percent and 14 percent respectively of students receiving need-based Pell grants.

Burd found that at New York University, the average tuition being charged to families making $30,000 or less is $25,462 per year—basically their entire yearly family income.

With interest rates on federal loans set to skyrocket to nearly 7 percent on July 1, a generation of poorer students are facing a one-two punch from colleges and the government that will guarantee they are both more indebted and will have a harder time climbing out of debt over time. Not to get all conspiracy theorist here, but the system, intentionally or not, is being rigged to keep the poor poor.

Which is why Elizabeth Warren’s idea to keep the government’s rates on student loans the same as its rates on loans to big banks makes a lot of sense. The US government currently charges banks 0.75% interest. The bank takes this money and repackages it as consumer loans that they make money from—for instance, home mortgages, which you can get for 3.5%. But you still can’t get a loan to go to college for less than 6.8%?

The government can’t do much to control colleges’ competitive strategies—it’s a for-profit industry, after all. But it can do its part to try to keep the playing field level. The economics of college, if left unchecked, could easily contribute to a dystopian future in which the rich really do stay rich and the poor, poor. And that would suck.