Saturday, April 30, 2005

Follow the bouncing tuition cut

From Alex Usher of the Educational Policy Institute via Paul Wells

The following may seem paradoxical but true - follow the logic:

1) Take a student from a reasonably affluent family: no student loans, no grants. Assume he has tuition and fees of about $5000. His net cost is $5000 minus the value of his tuition tax credit, which is equal to 16% of tuition federally and roughly 8% provincially (it varies a bit from place to place). So $5000-($5000x.24) = $3800. Now, give this kid a 10% cut in tuition. Now his cost is $4500 and his net cost after tax expenditures is $4500-($4500x.24) = $3420. So the net benefit to this student is $3800 - $3420 = $380. In short, the $500 tuition reduction will make the affluent student better off by $380.

2) Now, take a high-need student. Say, a single independent student with need (i.e. cost minus resources) of $9000 in Ontario (the example would work in most provinces, but Ontario has nice simple rules about remission, so they’re the easiest case to explain). This student has tuition and fees of $5000. As with the more affluent youth, the net cost after tax credits is $3800. She has $9000 in loans, of which anything over $7000 will be remitted at the end of the year, meaning that effectively she is carrying a $7000 loan and a $2000 grant.

Watch what happens when you give this student a 10% tuition reduction:

a) Tuition (i.e. cost) goes down by $500

b) Therefore “need” goes down by $500.

c) Therefore, this student’s loan will be cut to $8500

d) Because the remission threshold stays the same, this student will at the end of the year have $7000 in loans and $1500 in grants. In other words, the student is no better off because the $500 gained through lower tuition gets clawed back through the student aid system.

e) IT DOESN’T END THERE. Independently, the tax people are making their calculations. Like the more affluent student, the poor student will lose $120 of the $500 benefit due to the decrease in the tax credit.

f) Therefore, giving a high-need student a $500 break on tuition means taking away $500 in grants and $120 in tuition. In other words, reducing a high-need student’s tuition by $500 makes her worse off by $120.

So what we have here is not just a case of a policy where more rich kids benefit more than poor kids because they are likelier to be in school in the first place. And it’s not just a case that the rich kids get something while the poor kids get nothing. This is a policy where the low-need kids get something and the high-need kids LOSE something.