FIRE nerds are notorious tax cheats. Whether its Roth hacks or securing ACA subsidies, the entire FIRE movement is ill-reputed for spamming loopholes with a low living expenses/high asset lifestyle.
Is it a bridge too far then for early retirees similarly to use low early retirement income to slash college costs? Doesn’t this rob the U.S government or, worse, needier students? Is this immoral?
Here in Part 4, I will close out my college financial aid series by arguing that the U.S. college education system is no innocent maiden in need of protection, but is instead an agent of capitalism to which we are all willing participants.
College is a for profit business
One of my favorite Seinfeld episodes is called the “Heart attack,” where George goes to a holistic healer to seek an alternative to surgery.
The slapstick holistic healer has this quip to say, that could just as well apply to college: “The medical establishment is a business like any other business, and business needs customers. And they want to sell you their most expensive item . . . which is unnecessary surgery.” Here is the clip.
To continue the Seinfeld metaphor, you could think of college’s “most expensive item” as full price tuition, a towering figure presumptively fueled by American debt. Are full tuition sticker prices “unnecessary” or predatory like the surgery lambasted by George’s holisitic healer?
Or will I end up purple-faced in an ambulance like George for daring to pursue an alternative to full price tuition? While we’re on that topic, let’s take a closer examination of the business of full price tuition.
College tuition outpaces inflation 5X
On the surface, tuition sticker prices hikes are about as obscene as soaring healthcare costs. Pharma Boy and human turd Martin Shkreli rightly recognized that healthcare is a necessity that people will purchase at any cost – a fact he exploited to jack up profits (and later went to prison for).
Though to a lesser degree, its a fact that the entire healthcare industry has exploited this need to grow price, services, and profits far beyond inflation. The same is true of college. Its like a gatekeeper toll that most American families have no choice but to pay if they want to provide a better life for their children.
And like healthcare, college “sticker” price hikes have been outpacing inflation nearly 5X over the last 50 years.
Take a look at the graphic below. The blue and gray bars are the sticker prices of private and state universities (respectively) and the much smaller orange and yellow bars are what college would cost if it had tracked with inflation over the same time period.
Notice a theme? Over time, the listed sticker price for a college education is growing more and more divorced from actual wages and the actual economy.
College sticker prices are fake
Don’t be fooled by the obscene list price of college. It’s an illusion. Colleges need and indeed take in far less than list price. In 2016 for example, state schools pulled in an average tuition revenue of $7,547 per student, vs an average list price of $17,459. In other words, actual student tuition payments were less than 50% of list prices.
If you believe this sticker price reflects a college’s actual operating budget, you should be disturbed. With such a shortfall, you might think the entire college system is on the verge of collapsing. Those poor colleges!
But in fact, the opposite is true. Colleges continue to build beautiful new, glass-clad facilities, arenas, and classrooms – built right on top of the debt ridden bones of the parents and US government who amply fund it at less than 50% of list price.
Half of financial given out is fake too
Interestingly, just like tuition, the amount of aid given out is also outpacing inflation. This awarded aid is just as illusory as college’s fake tuition prices.
Consider this: the amount of students receiving financial aid increased by nearly 50% in just 15 years (44% of undergraduates in 2000 vs 63% by 2016). That’s more than 6 out of 10 families who theoretically can’t afford college.
According to PEW Research, however, 71% of Americans are middle class or higher. If that’s true (and financial aid was needs-based only), then only 29 of 100 families would receive financial aid as opposed to the 63 out of 100 who do.
By this measure, most financial aid awarded goes to families who do not need it. This, let’s call it, middle-class aid does not rob the 29% of low income Americans of Federal Pell Grants (a program that in fact has a surplus of funding). No, middle-class financial “aid” is a just as much of a sham as the sky high tuition prices peddled by those same colleges.
The statistics I just covered are not just some cherry picked numbers to prove an extreme position. These aid figures are conservative estimates. More recent 2020 data suggest that the % of students receiving aid may be much higher. The National Center for Education Statistics, for example, revealed that awarded aid for first time students grew to a whopping 87% in 2020.
The real cost of college is stagnant
Hmm, what is going on here? We seem to have 4 competing facts:
- Tuition prices are rising
- Less than 50% of tuition is actually collected by colleges
- Financial aid is rising
- More than 50% of recipients don’t need aid
All 4 things can’t simultaneously be true, can they? Actually . . . they can. In capitalism, consumer interest drives prices – not actual costs. This is as true of private business as it is of colleges, both products of American capitalism.
Funny thing about capitalism though. Pricing is driven by supply and demand. While for years college enrollment kept increasing right in line with draconian price hikes, it has been dropping. Enrollment is in fact down a whopping 20% in the last 8 years alone.
And when demand drops, supply goes up, and out comes the creative sales campaigns to put asses in chairs. What can colleges do to reel the customer back in? How about give up some of that sky high profit margin baked into the sticker price and charge a more moderate fee?
This is in fact exactly what has transpired. The actual costs of college tuition that consumers paid are stagnant over the past 10 years, increasing at just 1.7%. Compare that figure to the sticker price increase of 12.7% over the same time period.
Financial Aid is the greatest American Black Friday Sale
Stagnant true tuition prices are the reality, but what most Americans experience is the marketing theater of “enrollment management” administered by highly paid consultant firms that manage admissions, pricing, and marketing for colleges to maximize profit.
Americans love a great sale, and so the entire college system plays on this dynamic with fake markups (full tuition) followed by hot sales (financial aid) given out to 87% of incoming freshman. The consumer experience is: “Oh no! Price hikes! How can I possibly afford this? Oh, wow look at all this generous aid and ‘special’ loans I can get. Sign me up!”
Those with the means cough it up out of pocket, those without loan it, and both sets of consumers feel good about their purchase because they naively believe the college gave them a deal they couldn’t refuse.
The truth is most financial aid is little more than a marketing scam and might just be the biggest Black Friday sale the United States has ever invented. One of my favorite Black Friday memes captures this uniquely American melodrama below:
FAFSA hackers: freeloaders . . . or customers?
Still, even if we accept that some 50% of tuition pricing and aid is a sham, isn’t it still immoral for an early retiree to game the FAFSA for financial aid?
Its a fair question, but I’ll answer it with a provocative question of my own: who is gaming who here? If I accept aid I don’t need is it me preying on the college, or the college preying on me?
The answer is the latter. To the college enrollment system, my family is no liability, but a potential source of income. Instead of being tolerated, we will be recruited. Instead of being seen as freeloaders, we will be viewed as customers.
Colleges will be courting us by raining their fake “aid” packages down like manna from heaven . . . that is, as long as we are willing to pay the gap leftover (i.e. actual college revenue target). How is this possible? And why? Its because my family’s low income/high asset lifestyle makes us attractive customers.
First, with our low income, my family will receive a $7395 Pell grant and $5500 subsidized Stafford loan every year (paid by the federal government, not the state college). Score! Risk free money for the college – debt for everyone else involved.
Second, my family has high liquid assets, including sizable 529 education funds. This means we have the means to fund the leftover gap and pay the remaining balance that the college actually needs us to pay.
Everybody pays
Once you melt away the fiction of the sticker price and “aid,” my family will still pay a fair fee to attend college. There is no free lunch, for anybody.
The truth is less than 1% of college students get a full ride (think star athletes and Mensa geniuses). Despite political talking points, we don’t live in a nanny state where the poorest students are showered with 0$ college bills. No matter how much aid is given, the poor still have to cough up money, mostly through loans, like everyone else.
Even with such “generous” aid, only 11% of low income families complete a 4 year college degree. And while the poor own just 12% of the U.S. college loan debt amount, they own 65% of the default (source).
People who are unlikely to be long term consumers and who struggle to pay their bills do not make good customers – so says the college enrollment system. This is exactly why colleges limit how much aid flows to the needy.
Financial Aid is trickle-up economics
Instead colleges flow aid upward to court well off families, who the statistics say can pay, will pay, and are likely to stay enrolled for 4 years. Better for the college to offer $5K “grants” to 4 well off families who can pay the difference for 4 years, than offer $20K to one poor student who can’t pay and has a ~90% chance to drop out after one year.
Sound too nefarious to be true? Don’t take my word for it. Let’s look at what business leaders of the college enrollment industry say.
Richard DiFeliciantonio, VP of enrollment and expert in the college admission financial aid process had the following to say in a recent article for Inside Higher Ed: “Poorer families pay what they can, and must, but cannot provide enough revenue to sustain institutional aspirations” (italics mine).
The admissions process then is set up with algorithms that “hunt their admitted pools for prospects willing to pay a bit more, panning for shiny slivers of gold in their financial aid matrix sieves, to make next year’s budget.”
If that’s too esoteric for you, Mr. DiFeliciantonio puts it in more blunt language. In short, colleges achieve their revenue targets by “Financial aid dollars flowing uphill, where wealthier families are routinely over-aided.”
Its anecdotal, but this trending actual story is a revealing expose’ about how colleges toss out aid to lure more well off families, while charging full price to equally deserving poorer families.
This is especially true during crunch time (April – June), when colleges running short of enrollment (or revenue) quotas, start sending out new offers of increased aid to undecided students. The college will use brain-fogging buzz words – like VIP offer, grant, or scholarship – that dazzle well-off families into opening up their wallets . . . to pay what tuition should have been priced at to begin with.
Its tantamount to leaving an item in your online shopping cart, and then getting an email offer for 15% off if you submit your order in 24 hours. Only its worse with colleges, as these Black Friday special offers go out to middle and upper class families, not the poor.
Moral conclusion? Capitalism wins
The business of the college admission/revenue industry is certainly ugly. Its hard to defend money-based recruitment over needs-based. I also can’t argue that my plans to game the system make me a willing Capitalistic pawn at best, an opportunist at worst.
It seems both the business (colleges) and customers (paying families) are a fitting match, both willing dance partners in the capitalistic two-step, meeting each other stride for stride, our willingness to continue the dance dependent on a settled price that serves us both.
After you cut through illusory brochure prices and aid, colleges are willing to charge me a reasonable tuition price, and I am willing to pay that price – so we’re square. Capitalism is alright with me. As a matter of fact, I am cheering for capitalism to thrive. There is no better symbol of capitalism than the U.S.’s world leading stock market returns, which is the very oxygen sustaining the FIRE movement that allows me to retire early.
That does not mean Capitalism or the college education system is not without flaws. Neither system can provide complete answers to profound moral questions about education access, income inequality, and the social safety net.
Colleges try and (mostly) succeed in serving a pluralistic society, where the gap between the neediest and richest is as wide as the Grand Canyon. But the results are expectedly uneven. Most Americans land somewhere in the middle, but yes some fall through the cracks and are charged too little or too much. Still mystified by the never-ending fog of sham prices and aid, most families don’t even know where on this spectrum they even landed.
If this system enrages you, do something about it. Write your Congress woman, start a charity, create a scholarship fund, or maybe sponsor an under-privileged student at risk of falling through Capitalism’s cracks.
Just don’t blame regular people like me for calling colleges out for their bullsh*t prices and demanding a fair price that colleges only concede when we allow them to call it “aid.”