Education and inequality

During his latter years as chairman of the Federal Reserve Board, Alan Greenspan routinely warned about the long-term, adverse consequences that rising income inequality imposes on democratic societies. As incomes for lesser-skilled workers grow far more slowly than incomes of the highly skilled, “[t]he consequence, of course,” is “an increased concentration of income,” he told the Joint Economic Committee in June 2005. “As I’ve often said, this is not the type of thing which a democratic society — a capitalist democratic society — can really accept without addressing.” Mr. Greenspan repeatedly stressed that the best antidote would be to increase education levels of the nation’s workforce, a policy prescription that his successor as Fed chairman, Ben Bernanke, has enthusiastically endorsed.

Amid the widespread consensus about the urgency to raise the education levels of America’s workforce, it is striking to learn about the huge college-graduation gaps that persist among comparably high-achieving students within different socioeconomic levels. Looking at the high-school class of 1992, a 2005 study by the National Center for Education Statistics reviewed the comparative educational achievements among students of different socioeconomic backgrounds, all of whom had achieved high standardized test scores in junior high. The study differentiated socioeconomic status based on family income and educational attainment of parents. Not surprisingly, 74 percent of high-scoring upper-socioeconomic-status students (those within the top quarter) had graduated from four-year institutions. Within the middle half, 47 percent of high-scoring students had completed four-year college programs. However, despite achieving the same high-level standardized scores at the end of junior high, only 29 percent of low-socioeconomic-status students (those within the bottom quarter) had graduated from four-year institutions.

One obvious reason for the large graduation differences among various socioeconomic groups relates to a family’s ability to finance postsecondary education for its children. Notwithstanding that there are many generous tuition-assistance programs available to the poor, ranging from Pell Grants to university aid, there is considerable evidence that low- and moderate-income high-school graduates are disproportionately deterred from attending college because of unmet financial needs. Compared to 80 percent of students from families in the top-fifth income level who go straight to college from high school and 60 percent from the middle three-fifths, only 50 percent of students from the bottom-fifth make that transition.

Moreover, while many of the high-income and upper-middle-income families take advantage of education tax deductions, education savings accounts and two college-related tax credits (the Hope Credit, maximum $1,650; and the Lifetime Learning Credit, maximum $2,000), there is no evidence that these specific tax preferences were the determining factor in increased college enrollment. In essence, the tax preferences, particularly the tax credits, reduced the costs for students who would have attended college without them, according to a National Bureau of Economic Research study.

A major reason why the Hope Credit and the Lifetime Earning Credit have virtually no impact on total college enrollment is because they cannot be used at all by low-income families (e.g., married-couple, two-children families earning less than $24,300 in 2007) or fully used by moderate-income families of comparable make-up (earning less than $42,850). That is because neither credit is refundable. Interestingly, several studies have demonstrated that a $1,000 reduction in the cost of college (concentrated at the low- and moderate-income levels) could increase college enrollment by three to four percentage points, providing significant bang for the buck. A Congressional Research Service study concluded that “the benefits of the [Hope and Lifetime Learning] education tax credits would be greater for lower-income students, though they are the least likely to claim the credits” because they have very little or no income-tax liability.

In the near future, the Senate Finance Committee will be examining various options to make the tax credits at least partially refundable. Any changes would have to satisfy PAYGO restrictions, which means refundability would have to be offset by tax increases elsewhere or a reduction in entitlements. Given the warnings of Messrs. Greenspan and Bernanke and the huge gap in college graduation rates among comparably achieving students in high (74 percent) and low (29 percent) socioeconomic levels, these kinds of PAYGO-restricted tradeoffs at least deserve to be considered.