Is Financial Aid a form of Price Discrimination?

Maya Francis

college 

When students cannot pay for their full college tuition, colleges offer them financial aid. Financial aid helps students pay for everything: tuition, room and board fees, food, etc. There are many types of financial aid that are granted to different people. The amount of financial aid that is given is determined by the EFC (Expected Family Contribution) and the COA (Cost of Attendance of the school the student is going to). Basically, different people get different forms of financial aid based on their families’ incomes. This example of financial aid is a good example for price discrimination. Price discrimination is when “a firm attempts to sell the same item to different people at different prices”[1], or in the case of financial aid, colleges giving out the same financial aid to different people with different incomes.

This all begins with the Expected Family Contribution. It is the minimum amount that the parents are expected to contributed to the college fund. This tool is how colleges measure how much financial aid one person should receive. It takes into account your family’s income, assets, benefits, as well as how many children in your family are going to college.[2] An article by Forbes states that “it is also used by public colleges and most private ones to determine how much need-based “institutional aid” a family will get–basically, how much of a price break a school will give you.”[3] If someone’s EFC is lower than the tuition fee of the college, the student becomes eligible for need-based aid. Need-based aid is financial aid you can receive if you cannot afford to pay any of the tuition. The amount of financial aid that you receive will either be higher (if your family has a high income) or lower (if your family has a low income). However, there are other factors that need to be taken into account. If the student themselves has a job, that income will be taken into consideration for the amount of financial aid proven.[4] If your family has two children, the EFC will get split in half so sending one child to a prestigious private school would be tough.

In Naked Economics, Wheelan uses the example of airlines charging different prices for seats and different ticket prices in different seasons to demonstrate price discrimination. Instead   of charging different prices, colleges give out different amounts of financial aid. The amount of financial aid that is given out depends upon many factors. One is the EFC, which is the income, assets and benefits of the family. Another factor is whether the student makes money for themselves by having a job. The last factor is how many children are dependent on your family’s income. Financial aid is a prime example of price discrimination because different amounts are given to different people.

 

 

[1] Charles Wheelan Naked Economics (New York: W.W. Norton & Company, 2010), 18.

[2] Federal Student Aid How Aid is Calculated (Online) 

 https://studentaid.ed.gov/sa/fafsa/next-steps/how-calculated#whats-the-expected-family-contribution

[3] Troy Onink Do You Earn Too Much To Qualify For College Financial Aid? (Online: Forbes), 1.

http://www.forbes.com/sites/troyonink/2015/03/31/do-you-earn-too-much-to-qualify-for-college-financial-aid/#7e2ab64858ce

[4] Mark Kantrowitz Income and Financial Aid Eligibility (Online)

http://www.fastweb.com/financial-aid/articles/income-and-financial-aid-eligibility 

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