If one looks realistically at the US income distribution, financial aid, and the "expected family contribution" on which financial aid is based, what should target price point be for SLACs? Many of us are persuaded by the idea that there is no future in second and third tier SLACs charging $50K per year for four years of education. But is there a future at a different price point? This is a first exercise in trying to generate some insight that might help to answer that question.

The Market, Part I: American Families

The conventional view of the distribution of income in a country is a histogram showing how many families are in each income group, but a more useful visualization uses percentiles: what income level marks the boundary between the lowest 20% of families and the next 20% of families, for example? Here is a plot of income by cumulative percentage of all families.

cum-fam-inc-2012.png

https://www.census.gov/hhes/www/income/data/historical/families/

The standard calculation used in the financial aid business is the "Expected Family Contribution" (EFC). The EFC depends on all manner of data about a family's financial circumstances but there are some tables that show the approximate relationship between income and EFC. Here's a picture of the relationship between 2012-13 EFC and family aggregate gross income (AGI). One notes right away that EFC is quite an aggressive number. A family with an annual income of about 50,000 is expected to be able to pay about 6% of that for college.

EFC-2012-13.png

http://www.stratagee.com/resources/efc_quick_reference/1213_efc_quick_reference.html

We can combine these two by identifying the EFC for the various points on the income distribution plot.

fam-inc-and-EFC-2012.png

What can we learn from this? If we superimpose a line representing the total cost of attendance we see that there are very few families out there who can simply write a check for the full cost of attendance. For all practical purposes we can say that there are NONE.

EFC%20and%20COA.png

But, of course, there is financial aid: government grants, merit aid, need-based aid, and loans. Suppose a school recruits a student body that "looks like America," which is to say, its income distribution looks like that of the country. What does that student body's need (COA-EFC) look like?

Questions and Issues

Does not affect this analysis but numbers in F&T hard to reconcile with other published info. If these documents are authoritative, they should line up better or include explanations about why they do not.

References, etc.

Joyner, Jame. 2013. "Rich Kids Go to Elite Colleges, Becoming Rich Adults." Outside the Beltway Blog, MAY 17, 2013