Congress lives by illusion, especially during election season. Voters don't have the time or the knowledge to look below the surface of a politician's sweeping statement. If it sounds good, it gets votes.
The illusion du jour affects student aid. The middle classes worry about how they'll pay for college. So Congress has dreamed up a deal that will get the attention of every homeowner.
The proposal affects how your student-aid eligibility is figured. In general, the formulas look at your income and assets. From that, they determine how much of the college bill you will be required to pay yourself. Any gap between your contribution and a college's actual cost may be filled with student aid.
Your assets include your home equity, because you can take a second mortgage against it. And that's the sticking point. Many parents are saying they can't afford to borrow against their home equities, or don't want to. So Congress is proposing to let you apply for student aid without counting the value of your home or family farm. "Why should your house be held against you?" is the cry of the hour.
The budget struggle has apparently doomed this idea for the current year, but it will be back. Let me count the illusions behind it:
The Pell program, the government's major grant-giver, applies only to students of modest means. If your income is higher, you don't qualify -- and you still won't, even with your home equities taken out. So Congress is letting you think that more people will be "helped" than is actually the case. An analysis by the American Council on Education predicts that the new formula would add only 120,400 students to the Pell program.
Depending on your situation, the help might be significant or very slight. A study of 13,135 aid applicants, done by American College Testing (ACT) in Iowa City, found that dropping home equities out of the formula might make 254 students eligible for an average of $900 in aid. Another 499 students now receiving Pells might get an extra $460.
But at the upper end of the Pell income scale -- say an income of $30,000 -- a student might qualify for an extra $200.
Nothing compels a college to give you all the financial aid you qualify for, and most don't. If you get a higher Pell, it's possible that you might get less aid from the school's other funds. So you've gained nothing.
The proposal wouldn't help you get a higher government-subsidized student loan. Home equities would be dropped only from the formula for making grants, not from the formula for making loans.
If you have to borrow money for college (and most students or their parents do), a second mortgage is actually a pretty good loan to have. The interest payments are tax-deductible, whereas interest on student loans is not. So homeowners are better positioned than renters to raise the tuition money they need.
If you're one of the lucky 120,400 students, you'd just as soon have the extra money as not. But your aid would probably come to less than the ACT figures suggest because Congress allocates a set amount of money for Pells and the pot isn't growing. If more home-owning families become eligible, grants will be smaller for everyone.
At bottom, counting home equities is a fairness issue. People who rent apartments and save money would have all their savings counted for student-aid purposes, whereas people whose savings are in home equities wouldn't be expected to touch that money. The result: People with greater means would be eligible for the same amount of aid as people with lesser means. And each grant will be a little smaller.
Congress should drop this idea for good.