Monday, October 3, 2016

Lottery Winners, Money, and College

If you won the lottery, would you send your kids to college?
We examine more than one million children whose parents won a state lottery to trace out the effect of additional household resources on college outcomes. The analysis draws on the universe of federal tax records linked to federal financial aid records and leverages substantial variation in the size and timing of wins. The results reveal modest, increasing, and only weakly concave effects of resources: wins less than $100,000 have little influence on college-going (i.e., effects greater than 0.3 percentage point can be ruled out) while very large wins that exceed the cost of college imply a high upper bound (e.g., wins over $1,000,000 increase attendance by 10 percentage points).
So lottery winners are not much more likely than similar non-lottery winners to send their kids to college.  I can think of about a hundred reasons this might not mean much: maybe lottery winners are less intelligent than other people, or less focused on education as a route to success, or less intellectual, or however you want to formulate it. Or maybe the fact of winning the lottery encourages magical thinking in the whole family. Etc.

But anyway I have never believe that money is the thing that keeps people from attending or finishing college. Obviously that does happen, but the main reason people don't go to college is that they don't want to, and the main reason they drop out is that they find it boring and pointless.

I am opposed to making student loans our main funding mechanism because the 20s are a tough time for many, many people, and dumping all those debt repayments on people at that vulnerable point in their lives strikes me as a disaster. Student loans show up repeatedly as the main practical concern of young people disaffected with our system, e.g. Sanders supporters. So if I were in charge I would drastically rein in student loans.

But I think asking all students to pay something, and those who can to pay a lot, makes more sense than offering college for free to anyone. In the US, too many people go to college already.


David said...

There are a million children of lottery winners?? Who knew? That's practically a recognizable demographic group!

G. Verloren said...

@David The term "loterry winner" strikes me as vague and misleading, as there are lots of very minor prizes that can be won in lotteries. Is it fair to call someone who... say... wins $200 on a scratch-off ticket or something a "lottery winner", particularly when it is very likely they'll have spent at least that much money on the cost of tickets themselves over time?

G. Verloren said...

Heck, even if you win $100,000 there's still the question of how you're likely to have to spend it. First, there's the matter of taxes and payouts. As I understand it, if you opt to receive the prize as a lump sum, you get substantially less than the face value - you only receive all (or at least most of) your prize amount if you opt to receive it as a series of small payments over a number of years. And in either case, Uncle Sam is taking a pretty significant cut of it for himself as well.

Then there's the matter of what you actually have to spend the money on once you have it. How many people who buy lottery tickets maybe have existing debts they'd like to pay off? How many maybe have crappy cars or run down houses they'd rather fix up or replace? How many maybe spend it on healthcare for themselves or their loved ones? How many maybe are overworked and undertraveled, and want to take a real vacation for once in their lives, and maybe see Paris or something?

In the end, a $100,000 prize may not stretch very far. First off, the government will withhold $25,000 of it for federal income tax purposes. You'll get some of this back down the line depending on your tax bracket, but it's not available for some time. Then in more than half the states in the country, you'd pay a further 3 to 11 percent approximately on state taxes, let's say around 7% average, or another $7,000. So now we're down to about $70,000 to spend.

Buying a brand new car or truck in America today averages $33,560. So there's half your winnings gone already, if you go that route. And many people do - cars are vital possessions in much of the country, and many people resent not being able to afford better ones, having to spend countless years making due with used vehicles which often run poorly or have other faults they grudgingly tolerate. Given how much time the average American spends in their car, how visible a status symbol they are, and how much people wrap their identities up in their cars, it's easy to see why this would be a major contender for how one spends one's winnings.


G. Verloren said...

Let's compare to colleges. The average private college costs $32,405 in tuition for a single year. Public colleges are of course more affordable, costing $23,893 if you're from out of state, and only about $9,410 if you're a local resident.

So let's say you want to spend your $70,000 on sending a kid to school. You pick a local public school, and figure four years of tuition will get them a half decent degree that isn't completely worthless. $9,410 x 4 = $37,640 total, or comparable to the price of a new car, and about half your winnings after taxes (and assuming you didn't opt for a smaller lump sum.)

But that's only tuition costs.

First off, chances are even with "local" state schools, your kid is going to have to live away from home in another city. That means they need to pay housing, either on campus or private. They also need to pay for food and necessities, again either on campus or private. If they're full time students (and in most cases they have to be to finish in just four years), that doesn't leave much time for employment, so now they're losing several years worth of wages, or at least a significant percentage thereof if they work part time. Then they have to buy books for classes (which are never cheap), lab fees, et cetera. They're probably going to need transportation of some kind - likely a car, which they need to find parking for and keep paying insurance on, even if they don't use if often. And they're going to want to spend at least some time on leisure activities, even if it's just seeing the occasional movie with friends, or having a night out for dinner and drinks.

All told, it adds up quickly. Sure, with your $70,000 prize, you could probably afford to send your kid to a local school for four years, if they live frugally and consciensciously. But even that's going to eat up pretty much all of the prize money just by itself, leaving nothing much left over for anything else. Is it any wonder many people would rather spend it on things that have more immediate and visible effects on their lives, like owning a brand new car for the first time in their life, or paying off their mortgages?