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A Private Tax System That Saves The wealthiest $Billions?

Posted on January 3, 2016

The very richest are able to quietly shape tax policy that will allow them to shield billions in income.

By NOAM SCHEIBER and PATRICIA COHEN. DEC. 29, 2015

WASHINGTON — The hedge fund magnates Daniel S. Loeb, Louis Moore Bacon and Steven A. Cohen have much in common. They have managed billions of dollars in capital, earning vast fortunes.

They have invested large sums in art — and millions more in political candidates.

Andrew Bossone shared a link.

For the Wealthiest, a Private Tax System That Saves Them Billions

The very richest are able to quietly shape tax policy that will allow them to shield billions in income.nytimes.com| By PATRICIA COHEN

Each has exploited an esoteric tax loophole that saved them millions in taxes. The trick? Route the money to Bermuda and back.

With inequality at its highest levels in nearly a century and public debate rising over whether the government should respond to it through higher taxes on the wealthy, the very richest Americans have financed a sophisticated and astonishingly effective apparatus for shielding their fortunes.

Some call it the “income defense industry,” consisting of a high-priced phalanx of lawyers, estate planners, lobbyists and anti-tax activists who exploit and defend a dizzying array of tax maneuvers, virtually none of them available to taxpayers of more modest means.

(All you need is an experienced and affordable tax lawyer?)

In recent years, this apparatus has become one of the most powerful avenues of influence for wealthy Americans of all political stripes, including Mr. Loeb and Mr. Cohen, who give heavily to Republicans, and the liberal billionaire George Soros, who has called for higher levies on the rich while at the same time using tax loopholes to bolster his own fortune.

All are among a small group providing much of the early cash for the 2016 presidential campaign.

Operating largely out of public view — in tax court, through arcane legislative provisions and in private negotiations with the Internal Revenue Service — the wealthy have used their influence to steadily whittle away at the government’s ability to tax them.

The effect has been to create a kind of private tax system, catering to only several thousand Americans (the old money and new billionaires? Read this bogus charity trust of Zukerberg).

The impact on their own fortunes has been stark.

Two decades ago, when Bill Clinton was elected president, the 400 highest-earning taxpayers in America paid nearly 27% of their income in federal taxes, according to I.R.S. data. (What that rate represents in Revenue?)

By 2012, when President Obama was re-elected, that figure had fallen to less than 17%, which is just slightly more than the typical family making $100,000 annually, when payroll taxes are included for both groups.

The ultra-wealthy “literally pay millions of dollars for these services,” said Jeffrey A. Winters, a political scientist at Northwestern University who studies economic elites, “and save in the tens or hundreds of millions in taxes.”

Some of the biggest current tax battles are being waged by some of the most generous supporters of 2016 candidates.

They include the families of the hedge fund investors Robert Mercer, who gives to Republicans, and James Simons, who gives to Democrats; as well as the options trader Jeffrey Yass, a libertarian-leaning donor to Republicans.

Mr. Yass’s firm is litigating what the agency deemed to be tens of millions of dollars in underpaid taxes.

Renaissance Technologies, the hedge fund Mr. Simons founded and which Mr. Mercer helps run, is currently under review by the I.R.S. over a loophole that saved their fund an estimated $6.8 billion in taxes over roughly a decade, according to a Senate investigation.

Some of these same families have also contributed hundreds of thousands of dollars to conservative groups that have attacked virtually any effort to raises taxes on the wealthy.

In the heat of the presidential race, the influence of wealthy donors is being tested.

At stake is the Obama administration’s 2013 tax increase on high earners — the first substantial increase in two decades — and an I.R.S. initiative to ensure that, in effect, the higher rates stick by cracking down on tax avoidance by the wealthy.

While Democrats like Bernie Sanders and Hillary Clinton have pledged to raise taxes on these voters, virtually every Republican has advanced policies that would vastly reduce their tax bills, sometimes to as little as 10 percent of their income.

At the same time, most Republican candidates favor eliminating the inheritance tax, a move that would allow the new rich, and the old, to bequeath their fortunes intact, solidifying the wealth gap far into the future.

And several have proposed a substantial reduction — or even elimination — in the already deeply discounted tax rates on investment gains, a foundation of the most lucrative tax strategies.

“There’s this notion that the wealthy use their money to buy politicians; more accurately, it’s that they can buy policy, and specifically, tax policy,” said Jared Bernstein, a senior fellow at the left-leaning Center on Budget and Policy Priorities who served as chief economic adviser to Vice President Joseph R. Biden Jr. “That’s why these egregious loopholes exist, and why it’s so hard to close them.”

The Family Office

Each of the top 400 earners took home, on average, about $336 million in 2012, the latest year for which data is available. If the bulk of that money had been paid out as salary or wages, as it is for the typical American, the tax obligations of those wealthy taxpayers could have more than doubled.

Instead, much of their income came from convoluted partnerships and high-end investment funds.

Other earnings accrued in opaque family trusts and foreign shell corporations, beyond the reach of the tax authorities.

The well-paid technicians who devise these arrangements toil away at white-shoe law firms and elite investment banks, as well as a variety of obscure boutiques.

But at the fulcrum of the strategizing over how to minimize taxes are so-called family offices, the customized wealth management departments of Americans with hundreds of millions or billions of dollars in assets.

Family offices have existed since the late 19th century, when the Rockefellers pioneered the institution, and gained popularity in the 1980s. But they have proliferated rapidly over the last decade, as the ranks of the super-rich, and the size of their fortunes, swelled to record proportions.

“We have so much wealth being created, significant wealth, that it creates a need for the family office structure now,” said Sree Arimilli, an industry recruiting consultant.

Family offices, many of which are dedicated to managing and protecting the wealth of a single family, oversee everything from investment strategy to philanthropy.

But tax planning is a core function.

While the specific techniques these advisers employ to minimize taxes can be mind-numbingly complex, they generally follow a few simple principles, like converting one type of income into another type that’s taxed at a lower rate.

Mr. Loeb, for example, has invested in a Bermuda-based reinsurer — an insurer to insurance companies — that turns around and invests the money in his hedge fund.

That maneuver transforms his profits from short-term bets in the market, which the government taxes at roughly 40 percent, into long-term profits, known as capital gains, which are taxed at roughly half that rate.

It has had the added advantage of letting Mr. Loeb defer taxes on this income indefinitely, allowing his wealth to compound and grow more quickly.

The Bermuda insurer Mr. Loeb helped set up went public in 2013 and is active in the insurance business, not merely a tax dodge. Mr. Cohen and Mr. Bacon abandoned similar insurance-based strategies in recent years.

“Our investment in Max Re was not a tax-driven scheme, but rather a sound investment response to investor interest in a more dynamically managed portfolio akin to Warren Buffett’s Berkshire Hathaway,” said Mr. Bacon, who leads Moore Capital Management. “Hedge funds were a minority of the investment portfolio, and Moore Capital’s products a much smaller subset of this alternative portfolio.” Mr. Loeb and Mr. Cohen declined to comment.

Organizing one’s business as a partnership can be lucrative in its own right.

Some of the partnerships from which the wealthy derive their income are allowed to sell shares to the public, making it easy to cash out a chunk of the business while retaining control.

But unlike publicly traded corporations, they pay no corporate income tax; the partners pay taxes as individuals. And the income taxes are often reduced by large deductions, such as for depreciation.

For large private partnerships, meanwhile, the I.R.S. often struggles “to determine whether a tax shelter exists, an abusive tax transaction is being used,” according to a recent report by the Government Accountability Office.

The agency is not allowed to collect underpaid taxes directly from these partnerships, even those with several hundred partners. Instead, it must collect from each individual partner, requiring the agency to commit significant time and manpower.

The wealthy can also avail themselves of a range of esoteric and customized tax deductions that go far beyond writing off a home office or dinner with a client. One aggressive strategy is to place income in a type of charitable trust, generating a deduction that offsets the income tax.

The trust then purchases what’s known as a private placement life insurance policy, which invests the money on a tax-free basis, frequently in a number of hedge funds. The person’s heirs can inherit, also tax-free, whatever money is left after the trust pays out a percentage each year to charity, often a considerable sum.

Many of these maneuvers are well established, and wealthy taxpayers say they are well within their rights to exploit them.

Others exist in a legal gray area, its boundaries defined by the willingness of taxpayers to defend their strategies against the I.R.S. Almost all are outside the price range of the average taxpayer.

Among tax lawyers and accountants, “the best and brightest get a high from figuring out how to do tricky little deals,” said Karen L. Hawkins, who until recently headed the I.R.S. office that oversees tax practitioners. “Frankly, it is almost beyond the intellectual and resource capacity of the Internal Revenue Service to catch.”

(This cliché that the public institutions cannot afford and lack the best minds and expertise)

The combination of cost and complexity has had a profound effect, tax experts said. Whatever tax rates Congress sets, the actual rates paid by the ultra-wealthy tend to fall over time as they exploit their numerous advantages.

From Mr. Obama’s inauguration through the end of 2012, federal income tax rates on individuals did not change (excluding payroll taxes). But the highest-earning one-thousandth of Americans went from paying an average of 20.9 percent to 17.6%.

By contrast, the top 1%, excluding the very wealthy, went from paying just under 24% on average to just over that level.

“We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice,” said Victor Fleischer, a law professor at the University of San Diego who studies the intersection of tax policy and inequality. “

At the very top of the income distribution, the effective rate of tax goes down, contrary to the principles of a progressive income tax system.”

A Very Quiet Defense

Having helped foster an alternative tax system, wealthy Americans have been aggressive in defending it.

Trade groups representing the Bermuda-based insurance company Mr. Loeb helped set up, for example, have spent the last several months pleading with the I.R.S. that its proposed rules tightening the hedge fund insurance loophole are too onerous.

The major industry group representing private equity funds spends hundreds of thousands of dollars each year lobbying on such issues as “carried interest,” the granddaddy of Wall Street tax loopholes, which makes it possible for fund managers to pay the capital gains rate rather than the higher standard tax rate on a substantial share of their income for running the fund.

The budget deal that Congress approved in October allows the I.R.S. to collect underpaid taxes from large partnerships at the firm level for the first time — which is far easier for the agency — thanks to a provision that lawmakers slipped into the deal at the last minute, before many lobbyists could mobilize.

But the new rules are relatively weak — firms can still choose to have partners pay the taxes — and don’t take effect until 2018, giving the wealthy plenty of time to weaken them further.

Shortly after the provision passed, the Managed Funds Association, an industry group that represents prominent hedge funds like D. E. Shaw, Renaissance Technologies, Tiger Management and Third Point, began meeting with members of Congress to discuss a wish list of adjustments.

The founders of these funds have all donated at least $500,000 to 2016 presidential candidates.

During the Obama presidency, the association itself has risen to become one of the most powerful trade groups in Washington, spending over $4 million a year on lobbying.

The buying power lobbying clout of the wealthy is most often deployed through industry trade associations and lawyers, some rich families have locked arms to advance their interests more directly.

The inheritance tax has been a primary target.

In the early 1990s, a California family office executive named Patricia Soldano began lobbying on behalf of wealthy families to repeal the tax, which would not only save them money, but also make it easier to preserve their business empires from one generation to the next.

The idea struck many hardened operatives as unrealistic at the time, given that the tax affected only the wealthiest Americans. But Ms. Soldano’s efforts — funded in part by the Mars and Koch families — laid the groundwork for a one-year elimination in 2010.

The tax has been restored, but currently applies only to couples leaving roughly $11 million or more to their heirs, up from those leaving more than $1.2 million when Ms. Soldano started her campaign. It affected fewer than 5,200 families last year.

“If anyone would have told me we’d be where we are today, I would never have guessed it,” Ms. Soldano said in an interview.

Some of the most profound victories are barely known outside the insular world of the wealthy and their financial managers.

In 2009, Congress set out to require that investment partnerships like hedge funds register with the Securities and Exchange Commission, partly so that regulators would have a better grasp on the risks they posed to the financial system.

The early legislative language would have required single-family offices to register as well, exposing the highly secretive institutions to scrutiny that their clients were eager to avoid. Some of the I.R.S.’s cases against the wealthy originate with tips from the S.E.C., which is often better positioned to spot tax evasion.

By the summer of 2009, several family office executives had formed a lobbying group called the Private Investor Coalition to push back against the proposal. The coalition won an exemption in the 2010 Dodd-Frank financial reform bill, then spent much of the next year persuading the S.E.C. to largely adopt its preferred definition of “family office.”

So expansive was the resulting loophole that Mr. Soros’s $24.5 billion hedge fund took advantage of it, converting to a family office after returning capital to its remaining outside investors. The hedge fund manager Stanley Druckenmiller, a former business partner of Mr. Soros, took the same step.

The Soros family, which generally supports Democrats, has committed at least $1 million to the 2016 presidential campaign; Mr. Druckenmiller, who favors Republicans, has put slightly more than $300,000 behind three different G.O.P. presidential candidates.

A slide presentation from the Private Investor Coalition’s 2013 annual meeting credited the success to multiple meetings with members of the Senate Banking Committee, the House Financial Services Committee, congressional staff and S.E.C. staff.

“All with a low profile,” the document noted. “We got most of what we wanted AND a few extras we didn’t request.”

A Hobbled Monitor

After all the loopholes and all the lobbying, what remains of the government’s ability to collect taxes from the wealthy runs up against one final hurdle: the crisis facing the I.R.S.

President Obama has made fighting tax evasion by the rich a priority. In 2010, he signed legislation making it easier to identify Americans who squirreled away assets in Swiss bank accounts and Cayman Islands shelters

His I.R.S. convened a Global High Wealth Industry Group, known colloquially as “the wealth squad,” to scrutinize the returns of Americans with incomes of at least $10 million a year.

But while these measures have helped the government retrieve billions, the agency’s efforts have flagged in the face of scandal, political pressure and budget cuts.

Between 2010, the year before Republicans took control of the House of Representatives, and 2014, the I.R.S. budget dropped by almost $2 billion in real terms, or nearly 15%. That has forced it to shed about 5,000 high-level enforcement positions out of about 23,000, according to the agency.

Audit rates for the $10 million-plus club spiked in the first few years of the Global High Wealth program, but have plummeted since then.

The political challenge for the agency became especially acute in 2013, after the agency acknowledged singling out conservative nonprofits in a review of political activity by tax-exempt groups. (Senior officials left the agency as a result of the controversy.)

Several former I.R.S. officials, including Marcus Owens, who once headed the agency’s Exempt Organizations division, said the controversy badly damaged the agency’s willingness to investigate other taxpayers, even outside the exempt division.

“I.R.S. enforcement is either absent or diminished” in certain areas, he said. Mr. Owens added that his former department — which provides some oversight of money used by charities and nonprofits — has been decimated.

Groups like FreedomWorks and Americans for Tax Reform, which are financed partly by the foundations of wealthy families and large businesses, have called for impeaching the I.R.S. commissioner.

They are bolstered by deep-pocketed advocacy groups like the Club for Growth, which has aided primary challenges against Republicans who have voted in favor of higher taxes.

In 2014, the Club for Growth Action fund raised more than $9 million and spent much of it helping candidates critical of the I.R.S. Roughly 60 percent of the money raised by the fund came from just 12 donors, including Mr. Mercer, who has given the group $2 million in the last five years.

Mr. Mercer and his immediate family have also donated more than $11 million to several super PACs supporting Senator Ted Cruz of Texas, an outspoken I.R.S. critic and a presidential candidate.

Another prominent donor is Mr. Yass, who helps run a trading firm called the Susquehanna International Group. He donated $100,000 to the Club for Growth Action fund in September. Mr. Yass serves on the board of the libertarian Cato Institute and, like Mr. Mercer, appears to subscribe to limited-government views that partly motivate his political spending.

But he may also have more than a passing interest in creating a political environment that undermines the I.R.S. Susquehanna is currently challenging a proposed I.R.S. determination that an affiliate of the firm effectively repatriated more than $375 million in income from subsidiaries located in Ireland and the Cayman Islands in 2007, creating a large tax liability.

(The affiliate brought the money back to the United States in later years and paid dividend taxes on it; the I.R.S. asserts that it should have paid the ordinary income tax rate, at a cost of tens of millions of dollars more.)

In June, Mr. Yass donated more than $2 million to three super PACs aligned with Senator Rand Paul of Kentucky, who has called for taxing all income at a flat rate of 14.5 percent. That change in itself would save wealthy supporters like Mr. Yass millions of dollars.

Mr. Paul, also a presidential candididate, has suggested going even further, calling the I.R.S. a “rogue agency” and circulating a petition in 2013 calling for the tax equivalent of regime change. “Be it now therefore resolved,” the petition reads, “that we, the undersigned, demand the immediate abolishment of the Internal Revenue Service.”

But even if that campaign is a long shot, the richest taxpayers will continue to enjoy advantages over everyone else.

For the ultra-wealthy, “our tax code is like a leaky barrel,” said J. Todd Metcalf, the Democrats’ chief tax counsel on the Senate Finance Committee. ”Unless you plug every hole or get a new barrel, it’s going to leak out.”

Nicholas Confessore contributed reporting and Kitty Bennett contributed research.

A version of this article appears in print on December 30, 2015, on page A1 of the New York edition with the headline: By Molding Tax System,Wealthiest Save Billions.

Poor? Even in school?

Low-income strivers face uphill climbs, especially at Ball High School, where a third of the girls’ class failed to graduate on schedule.

By the time, the triplets, Angelica Gonzales, Melissa O’Neal and Bianca Gonzalez donned mortarboards in the class of 2008, their story seemed to validate the promise of education as the great equalizer.

“I just didn’t understand the extent of the obstacles I was going to have to overcome.”

Who is this Lucy Parsons?
Photo
 Published in nyt on December 22, 2012 under: “For Poor, Leap to College Often Ends in a Hard Fall”

GALVESTON, Tex. — Angelica Gonzales marched through high school in Goth armor — black boots, chains and cargo pants — but undermined her pose of alienation with a place on the honor roll.

Angelica nicknamed herself after a metal band and vowed to become the first in her family to earn a college degree: “I don’t want to work at Walmart like mother“, she wrote to a school counselor.

Weekends and summers were devoted to a college-readiness program, where her best friends, Melissa O’Neal and Bianca Gonzalez, shared her drive to “get off the island” — escape the prospect of dead-end lives in luckless Galveston.

Melissa, an eighth-grade valedictorian, seethed over her mother’s boyfriends and drinking, and Bianca’s bubbly innocence hid the trauma of her father’s death. They stuck together so much that a tutor called them the “triplets.”

Affluent Students Have an Advantage and the Gap Is Widening

Angelica, a daughter of a struggling Mexican immigrant, was headed to Emory University. Bianca enrolled in community college, and Melissa left for Texas State University, President Lyndon B. Johnson’s alma mater.

“It felt like we were taking off, from one life to another,” Melissa said. “It felt like, ‘Here we go!’ ”

Four years later, their story seems less like a tribute to upward mobility than a study of obstacles in an age of soaring economic inequality.

Not one of them has a four-year degree.

Only one is still studying full time, and two have crushing debts. Angelica, who left Emory owing more than $60,000, is a clerk in a Galveston furniture store.

Each showed the ability to do college work, even excel at it.

But the need to earn money brought one set of strains, campus alienation brought others, and ties to boyfriends not in school added complications. With little guidance from family or school officials, college became a leap that they braved without a safety net.

The story of their lost footing is also the story of something larger — the growing role that education plays in preserving class divisions.

Poor students have long trailed affluent peers in school performance, but from grade-school tests to college completion, the gaps are growing.

With school success and earning prospects ever more entwined, the consequences carry far: education, a force meant to erode class barriers, appears to be fortifying them.

“Everyone wants to think of education as an equalizer — the place where upward mobility gets started,” said Greg J. Duncan, an economist at the University of California, Irvine. “But on virtually every measure we have, the gaps between high- and low-income kids are widening. It’s very disheartening.”

The growing role of class in academic success has taken experts by surprise since it follows decades of equal opportunity efforts and counters racial trends, where differences have narrowed.

It adds to fears over recent evidence suggesting that low-income Americans have lower chances of upward mobility than counterparts in Canada and Western Europe.

Thirty years ago, there was a 31 percentage point difference between the share of prosperous and poor Americans who earned bachelor’s degrees, according to Martha J. Bailey and Susan M. Dynarski of the University of Michigan. Now the gap is 45 points.

While both groups improved their odds of finishing college, the affluent improved much more, widening their sizable lead.

Likely reasons include soaring incomes at the top and changes in family structure, which have left fewer low-income students with the support of two-parent homes.

Neighborhoods have grown more segregated by class, leaving lower-income students increasingly concentrated in lower-quality schools.

And even after accounting for financial aid, the costs of attending a public university have risen 60% in the past two decades. Many low-income students, feeling the need to help out at home, are deterred by the thought of years of lost wages and piles of debt.

In placing their hopes in education, the Galveston teenagers followed a tradition as old as the country itself. But if only the prosperous become educated — and only the educated prosper — the schoolhouse risks becoming just another place where the fortunate preserve their edge.

“It’s becoming increasingly unlikely that a low-income student, no matter how intrinsically bright, moves up the socioeconomic ladder,” said Sean Reardon, a sociologist at Stanford. “What we’re talking about is a threat to the American dream.”

High School

No one pictured the teenagers as even friends, much less triplets. Angelica hid behind dark eyeliner, Melissa’s moods turned on the drama at home, and Bianca, in the class behind, seemed even younger than she was.

What they had in common was a college-prep program for low-income teenagers, Upward Bound, and trust in its counselor, Priscilla Gonzales Culver, whom everyone called “Miss G.”

Angelica was the product of a large Mexican-American family, which she sought both to honor and surpass. Her mother, Ana Gonzales, had crossed the border illegally as a child, gained citizenship and settled the clan in Galveston, where she ruled by force of will. She once grounded Angelica for a month for coming home a minute late. With hints of both respect and fear, Angelica never called her “Mom” — only “Mrs. Lady.”

Home was an apartment in a subdivided house, with relatives in the adjacent units. Family meals and family feuds went hand in hand. One of Angelica’s uncles bore scars from his days in a street gang. Her grandmother spoke little English.

With a quirky mix of distance and devotion, Angelica studied German instead of Spanish and gave the fiesta celebrating her 15th birthday a Goth theme, with fairies and dragons on the tabletop globes. “Korn chick,” she fancifully called herself, after the dissonant metal band.

But school was all business. “Academics was where I shined,” she said. Her grandmother and aunts worked at Walmart alongside Mrs. Lady, and Angelica was rankled equally by how little money they made and how little respect they got. Upward Bound asked her to rank the importance of college on a scale of 1 to 10.

“10,” she wrote.

Melissa also wanted to get off the island — and more immediately out of her house. “When I was about 7, my mom began dating and hanging around a bunch of drunks,” she wrote on the Upward Bound application. For her mother, addiction to painkillers and severe depression followed. Her grandparents offered her one refuge, and school offered another.

“I like to learn — I’m weird,” she said.

By eighth grade, Melissa was at the top of her class and sampling a course at a private high school. She yearned to apply there but swore the opposite to her mother and grandparents. Protecting families from their own ambition is a skill many poor students learn. “I knew we didn’t have the money,” Melissa said. “I felt like I had no right to ask.”

New to Upward Bound, Melissa noticed that one student always ate alone and crowded in beside her. “She forced her friendship on me,” Angelica said.

Bianca joined the following year with a cheerfulness that disguised any trace of family tragedy. As the eldest of four siblings, she had spent the years since her father’s death as a backup mother. To Bianca, family meant everything.

She arrived just in time for the trip at the heart of triplets lore — the Upward Bound visit to Chicago. While they had known they wanted more than Galveston offered, somewhere between the Sears Tower and Northwestern University they glimpsed what it might be. The trip at once consecrated a friendship and defined it around shared goals.

“We wanted to do something better with our lives,” Angelica said.

Ball High was hard on goals. In addition to Bosco, a drug-sniffing dog profiled in the local paper, the campus had four safety officers to deter fights. A pepper spray incident in the girls’ senior year sent 50 students to the school nurse. Only 2 percent of Texas high schools were ranked “academically unacceptable.” Ball was among them.

Melissa now marvels at what a good parent her mother has become to her younger brother after she stopped drinking and was treated for her depression. But when she returned from the high school trip to Chicago, the conflicts grew so intense that Miss G. took her in one night.

“I really put her through a lot,” said Melissa’s mother, Pam Craft. “Everything she did, she did on her own — I’m so proud of her.” Miss G.’s notes variously observed that “there are limited groceries,” “student is overwhelmed” and “she’s basically raising herself.”

While faulting her mother’s choices in men, Melissa made a troubling choice of her own with her less ambitious boyfriend. Among the many ways he let her down was getting another girl pregnant. Yet as many times as they broke up, they got back together again. “He is going to bring her down,” Miss G. warned.

Despite the turmoil, Melissa earned “commended” marks, the highest level, on half her state skills tests, edited the yearbook and published two opinion articles in the Galveston newspaper, one of them about her brother’s struggle with autism.

Working three jobs, she missed so much school that she nearly failed to graduate, but she still finished in the top quarter of her class. It was never clear which would prevail — her habit of courting disaster or her talent for narrow escapes.

Returning from Chicago, Bianca jumped a grade, which allowed her to graduate with Melissa and Angelica.

Angelica kept making A’s on her way to a four-year grade-point average of 3.9.

“Amazingly bright and dedicated,” one instructor wrote. A score of 1,240 on the math and reading portions of her SAT ranked her at the 84th percentile nationwide. When the German teacher suddenly quit, the school tapped her to finish teaching the first-year course.

Outside school, Angelica’s life revolved around her boyfriend, Fred Weaver, who was three years older and drove a yellow Sting Ray. Fred was devoted — too devoted, Mrs. Lady thought, and she warned Angelica not to let the relationship keep her from going to college. Fred’s father owned a local furniture store, and everyone could see that Fred’s dream was to run it with Angelica at his side.

Senior year raced by, with Miss G. doing her best to steer frightened and distracted students though the college selection process. Despite all the campus visits, choices were made without the intense supervision that many affluent students enjoy. Bianca, anchored to the island by family and an older boyfriend, chose community college. Melissa picked Texas State in San Marcos because “the application was easiest.”

Angelica had thought of little beyond Northwestern and was crestfallen when she was rejected. She had sent a last-minute application to a school in Atlanta that had e-mailed her. Only after getting in did she discover that she had achieved something special.

Emory cost nearly $50,000 that year, but it was one of a small tier of top schools that promised to meet the financial needs of any student good enough to be admitted. It had even started a program to relieve the neediest students of high debt burdens. “No one should have to give up their goals and dreams because financial challenges stand in the way,” its Web site says.

Plus an unseen campus a thousand miles away had an innate appeal. “How many times do you get the chance to completely reinvent yourself?” Angelica said.

Rich-Poor Gap Grows

If Melissa and Angelica felt that heading off to university set them apart from other low-income students, they were right. Fewer than 30% of students in the bottom quarter of incomes even enroll in a four-year school. And among that group, fewer than half graduate.

Income has always shaped academic success, but its importance is growing. Professor Reardon, the Stanford sociologist, examined a dozen reading and math tests dating back 25 years and found that the gap in scores of high- and low-income students has grown by 40%, even as the difference between blacks and whites has narrowed.

While race once predicted scores more than class, the opposite now holds. By eighth grade, white students surpass blacks by an average of three grade levels, while upper-income students are four grades ahead of low-income counterparts.

“The racial gaps are quite big, but the income gaps are bigger,” Professor Reardon said.

One explanation is simply that the rich have clearly gotten richer. A generation ago, families at the 90th percentile had five times the income of those at the 10th percentile. Now they have 10 times as much.

But as shop class gave way to computer labs, schools may have also changed in ways that make parental income and education more important. SAT coaches were once rare, even for families that could afford them. Now they are part of a vast college preparation industry.

Certainly as the payoff to education has grown — college graduates have greatly widened their earnings lead — affluent families have invested more in it. They have tripled the amount by which they outspend low-income families on enrichment activities like sports, music lessons and summer camps, according to Professor Duncan and Prof. Richard Murnane of Harvard.

In addition, upper-income parents, especially fathers, have increased their child-rearing time, while the presence of fathers in low-income homes has declined. Miss G. said there is a reason the triplets relied so heavily on boyfriends: “Their fathers weren’t there.”

Annette Lareau, a sociologist at the University of Pennsylvania, argues that the affluent also enjoy an advocacy edge: parents are quicker to intervene when their children need help, while low-income families often feel intimidated and defer to school officials, a problem that would trail Melissa and Angelica in their journey through college.

“Middle-class students get the sense the institution will respond to them,” Professor Lareau said. “Working-class and poor students don’t experience that. It makes them more vulnerable.”

Matthew M. Chingos of the Brookings Institution has found that low-income students finish college less often than affluent peers even when they outscore them on skills tests. Only 26% of eighth graders with below-average incomes but above-average scores go on to earn bachelor’s degrees, compared with 30 percent of students with subpar performances but more money.

“These are students who have already overcome significant obstacles to score above average on this test,” Mr. Chingos said. “To see how few earn college degrees is really disturbing.”

Triplets Start College

Melissa lasted at Texas State for all of two hours. As soon as she arrived, her car battery died, prompting a tearful call to Miss. G., who arranged a jump. Her dorm mates had parents to haul boxes and hover. Melissa unpacked alone. With four days left until classes began, she panicked and drove 200 miles back home.

For all the talk of getting away, her tattoo featured a local boast: she was “B.O.I.” — born on the island. Her grandparents ordered her back to school. “I really didn’t want to leave” the island, she said.

Midway through the semester she decided she had made a mistake by going to Texas State. She had picked the wrong time to leave home. She would move back to Galveston, join Bianca at community college and transfer to a four-year school later. But when she tried to return the financial aid to Texas State, she discovered it was too late. A long walk across the hilly campus led to an epiphany.

“I realized there was nothing in Galveston for me,” she said. “This is where I need to be.”

Angelica had a costlier setback. For an elite school, Emory enrolls an unusually large number of low-income students — 22% get Pell grants, compared with 11 percent at Harvard — and gives them unusually large aid packages. But Angelica had failed to complete all the financial aid forms.

Slow to consider Emory, she got a late start on the complex process and was delayed by questions about her father, whom she did not even know how to reach. Though Emory sent weekly e-mails — 17 of them, along with an invitation to a program for minority students — they went to a school account she had not learned to check. From the start, the wires were crossed.

As classes approached, she just got in the car with Mrs. Lady and Fred and drove 14 hours to Atlanta hoping to work things out. But by then Emory had distributed all of its aid. Even with federal loans and grants, Angelica was $40,000 short. The only way to enroll was to borrow from a bank.

Forty thousand dollars was an unfathomable sum. Angelica did not tell Mrs. Lady, to protect her from the worry. She needed a co-signer, and the only person she could ask was Fred. That would bind her future to her past, but she feared that if she tried to defer, she might not have a future — she might never make it back.

“I was like, ‘I don’t care what kind of debt it puts me in — I’ve got to get this done,”‘ she said.

Fred answered her request with his. They got engaged.

A few weeks later, Hurricane Ike hit Galveston, with Katrina-like consequences. About a sixth of the population never returned. Mrs. Lady lost her apartment and much of what she owned. Fred, consumed with rebuilding the store, reduced the modest sums he had promised to send Angelica.

Social life was awkward. She often felt she was the only one on campus without a credit card. Her roommate moved out, with no explanation. But one element of college appealed to Angelica and Melissa alike: the classes. Other debt-ridden students might wonder why the road to middle-class life passed through anthropology exams and lectures on art history.

But Melissa was happy to ponder tribal life in Papua New Guinea and Angelica stepped off the 18-hour bus ride home and let slip an appreciative word about German film.

“My family said ‘O.K., now you go to some big fancy school,’ ” she said.

With A’s, B’s, C’s and D’s, her report card looked like alphabet soup. “I was ready for Galveston College — I wasn’t ready for Emory,” Angelica said. But she salvaged a 2.6 GPA and went home for the summer happy.

“I thought the hard part was over,” she said.

At the end of the summer, Angelica and Melissa marked their ascent as college women with the perfect road trip. Melissa had decided to become a speech therapist. Angelica would practice child psychology. Somewhere between the rainbow in Louisiana and the blues bar in Orlando, they talked of launching a practice to help poor children. Fortune smiled all week.

“We were where we should be and we had the world at our feet,” Melissa said.

Melissa

She returned to a campus that was starting to feel like home. She had a roommate she liked and a job she loved, as a clerk in a Disney store. But despite the feeling of deep change — or perhaps because of it — she got back together with her high-school boyfriend. “That was one of the stupidest things I’ve ever done,” she said.

In the middle of Melissa’s sophomore year they became engaged. He moved near the campus to live with her, and Melissa charged most of their expenses on her credit cards. He was enrolling in the Job Corps program, and they agreed they would pay down the bills together after he became an electrician.

Melissa hit an academic pothole — a C in a communications course, which kept her out of the competitive speech therapy program. But she decided to aim for graduate-school training, and her other grades soared, placing her on the dean’s list both semesters her junior year. When her mother made a rare campus visit, Melissa hurried to show her the prominent display on the student center wall.

“That was one of the proudest moments of my life,” Melissa said.

Just before her senior year, Melissa planned a trip to celebrate her 21st birthday. Preparing to leave, she discovered her money was missing. Only one person had her bank code. After finishing Job Corps, her boyfriend was jobless once again and acting odd — as if he were using drugs.

No one but Melissa was surprised. Although she returned the engagement ring, she could not return the $4,000 in credit card debt he had promised to help pay. With her finances and emotions in disarray, she started her senior year so depressed she hung up black curtains so she could sleep all day. She skipped class, doubled her work hours, and failed nearly every course.

“I started partying, and I was working all the time because I had this debt,” she said.

If the speed of her decline stands out, so does her lack of a safety net. It is easy to imagine a more affluent family stepping in with money or other support. Miss G. sent her the names of some campus therapists but Melissa did not call. She waited for an internal bungee cord to break the fall. She came within one F of losing her financial aid, then aced last summer’s classes.

She is now a fifth-year senior, on track to graduate next summer, and her new boyfriend is studying to be an engineer. At home, she had a way of finding the wrong people. “I haven’t found any wrong people out here,” she said.

With more than $44,000 in loans, she can expect to pay $250 a month for the next quarter century, on top of whatever she may borrow for graduate school. She hides the notices in a drawer and harbors no regrets. “Education — you can’t put a price on it,” she said. “No matter what happens in your life, they can’t take your education away.”

Bianca

Bianca missed the Florida road trip, though no one remembers why. She liked to talk of getting away, until it came time to go.

Among the perils that low-income students face is “under-matching,” choosing a close or familiar school instead of the best they can attend.

“The more selective the institution is, the more likely kids are to graduate,” said Mr. Chingos, the Brookings researcher. “There are higher expectations, more resources and more stigma to dropping out.”

Bianca was under-matched. She was living at home, dating her high-school boyfriend and taking classes at Galveston College. A semester on the honor roll only kept her from sensing the drift away from her plan to transfer to a four-year school.

Her grandfather’s cancer, and chemotherapy treatments, offered more reasons to stay. She had lived with him since her father had died. Leaving felt like betrayal. “I thought it was more important to be at home than to be selfish and be at school,” she said.

The idea that education can be “selfish” — a belief largely alien among the upper-middle class — is one poor students often confront, even if it remains unspoken. “Family is such a priority, especially when you’re a Hispanic female,” Miss G. said. “You’re afraid you’re going to hear, ‘You’re leaving us, you think you’re better.’ ”

In her second year of community college, Bianca was admitted to a state university a hundred miles away. Miss. G. and her mother urged her to go. Her mind raced with reasons to wait.

“I didn’t want to leave and have my grandfather die.”

“I had to help my mom.”

“I think I got burned out.”

Bianca stayed in Galveston, finished her associate degree, and now works as a beach-bar cashier and a spa receptionist. She still plans to get a bachelor’s degree, someday.

“I don’t think I was lazy. I think I was scared,” she said. In the meantime, “life happened.”

Angelica

After the financial aid disaster in her first year, Angelica met the next deadline and returned as a sophomore with significant support. Still, she sensed she was on shakier ground than other low-income students and never understood why. The answer is buried in the aid archives: Emory repeatedly inflated her family’s income without telling her.

Angelica reported that her mother made $35,000 a year and paid about half of that in rent. With her housing costs so high, Emory assumed the family had extra money and assigned Mrs. Lady an income of $51,000. But Mrs. Lady was not hiding money. She was paying inflated post-hurricane rent with the help of Federal disaster aid, a detail Angelica had inadvertently omitted.

By counting money the family did not have, Emory not only increased the amount it expected Angelica to pay in addition to her financial aid. It also disqualified her from most of the school’s touted program of debt relief.

Under the Emory Advantage plan the school replaces loans with grants for families making less than $50,000 a year. Moving Angelica just over the threshold placed her in a less-generous tier and forced her to borrow an additional $15,000 before she could qualify. The mistake will add years to her repayment plan.

She discovered what had happened only recently, after allowing a reporter to review her file with Emory officials. “There was no other income coming in,” she said. “I can’t believe that they would do that and not say anything to us. That seems completely unfair.”

Emory officials said they had to rely on the information Angelica provided and that they will not make retroactive adjustments.

“The method that was used in her case was very standard methodology,” said J. Lynn Zimmerman, the senior vice provost who oversees financial aid. “I think that what’s unusual is that she really didn’t advocate for herself or ask for any kind of review. If she or her mother would have provided any additional information it would have triggered a conversation.”

Unaware she had any basis for complaint, Angelica found a campus job she loved, repairing library books. It was solitary and artistic work, and it attracted a small sisterhood of women who appreciated her grandmother’s tamales and her streak of purple hair. One day her boss, Julie Newton, overheard her excitedly talking about Hegel.

“She was an extremely intelligent woman and an unusual one,” she said.

Yet even as Angelica’s work hours grew, so did the rigor of her coursework. Meetings with faculty advisers were optional and Angelica did not consult hers. When it came time to declare a major, she had a B-plus average in the humanities and D’s in psychology. She chose psychology.

By the end of her second year, she felt exhausted and had grades to show it. Her long-distance love life was exhausted, too, and she briefly broke up with Fred. She went home for the summer to work at Target and dragged herself back to a troubled junior year.

She moved off campus to save money but found herself spending even more. “I would sit and debate whether I could buy a head of lettuce,” she said. Fred was no longer helping, and her relationship with him snapped. That he had backed a $40,000 loan only made the split harder. They had been together since she was 15.

“It was days of back and forth, crying,” she said.

This was no time to tackle Psychology 200, a course on research methods required of majors. The devotion of the professor, Nancy Bliwise, had earned her a campus teaching award. But her exacting standards and brusque manner left student opinion divided.

“Quite possibly the greatest professor at Emory,” wrote one contributor to the Web site Rate My Professor. Others found her “condescending,” “horribly disrespectful,” and “plain out mean.”

Midway through the semester, Angelica just stopped coming to class. Professor Bliwise called her in and found her despondent. “She was emotionless and that scared me,” the professor said in an interview. Angelica said she had to work too much to keep up, but could not drop the course without losing her full-time status and her aid. So she planned to take an “F.”

Alarmed, Professor Bliwise raised other options, then asked — empathetic, the professor thought — if Angelica had considered cheaper schools. She herself had worked her way through Cleveland State then earned a doctorate at the University of Chicago.

Angelica sat stone-faced, burning. All she could hear was someone saying she was too poor for Emory. “It was pretty clear if I couldn’t afford to be there, I shouldn’t waste her time,” she said.

That was the beginning of the end. Angelica failed that course and three others her junior year, as her upside-down circumstances left her cheating a $200,000 education for a $9-an-hour job. She was not one to make it easy, but Emory never found a way to intervene. “Is there a way to reach out to her?” Professor Bliwise asked in an e-mail to the dean’s office.

The dean’s office left messages. Angelica acknowledged that she was slow to respond but said she got no answer when she did. The school did an electronic key card check to verify whether she was still on campus. More professors expressed concerns. “Personal issues are interfering with her ability to concentrate,” one warned. Angelica contacted campus counseling but said all the appointments had been taken.

Emory can hardly be cast as indifferent to low-income students. It spends $94 million a year of its own money on financial aid and graduates its poorest students nearly as often as the rest. Its failure to reach Angelica may have come up short, but that is partly a measure of the sheer distance it was trying to bridge.

When Angelica finally found a way to express herself, she did so silently. Her final piece for a sculpture class was a papier-mâché baby, sprouting needles like a porcupine. No one could mistake the statement of her own vulnerability.

“It was a shocking piece,” said her professor, Linda Armstrong. “She had a way of using art to tap into her deepest emotions and feelings. I don’t think she understood how good she was.”

Angelica spent the next summer waiting for an expulsion letter that never came. Another missed deadline cost her several thousand dollars in aid in her senior year, and Emory mistakenly concluded that Mrs. Lady had made a $70,000 down payment on a house. (In describing the complicated transaction with a nonprofit group, Angelica failed to note that most of the money came from a program for first-time home buyers.)

Emory officials said the mistake did not affect her aid, but the difference between the school’s costs and her package of loans and grants swelled to $12,000 — a sum she could not possibly meet.

She skipped more classes and worked longer hours.

“I felt, I’m going to be on academic probation anyway, I might as well work and pay my rent until they suspend me.”

Finally, Emory did — forcing her to take a semester away with the option of reapplying.

The tale could be cast as an elite school failing a needy student or a student unwilling to be helped, but neither explanation does justice to an issue as complicated as higher education and class.

“It’s a little of both,” said Joanne Brzinski, a dean who oversees academic advising. “We reached out to her, but she didn’t respond. I always fault myself when students don’t do as well as we’d like them to.”

“It’s such a sad story,” she added. “She had the ability.”

Ms. Newton, Angelica’s former supervisor at the library, wondered if her conflict went beyond money, to a fear of the very success she sought. “I wouldn’t go as far as to say she was committing self-sabotage, but the thought crossed my mind,” she said. “For someone so connected to family and Grandma and the tamales, I wondered if she feared that graduating would alienate her.”

A long bridge crosses the bay to Galveston Island. Angelica returned a year ago the way she had left, with Mrs. Lady and Fred at her side. She is $61,000 in debt, seeing Fred again, and making $8.50 an hour at his family’s furniture store. No one can tell whether she is settling down or gathering strength for another escape.

A dinner with Melissa and Bianca a while back offered the comfort of friends who demand no explanations. Melissa suggested they all enroll at Texas State. But Bianca does not know what to study, and Angelica said that she had gone too far to surrender all hopes of an Emory degree.

“I could have done some things better, and Emory could have done some things better,” she said. “But I don’t blame either one of us. Everyone knows life is unfair — being low-income puts you at a disadvantage. I just didn’t understand the extent of the obstacles I was going to have to overcome.”

Kitty Bennett contributed research.


adonis49

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December 2021
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