Optimal Need-Based Financial Aid

Abstract

We study the optimal design of student financial aid as a function of parental income. We derive optimal financial aid formulas in a general model. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal financial aid is strongly declining in parental income even without distributional concerns. Equity and efficiency go hand in hand.

Optimal linear income taxes and education subsidies under skill-biased technical change

“…Since investment in education generates infra-marginal rents for all but the marginally skilled individual, the government likes to tax these rents and redistribute income from high-skilled to lowskilled workers. This finding is in line with Findeisen and Sachs (2016) and Colas et al (2021), who also analyze optimal education policies with discrete education choices. 23 Furthermore, lower net taxes (or even net subsidies) on education generate general-equilibrium effects on wages that are captured by 𝜌(g L − gH )𝜀 GE .…”

“…We find that education subsidies are employed to alleviate tax distortions on education, but do not fully eliminate all tax-induced distortions on education, as in Bovenberg and Jacobs (2005). The government likes to tax away infra-marginal rents in education to redistribute income from high-skilled to low-skilled workers-ceteris paribus-see also Findeisen and Sachs (2016) and Colas et al (2021).…”

“…Jacobs and Yang (2016) demonstrate that tighter credit constraints typically raise optimal taxes and education subsidies (lower net taxes on education), thereby strengthening the main findings of this paper. Related is Colas et al (2021), who analyze the optimal allocation of education subsidies across the income distribution (and other dimensions). They find that education subsidies should optimally be targeted toward students from lower socioeconomic backgrounds, because credit constraints, externalities or information frictions are more severe for them.…”

The Insurance Value of Financial Aid

“…Colas, Findeisen and Sachs (2021) also show that optimal financial aid is declining in parental income even without a redistributive motive. Unlike the model here, which focuses on the insurance value of financial aid to the parents, they focus on how the price-sensitivity and the lifetime (positive) fiscal externality of college-going decline with income.…”

Sequential Choices, Option Values, and the Returns to Education

“…Our paper further relates to the literature that emphasizes individual learning about their own ability and preferences as they progress in their schooling career (Arcidiacono et al, 2016;Stinebrickner and Stinebrickner, 2014). We complement the literature that focuses on the optimal design of school aid policies in a life-cycle context (Colas et al, 2021;Stantcheva, 2017).…”