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College financial aid rules and the allocation of savings

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  • Jessica Wolpaw Reyes

Abstract

The college financial aid system imposes an implicit asset tax that is prevalent and substantial. Facing this tax, rational families should reduce their total assets and shelter assets in protected categories. I find that the tax induces a 7-12% reduction in total assets, a result in line with the literature. Furthermore, I find evidence that families reallocate assets into sheltered retirement accounts. The paper provides further evidence that the financial aid tax reduces asset accumulation and prompts a reconsideration of the simple 'higher tax, lower assets' story. It provides the first evidence that families may be engaging in a rational reallocation of their asset portfolio.

Suggested Citation

  • Jessica Wolpaw Reyes, 2008. "College financial aid rules and the allocation of savings," Education Economics, Taylor & Francis Journals, vol. 16(2), pages 167-189.
    • Handle: RePEc:taf:edecon:v:16:y:2008:i:2:p:167-189
    DOI: 10.1080/09645290701383605
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    References listed on IDEAS

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    1. Dynarski, Susan M. & Scott–Clayton, Judith E., 2006. "The Cost of Complexity in Federal Student Aid: Lessons From Optimal Tax Theory and Behavioral Economics," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(2), pages 319-356, June.
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    Cited by:

    1. Kristy Fan & Tyler J. Fisher & Andrew A. Samwick, 2021. "The Insurance Value of Financial Aid," NBER Working Papers 28669, National Bureau of Economic Research, Inc.
    2. Rajeev Darolia, 2015. "Income-Tested College Financial Aid and Labor Disincentives," Upjohn Working Papers 15-248, W.E. Upjohn Institute for Employment Research.
    3. Catherine A. Manly & Ryan S. Wells & Genia M. Bettencourt, 2017. "Financial Planning for College: Parental Preparation and Capital Conversion," Journal of Family and Economic Issues, Springer, vol. 38(3), pages 421-438, September.

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