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The Effect of Tax-Based Federal Student Aid on College Enrollment

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  • Turner, Nicholas
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    Abstract

    The Hope Tax Credit, the Lifetime Learning Tax Credit and the Tuition and Fees Deduction are the first forms of federal student aid administered through the tax code. In this paper, which is the first to explore the effects of the three programs, I use policy-induced variation in the value of these programs to estimate their causal effect on college enrollment. The results indicate that tax-based aid programs have a positive enrollment effect for the first two years of college. Using detailed family income data to construct direct measures of credit constraints, I find no evidence of heterogeneous effects of the subsidy for individuals that are likely to be constrained, suggesting that credit constraints are non-binding. I find further support for this interpretation from results that explore heterogeneous effects by income, from the comparison of the enrollment effect of tax-based aid to other forms of student aid, and from the similarity of enrollment responses for the first and second years of college.

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    Bibliographic Info

    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt6758069g.

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    Date of creation: 18 Mar 2010
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    Handle: RePEc:cdl:ucsdec:qt6758069g

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    Keywords: tax-based student aid; credit constraints; postsecondary enrollment; Social and Behavioral Sciences;

    References

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    1. Dynarski, Susan, 2000. "Hope for Whom? Financial Aid for the Middle Class and Its Impact on College Attendance," National Tax Journal, National Tax Association, vol. 53(n. 3), pages 629-62, September.
    2. Thomas J. Kane, 1995. "Rising Public College Tuition and College Entry: How Well Do Public Subsidies Promote Access to College?," NBER Working Papers 5164, National Bureau of Economic Research, Inc.
    3. Kane, Thomas J., 1998. "Savings Incentives for Higher Education," National Tax Journal, National Tax Association, vol. 51(n. 3), pages 609-20, September.
    4. Tullio Jappelli & Jörn-Steffen Pischke & Nicholas S. Souleles, 1998. "Testing For Liquidity Constraints In Euler Equations With Complementary Data Sources," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 251-262, May.
    5. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(2), pages 305-46, April.
    6. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
    7. Jacoby, Hanan G, 1994. "Borrowing Constraints and Progress through School: Evidence from Peru," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 151-60, February.
    8. Davis, Albert J., 2002. "Choice Complexity in Tax Benefits for Higher Education," National Tax Journal, National Tax Association, vol. 55(3), pages 509-38, September.
    9. Susan M. Dynarski & Judith E. Scott-Clayton, 2008. "Complexity and Targeting in Federal Student Aid: A Quantitative Analysis," NBER Chapters, in: Tax Policy and the Economy, Volume 22, pages 109-150 National Bureau of Economic Research, Inc.
    10. Susan M. Dynarski, 2003. "Does Aid Matter? Measuring the Effect of Student Aid on College Attendance and Completion," American Economic Review, American Economic Association, vol. 93(1), pages 279-288, March.
    11. Helena Skyt Nielsen & Torben S�rensen & Christopher Taber, 2010. "Estimating the Effect of Student Aid on College Enrollment: Evidence from a Government Grant Policy Reform," American Economic Journal: Economic Policy, American Economic Association, vol. 2(2), pages 185-215, May.
    12. Edward C. Norton & Hua Wang & Chunrong Ai, 2004. "Computing interaction effects and standard errors in logit and probit models," Stata Journal, StataCorp LP, StataCorp LP, vol. 4(2), pages 154-167, June.
    13. repec:fth:pennfi:69 is not listed on IDEAS
    14. Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(1), pages 132-182, February.
    15. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    16. Thomas J. Kane, 2003. "A Quasi-Experimental Estimate of the Impact of Financial Aid on College-Going," NBER Working Papers 9703, National Bureau of Economic Research, Inc.
    17. Pedro Carneiro & James J. Heckman, 2002. "The Evidence on Credit Constraints in Post--secondary Schooling," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(482), pages 705-734, October.
    18. Turner, Nick, 2010. "Who Benefits From Student Aid? The Economic Incidence of Tax-Based Federal Student Aid," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt7g0888mj, Department of Economics, UC San Diego.
    19. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
    20. Christopher Cornwell & David B. Mustard & Deepa J. Sridhar, 2006. "The Enrollment Effects of Merit-Based Financial Aid: Evidence from Georgia's HOPE Program," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 24(4), pages 761-786, October.
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    Cited by:
    1. Turner, Nick, 2010. "Why Don’t Taxpayers Maximize their Tax-Based Student Aid? Salience and Inertial in Program Selection," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt0pb3f440, Department of Economics, UC San Diego.

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