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Is College Financial Aid Equitable and Efficient?

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  • Aaron S. Edlin

Abstract

Two families with identical earnings paths pay dramatically different amounts for college if one saves more than the other. Because saving leads to receiving less financial aid, a family's return to saving is substantially below the social return. This may lead to families making inefficient intertemporal choices and correspondingly to an inefficient loss of capital formation. This paper first explores the size of the implicit tax on savings, pointing out its potential effects, and its accompanying problems of inefficiency and unfairness. To cure these ills, I will argue that financial aid for dependent students should be based upon the best available measure of parents' permanent income from long streams of wage data. This would require Congress to change the Congressional Methodology, the federal formula for determining a family's financial need.

Suggested Citation

  • Aaron S. Edlin, 1993. "Is College Financial Aid Equitable and Efficient?," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 143-158, Spring.
  • Handle: RePEc:aea:jecper:v:7:y:1993:i:2:p:143-58 Note: DOI: 10.1257/jep.7.2.143
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    References listed on IDEAS

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    1. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, pages 533-544.
    2. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    3. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    4. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters,in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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