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The Savings Impact of College Financial Aid

Author

Listed:
  • Dick Andrew W.

    (University of Rochester School of Medicine)

  • Edlin Aaron S.

    (UC Berkeley)

  • Emch Eric R.

    (U.S. Dept. of Justice Antitrust Division)

Abstract

When parents save money for their children's college education, a portion of their savings is later taken away in the form of reduced eligibility for college financial aid. We estimate the long-run impact of this implicit asset tax by estimating family preferences over life-cycle consumption, savings and college choices and then simulating family choices over these variables under various hypothetical financial aid systems with different asset treatments. Our simulations suggest that the implicit taxes in the current college financial aid system may in the long run reduce economy-wide asset holdings in the U.S. by $186 billion versus aid systems with no implicit asset taxes. This figure is less than 1% of total U.S. wealth during the years of our data. It, however, reflects a 10.2% reduction is asset holdings for affected families.

Suggested Citation

  • Dick Andrew W. & Edlin Aaron S. & Emch Eric R., 2003. "The Savings Impact of College Financial Aid," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 2(1), pages 1-31, June.
    • Handle: RePEc:bpj:bejeap:v:contributions.2:y:2003:i:1:n:8
    DOI: 10.2202/1538-0645.1044
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    Cited by:

    1. Lance J. Lochner & Alexander Monge-Naranjo, 2011. "The Nature of Credit Constraints and Human Capital," American Economic Review, American Economic Association, vol. 101(6), pages 2487-2529, October.
    2. Philippe Belley & Lance Lochner, 2007. "The Changing Role of Family Income and Ability in Determining Educational Achievement," Journal of Human Capital, University of Chicago Press, vol. 1(1), pages 37-89.
    3. 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.

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