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The Insurance Value of Financial Aid

Author

Listed:
  • Kristy Fan

    (Google, LLC Cambridge, MA 02142)

  • Tyler J. Fisher

    (Counslr Inc Roslyn, NY 11576)

  • Andrew A. Samwick

    (Department of Economics Dartmouth College Hanover, NH 03755; NBER)

Abstract

Prior studies of means-testing in college financial aid formulas have analyzed the disincentives to save attributable to the inclusion of assets in the formulas. Such disincentives are only half of a standard incentives–insurance trade-off. When income is uncertain, a financial aid formula that conditions aid on assets and income provides insurance against that uncertainty. Using a stochastic, life-cycle model of consumption and labor supply, we show that the insurance value of financial aid is substantial. Compensating families for the loss of the income- and asset-contingent elements of the current formula requires additional aid sufficient to reduce the net cost of attendance by 11 to 22 percent. This compensating variation is net of the negative welfare consequences of the disincentives to work and save inherent in the means-testing of financial aid. Replacing just the financial aid tax on assets with a lump sum also reduces welfare.

Suggested Citation

  • Kristy Fan & Tyler J. Fisher & Andrew A. Samwick, 2025. "The Insurance Value of Financial Aid," Education Finance and Policy, MIT Press, vol. 20(4), pages 674-703, Fall.
    • Handle: RePEc:tpr:edfpol:v:20:y:2025:i:4:p:674-703
    DOI: 10.1162/edfp_a_00442
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    Cited by:

    1. is not listed on IDEAS
    2. Matsuda, Kazushige & Mazur, Karol, 2022. "College education and income contingent loans in equilibrium," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 100-117.

    More about this item

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G52 - Financial Economics - - Household Finance - - - Insurance
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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