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Optimal Need-Based Financial Aid

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  • Mark Colas
  • Sebastian Findeisen
  • Dominik Sachs

Abstract

We study the optimal design of student financial aid as a function of parental income. We derive optimal financial aid formulas in a general model. We estimate a model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. We quantify optimal financial aid in the estimated model and find it is strongly declining in parental income even without distributional concerns. Equity and efficiency go hand in hand.

Suggested Citation

  • Mark Colas & Sebastian Findeisen & Dominik Sachs, 2021. "Optimal Need-Based Financial Aid," Journal of Political Economy, University of Chicago Press, vol. 129(2), pages 492-533.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/711952
    DOI: 10.1086/711952
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Zhifeng Cai & Jonathan Heathcote, 2022. "College Tuition and Income Inequality," American Economic Review, American Economic Association, vol. 112(1), pages 81-121, January.
    2. 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.
    3. Bas Jacobs & Uwe Thuemmel, 2023. "Optimal linear income taxes and education subsidies under skill-biased technical change," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(6), pages 1529-1575, December.
    4. Mark Colas & Dominik Sachs, 2020. "The Indirect Fiscal Benefits of Low-Skilled Immigration," Opportunity and Inclusive Growth Institute Working Papers 38, Federal Reserve Bank of Minneapolis.
    5. Koen Declercq & Erwin Ooghe, 2021. "Should Higher Education Be Subsidized More?," CESifo Working Paper Series 9377, CESifo.
    6. Winfried Koeniger & Julien Prat, 2018. "Human Capital and Optimal Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 1-26, January.
    7. Manudeep Bhuller & Philipp Eisenhauer & Moritz Mendel, 2022. "Sequential Choices, Option Values, and the Returns to Education," Papers 2205.05444, arXiv.org, revised Jul 2024.
    8. Youngmin Park, 2018. "Inequality in Parental Transfers, Borrowing Constraints, and Optimal Higher Education Subsidies," 2018 Meeting Papers 623, Society for Economic Dynamics.
    9. Aronsson, Thomas & Bastani, Spencer & Tayibov, Khayyam, 2021. "Social Exclusion and Optimal Redistribution," Umeå Economic Studies 1004, Umeå University, Department of Economics.
    10. Arenas, Andreu & Malgouyres, Clément, 2018. "Countercyclical school attainment and intergenerational mobility," Labour Economics, Elsevier, vol. 53(C), pages 97-111.
    11. Mookherjee, Dilip & Napel, Stefan, 2021. "Welfare rationales for conditionality of cash transfers," Journal of Development Economics, Elsevier, vol. 151(C).
    12. Garrett Anstreicher, 2024. "Family Resources and Human Capital in Economic Downturns," Working Papers 24-15, Center for Economic Studies, U.S. Census Bureau.
    13. Spencer Bastani & Sebastian Koehne, 2022. "How Should Consumption Be Taxed?," CESifo Working Paper Series 10038, CESifo.
    14. Mark Colas & Dominik Sachs, 2020. "The Indirect Fiscal Benefits of Low-Skilled Immigration," CESifo Working Paper Series 8604, CESifo.
    15. Alessandra Casarico & Elena Del Rey & Jose I. Silva, 2023. "Child care costs, household liquidity constraints, and gender inequality," Journal of Population Economics, Springer;European Society for Population Economics, vol. 36(3), pages 1461-1487, July.

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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

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