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

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.