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The impact of grants, tax credit and education savings account on parental contributions to college expenses and the educational attainment of children

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  • Morris, Michael D.

    (University of New Orleans)

Abstract

This paper presents a multi-period, dynamic programming model of household choices on savings, consumption, having children and helping to fund children's education. Data from the National Longitudinal Survey young women cohort are used to estimate the parameters of the model. The full structural model is estimated using a simulated maximum likelihood procedure utilizing the dynamic programming model solution to create simulated data samples from which nonparametric kernel estimators are used to construct the densities in the likelihood. The estimated model is able to match the general trends in the NLS data, particularly as related to the interaction between children, savings and spending on education. The life-cycle paths of these choices suggest that parents do save to help make sizeable transfers to their children, and that making such choices endogenous is important. Furthermore, the parameter estimates indicate that the amount that parents choose to contribute to a child’s education has a strong impact on the probability that a child attains a college degree, as does the level of education of the parents. Using the estimated model, policy experiments are performed to look at the impact of additional government grants for college education, tax credits for college spending and the creation of tax-free education savings accounts on parental savings, contributions toward education, and the education attainment of children. While all of the policies increase net contributions to children and increase the probability that a child attains a college degree, the grants and education savings accounts are found to be the most effective. In addition, both policies are actually found to have a greater impact on children with less educated parents.

Suggested Citation

  • Morris, Michael D., 2003. "The impact of grants, tax credit and education savings account on parental contributions to college expenses and the educational attainment of children," Working Papers 2003-07, University of New Orleans, Department of Economics and Finance.
  • Handle: RePEc:uno:wpaper:2003-07
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    More about this item

    Keywords

    Grants; Tax credits; Education savings accounts; College expenses;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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