Our website will undergo scheduled maintenance on the morning of Thursday, August 11, 2022. During this time, connection to our website and some of its features may be unavailable. Thank you for your patience and we apologize for any inconvenience.

Working Paper

Optimal Need-Based Financial Aid


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. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal financial aid is strongly declining in parental income even without distributional concerns. Equity and efficiency go hand in hand.

Keywords: Financial aid; College subsidies; Optimal taxation; Inequality;

JEL Classification: H21; H23; I22; I24; I28;

https://doi.org/10.21034/iwp.14

Access Documents

File(s): File format is application/pdf https://www.minneapolisfed.org/institute/working-papers-institute/iwp14.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Opportunity and Inclusive Growth Institute Working Papers

Publication Date: 2018-09-07

Number: 14

Pages: 77 pages