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Title: Optimal Need-Based Financial Aid

Author(s): Mark Colas, Sebastian Findeisen and Dominik Sachs

Publication Date: September 2018

Keyword(s): College Subsidies, Financial Aid, inequality and optimal taxation

Programme Area(s): Public Economics

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.

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Bibliographic Reference

Colas, M, Findeisen, S and Sachs, D. 2018. 'Optimal Need-Based Financial Aid'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13196