Optimal Need-Based Financial Aid

78 Pages Posted: 21 Feb 2019

See all articles by Mark Colas

Mark Colas

University of Oregon

Sebastian Findeisen

University of Zurich; IZA Institute of Labor Economics

Dominik Sachs

Ludwig Maximilian University of Munich

Date Written: 2018


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: H210, H230, I220, I240, I280

Suggested Citation

Colas, Mark and Findeisen, Sebastian and Sachs, Dominik, Optimal Need-Based Financial Aid (2018). CESifo Working Paper No. 7271. Available at SSRN: https://ssrn.com/abstract=3338596

Mark Colas (Contact Author)

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Sebastian Findeisen

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072

Dominik Sachs

Ludwig Maximilian University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539

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