The Cost of Complexity in Federal Student Aid: Lessons from Optimal Tax Theory and Behavioral Economics

59 Pages Posted: 25 May 2006 Last revised: 20 Mar 2010

See all articles by Susan M. Dynarski

Susan M. Dynarski

National Bureau of Economic Research (NBER); University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan at Ann Arbor - School of Education

Judith Scott Clayton

Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2006

Abstract

The federal system for distributing student financial aid rivals the tax code in its complexity. Both have been a source of frustration and a focus of reform efforts for decades, yet the complexity of the student aid system has received comparatively little attention from economists. We describe the complexity of the aid system, and apply lessons from optimal tax theory and behavioral economics to show that complexity is a serious obstacle to both efficiency and equity in the distribution of student aid. We show that complexity disproportionately burdens those with the least ability to pay and undermines redistributive goals. We use detailed data from federal student aid applications to show that a radically simplified aid process can reproduce the current distribution of aid using a fraction of the information now collected.

Suggested Citation

Dynarski, Susan M. and Scott-Clayton, Judith E., The Cost of Complexity in Federal Student Aid: Lessons from Optimal Tax Theory and Behavioral Economics (May 2006). NBER Working Paper No. w12227. Available at SSRN: https://ssrn.com/abstract=902579

Susan M. Dynarski (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

735 South State Street, Weill Hall
Ann Arbor, MI 48109
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University of Michigan at Ann Arbor - School of Education ( email )

610 East University Avenue
Ann Arbor, MI 48109-1259
United States

Judith E. Scott-Clayton

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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