College financial aid rules and the allocation of savings

Jessica Wolpaw Reyes

Education Economics, 2008, vol. 16, issue 2, pages 167-189

Abstract: The college financial aid system imposes an implicit asset tax that is prevalent and substantial. Facing this tax, rational families should reduce their total assets and shelter assets in protected categories. I find that the tax induces a 7-12% reduction in total assets, a result in line with the literature. Furthermore, I find evidence that families reallocate assets into sheltered retirement accounts. The paper provides further evidence that the financial aid tax reduces asset accumulation and prompts a reconsideration of the simple 'higher tax, lower assets' story. It provides the first evidence that families may be engaging in a rational reallocation of their asset portfolio.

Keywords: college financial aid; tax; savings behavior (search for similar items in EconPapers)
Date: 2008

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