The Effects of College Financial Aid on Household Savings and Portfolios - Evidence from the 1992 Amendments to the Higher Education Act
Posted: 15 Aug 2011
Date Written: August 14, 2011
Abstract
In the U.S., need-based college financial aid imposes an implicit financial-aid tax on asset accumulation, but some assets are not taxed. This paper examines the effects of the implicit tax on a family's level of total assets and portfolio composition. We exploit the tax-rate changes on assets owing to the 1992 Amendments to the Higher Education Act (HEA92).
Using the Panel Study of Income Dynamics, we find that the HEA92 did not significantly alter the level of total assets. However, families shifted assets into home equity and other non-taxable assets and sheltered their taxable financial assets.
Furthermore, we find that families who may have not been aware of the new rules did not seem to respond to the tax changes. Finally, the timing of portfolio shifting is sensitive to the degree of imminence of the tax. More specifically, families did not adjust their portfolios until their children reached senior-high-school ages.
Keywords: College financial aid, Implicit taxes, Portfolio choice, Savings, Educational finance
JEL Classification: E21, G11, H29, H52, I28
Suggested Citation: Suggested Citation