Andrew W. Dick, Aaron S. Edlin, Eric R. Emch
June 13, 2003
When parents save money for their children's college education, a portion of their savings is later taken away in the form of reduced eligibility for college financial aid. We estimate the long-run impact of this implicit asset tax by estimating family preferences over life-cycle consumption, savings and college choices and then simulating family choices over these variables under various hypothetical financial aid systems with different asset treatments. Our simulations suggest that the implicit taxes in the current college financial aid system may in the long run reduce economy-wide asset holdings in the U.S. by $186 billion versus aid systems with no implicit asset taxes. This figure is less than 1% of total U.S. wealth during the years of our data. It, however, reflects a 10.2% reduction is asset holdings for affected families.