Government-provided tuition subsidies "crowd out" parental contributions to their children's college educations, although the effect is much more pronounced for students from wealthier families than for those from lower-income backgrounds, a study published Monday by the National Bureau of Economic Research asserts. The paper, written by two economists at the University of British Columbia and scholars from Yale and New York University (abstract available here), applies economic modeling to test how various changes in federal financial aid policy would play out if they were put in place. Among other things, the researchers estimate that "every additional dollar of government grants crowds out 20-30 cents of parental [intergenerational transfers of wealth] on average," but that "while for wealthy parents with high ability children public subsidies crowd out private transfers, poorer parents tend to reinforce government subsidies since the expected return to their transfers increases when college becomes more attainable, particularly for those with high ability children."
The researchers also say their data show that the federal financial aid programs contribute meaningfully to the public welfare. "Indeed, we estimate that the combined system of federal aid to college students (grants and loans) is worth 2.5 percent of GDP," they write.
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