Economic impact of tax-based federal student aid

Tax-based federal student aid--the Hope Tax Credit, Lifetime Learning Tax Credit and Tuition Deduction--marks a new paradigm for federal aid by offering tax incentives for postsecondary enrollment aimed at the middle-class. In this dissertation, I examine how the programs impact postsecondary enrollment, how colleges and universities respond to the programs, and I explore how taxpayers who are limited to one program select among the three options. In the first Chapter, I exploit policy-induced variation in tax-based aid eligibility to estimate its casual effect on college enrollment. I find that tax-based aid increases full-time enrollment in the first two years of college for 18-19 year-olds by 2.2 percentage points (6.7 percent). Yet, the enrollment increase comes at a steep price. Between 7 and 13 inframarginal youths are subsidized for each marginal youth that is induced to enroll in college. In the second chapter, I explore how colleges and universities respond to tax- based federal student aid. I demonstrate the importance of benefit incidence analysis by showing that the intended cost reductions of tax-based federal student aid are substantially offset by institutional price increases. Contrary to the goal of policymakers, I find that tax-based aid crowds out institutional aid dollar-for-dollar. Unfortunately, it is not clear how institutions utilize these captured resources, so that the ultimate incidence of the programs is uncertain. In the third chapter, I show that roughly one in five taxpayers who are eligible for more than one tax-based federal student aid program, and who are limited to one program per student per year, select a program that offers a smaller reduction in combined federal and state tax liability. I offer three explanations for this pattern of tax-based aid selection, including salience in program value, tax evasion and inertia in program selection. Collectively, the results from these chapters suggest that the benefits of tax- based federal student aid have come at a heavy price. The modest postsecondary enrollment increase for middle-income youths is achieved via a substantial transfer to colleges and universities, while complexity in program rules introduces substantial frictions for taxpayer