Who Benefits from the Education Saving Incentives? Income, Educational Expectations, and the Value of the 529 and Coverdell

This paper examines the incentives created by the 529 and Coverdell tax-advantaged savings accounts. I find that the advantages of the 529 and Coverdell rise sharply with income, for three reasons. First, those with the highest marginal tax rates benefit the most from sheltering income, gaining most in both absolute and relative terms. Second, the tax penalties that are assessed on families whose children do not use their Coverdell accounts to pay for college hit some families harder than others. Strikingly, those in the top two tax brackets benefit more from non-educational use of a Coverdell than those in the bottom bracket gain from its educational use. Finally, the college financial aid system reduces aid for those families that have any financial assets, including an ESA or 529. Since the highest-income families are unaffected by this aid tax, this further intensifies the positive correlation between income and the advantages of the tax-advantaged college savings accounts.

Tax Policy and Education Policy: Collision or Coordination? A Case Study of the 529 and Coverdell Saving Incentives

529 saving plans and Coverdell Educational Savings Accounts are marketed as attractive vehicles for college savings. The main finding of this paper is that college savings plans can actually harm some families. The joint treatment by the income tax code and financial aid system of college savings creates tax rates that exceed 100 percent for those families on the margin of receiving additional financial aid. Since even families with incomes above $100,000 receive need-based aid, the impact of these very high taxes is quite broad. I find that an aid-marginal family with funds in a Coverdell is worse off than if it did not save at all. Simulations show that$1,000 of pretax income placed in a Coverdell for a newborn and left to accumulate until college will face income and aid taxes that consume all of the principal, all of the earnings and an additional several hundred dollars. This perverse outcome is the product of poor coordination between the income tax code and the financial aid system.

Gains and Gaps: Changing Inequality in U.S. College Entry and Completion

We describe changes over time in inequality in postsecondary education using nearly seventy years of data from the U.S. Census and the 1979 and 1997 National Longitudinal Surveys of Youth. We find growing gaps between children from high- and low-income families in college entry, persistence, and graduation. Rates of college completion increased by only four percentage points for low-income cohorts born around 1980 relative to cohorts born in the early 1960s, but by 18 percentage points for corresponding cohorts who grew up in high-income families. Among men, inequality in educational attainment has increased slightly since the early 1980s. But among women, inequality in educational attainment has risen sharply, driven by increases in the education of the daughters of high-income parents. Sex differences in educational attainment, which were small or nonexistent thirty years ago, are now substantial, with women outpacing men in every demographic group. The female advantage in educational attainment is largest in the top quartile of the income distribution. These sex differences present a formidable challenge to standard explanations for rising inequality in educational attainment.

Does Aid Matter? Measuring the Effect of Student Aid on College Attendance and Completion

Does student aid increase college attendance or simply subsidize costs for infra-marginal students? Settling the question empirically is a challenge, because aid is correlated with many characteristics that influence educational investment decisions. A shift in financial aid policy that affects some youth but not others can provide an identifying source of variation in aid. In 1982, Congress eliminated the Social Security Student Benefit Program, which at its peak provided grants totaling $3.7 billion a year to one out of ten college students. Using the death of a parent as a proxy for Social Security beneficiary status, I find that offering$1,000 ($1998) of grant aid increases educational attainment by about 0.16 years and the probability of attending college by four percentage points. The elasticities of attendance and completed years of college with respect to schooling costs are 0.7 to 0.8. The evidence suggests that aid has a 'threshold effect': a student who has crossed the hurdle of college entry with the assistance of aid is more likely to continue schooling later in life than one who has never attempted college. This is consistent with a model in which there are fixed costs of college entry. Finally, a cost-benefit analysis indicates that the aid program examined by this paper was a cost-effective use of government resources.

The Cost of Complexity in Federal Student Aid: Lessons from Optimal Tax Theory and Behavioral Economics

The federal system for distributing student financial aid rivals the tax code in its complexity. Both have been a source of frustration and a focus of reform efforts for decades, yet the complexity of the student aid system has received comparatively little attention from economists. We describe the complexity of the aid system, and apply lessons from optimal tax theory and behavioral economics to show that complexity is a serious obstacle to both efficiency and equity in the distribution of student aid. We show that complexity disproportionately burdens those with the least ability to pay and undermines redistributive goals. We use detailed data from federal student aid applications to show that a radically simplified aid process can reproduce the current distribution of aid using a fraction of the information now collected.

Charter Schools and the Road to College Readiness: The Effects on College Preparation, Attendance and Choice

The analysis here focuses on Boston's charter high schools. For the purpose of this report, an analysis of high schools is both a necessity and a virtue. It is necessary to study high schools because most students applying to charters in earlier grades are not yet old enough to generate data on postsecondary outcomes. Charter high schools are also of substantial policy interest: a growing body of research argues that high school may be too late for cost-effective human capital interventions. Indeed, impact analyses of interventions for urban youth have mostly generated disappointing results.This report is interested in ascertaining whether charter schools, which in Massachusetts are largely budget-neutral, can have a substantial impact on the life course of affected students. The set of schools studied here comes from an earlier investigation of the effects of charter attendance in Boston on test scores.The high schools from the earlier study, which enroll the bulk of charter high school students in Boston, generate statistically and socially significant gains on state assessments in the 10th grade. This report questions whether these gains are sustained

Experimental Evidence on the Effect of Childhood Investments on Postsecondary Attainment and Degree Completion

This paper examines the effect of early childhood investments on college enrollment and degree completion. We use the random assignment in the Project STAR experiment to estimate the effect of smaller classes in primary school on college entry, college choice, and degree completion. We improve on existing work in this area with unusually detailed data on college enrollment spells and the previously unexplored outcome of college degree completion. We find that assignment to a small class increases the probability of attending college by 2.7 percentage points, with effects more than twice as large among blacks. Among students enrolled in the poorest third of schools, the effect is 7.3 percentage points. Smaller classes increase the likelihood of earning a college degree by 1.6 percentage points and shift students towards high-earning fields such as STEM (science, technology, engineering and mathematics), business and economics. We find that test score effects at the time of the experiment are an excellent predictor of long-term improvements in postsecondary outcomes.

Stand and Deliver: Effects of Boston’s Charter High Schools on College Preparation, Entry, and Choice

We use admissions lotteries to estimate effects of attendance at Boston’s charter high schools on college preparation and enrollment. Charter schools increase pass rates on Massachusetts’ high-stakes exit exam, with large effects on the likelihood of qualifying for a state-sponsored scholarship. Charter attendance also boosts SAT scores sharply and increases the likelihood of taking an Advanced Placement (AP) exam, the number of AP exams taken, and AP scores. Charters induce a substantial shift from 2- to 4-year institutions, though the effect on overall college enrollment is modest. Charter effects on college-related outcomes are strongly correlated with charter effects on earlier tests.Institute of Education Sciences (U.S.) (Grant 08120031)NewSchools Venture Fun

Who Benefits from KIPP?

The nation's largest charter management organization is the Knowledge is Power Program (KIPP). KIPP schools are emblematic of the No Excuses approach to public education, a highly standardized and widely replicated charter model that features a long school day, an extended school year, selective teacher hiring, strict behavior norms, and emphasizes traditional reading and math skills. No Excuses charter schools are sometimes said to target relatively motivated high achievers at the expense of students who are more difficult to teach, including limited English proficiency (LEP) and special education (SPED) students, as well as students with low baseline achievement levels. We use applicant lotteries to evaluate the impact of KIPP Academy Lynn, a KIPP school in Lynn, Massachusetts that typifies the KIPP approach. Our analysis focuses on special needs students that may be underserved. The results show average achievement gains of 0.36 standard deviations in math and 0.12 standard deviations in reading for each year spent at KIPP Lynn, with the largest gains coming from the LEP, SPED, and low-achievement groups. Average reading gains are driven almost entirely by SPED and LEP students, whose reading scores rise by roughly 0.35 standard deviations for each year spent at KIPP Lynn