Study Suggests Economy Will Benefit from Allocating Financial Aid to Low-Income Students

According to a recent study by the Federal Reserve Bank of Minneapolis’ Opportunity & Inclusive Growth Institute, the U.S. would be better off financially were the federal government to offer federal aid dollars solely to low-income students, as opposed to those from wealthier households. Not only would this approach achieve improved social mobility and educational equity for low-income students, researchers argue, but it would also allow the greatest number of people to receive a college education at the greatest benefit to the U.S. economy.

To conduct the study, called Optimal Need-Based Financial Aidresearchers used a theoretical model that compared two factors across a range of income levels: how much money families can afford to contribute toward college expenses versus the earnings potential that comes with completing a college degree. In this model, individuals whose parents can contribute little or no financial support for their education experience the greatest increase in earnings potential, thus representing the greatest gain to the economy in terms of consumer spending and income tax dollars. Results were also calculated using a similar model that factored in low-income student dropout rates and the average amount of money that such students can contribute to their own education if they work while in school.

For both models, researchers concluded that the short-term cost of awarding federal financial assistance to disadvantaged students is high; however, supporting these individuals ultimately results in the biggest return on investment for the government and economy overall. Therefore, the study’s authors are urging lawmakers to consider these long-term gains when making decisions about the allocation of federal aid dollars.

The study also provided estimates of how the government can most efficiently distribute aid dollars to achieve the greatest economic benefits. According to their calculations, students from households in the bottom 10th percentile of income earners should receive 70 times the amount of financial aid that is available to those whose families are in the top 10th percentile. In addition, students whose parents make $80,000 or less should receive more aid than what is currently available to them, while those making more than $80,000 should have less access to federal funding. The researchers also suggest that any increase in funding provided for students from families in the bottom half of income earners would generate enough tax revenue to eventually pay for itself.

They also note that while it has been proven that college graduates from higher income households go on to earn more — and thus generate more tax revenue — than their low-income peers, these students tend to enroll in college whether they receive financial aid or not. Thus, the authors argue, federal dollars are best spent on students for whom attending college is dependent on receiving financial assistance.