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OXFORD REVIEW OF ECONOMIC POLICY, VOL. 20, NO. 2, PP. 284-297
Oxford Review of Economic Policy vol. 20 no. 2 2004 © Oxford University Press and the Oxford Review of Economic Policy Limited 2004; all rights reserved.

Should Higher Education Subsidies Depend on Parental Income?

Robert Dur
Tinbergen Institute, Erasmus University

Coen Teulings
Tinbergen Institute, University of Amsterdam

Thijs van Rens
Princeton University

Abstract

In many countries, student grants, tuition fees, and subsidized loans depend on parental income. This paper examines the efficiency and distributional effects of such conditioning, and assesses whether it is optimal practice when the government wants to reduce after-tax income inequality in the most efficient manner. Increasing the mean level of education among the work-force compresses wage differentials by level of education and thereby the pre-tax income distribution. Hence, subsidizing education may be part of an optimal redistribution policy. However, education subsidies mainly benefit high-ability students, limiting their redistributive virtues. Conditioning education subsidies on parental income may enable the government to reduce inframarginal subsidies, mainly benefiting high-ability students, while preserving the marginal subsidy, and thus the favourable effect on the mean education level which leads to wage compression.


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