Abstract
Federal college financial aid imposes an implicit tax on asset accumulation, which reduces the incentive for families to save. Prior literature has found evidence of large reductions in asset accumulation as a result. This paper finds that these conclusions are over-estimated and are sensitive to the assumptions used in estimating the implicit tax rate. Additionally, the 1992 exemption of home equity and other changes in federal policy have substantially eliminated the savings disincentive for many families. Thus, the results of studies that examined families prior to the 1992 changes cannot be applied to the current program.
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