The Cost of Complexity in Federal Student Aid: Lessons from Optimal Tax Theory and Behavioral Economics. Faculty Research Working Papers Series. RWP06-013

The complexity of the federal tax code has been the focus of reform efforts for decades, and has received considerable attention in the economic literature. The federal system for distributing student financial aid is similarly convoluted, yet has received relatively little attention from economists. For the typical household, the aid application (the Free Application for Federal Student Aid, known as the FAFSA) is longer and more complicated than the federal tax return. The aid process is also highly uncertain, with definitive information about freshman-year aid not revealed until the spring of the senior year in high school. The consequences of complexity and uncertainty in aid extend beyond annoyance and frustration. The intent of financial aid is to reduce the cost of college, thereby encouraging college attendance. It is argued that complexity disproportionately burdens those on the margin of college entry, thereby blunting the impact of aid on their schooling decisions. Uncertainty about aid similarly blunts its impact on behavior: high school students most sensitive to cost are unlikely to start down the path to college school if they do not know college is affordable. For those on the margin of college entry, concrete information about aid simply arrives too late. (Contains 1 exhibit, 6 figures, and 3 tables.) [This paper was produced by the Program on Education Policy and Governance, Harvard University.]