Abstract

October 30, 2008

Undergraduate students who receive federal grants in aid -- Pell grants or Supplemental Educational Opportunity Grants (SEOG) -- experience high implicit marginal income tax rates resulting from the methods used to determine student aid levels. The federal methodology assumes that a student can afford to spend half of his or her annual income in excess of $2,500 to pay for college (2007).  These potentially high implicit marginal tax rates led us to investigate the size of the associated work disincentives among Pell and SEOG grant receiving students.  Ceteris Paribus, SEOG and Pell Grant recipients should decrease their market labor hours and hence their earnings relative non grant-receiving students who are otherwise similar.  When grant recipients no longer face this financial aid tax, for example during their senior year, this disincentive should disappear and there should no longer be a difference in labor force participation between these two groups.  We use data from the 1995 National Postsecondary Student Aid Survey (NPSAS) and the Beginning Postsecondary Students (BPS) survey distributed by the National Center for Education Statistics in 1996, 1998, and 2001 to test for these effects and estimate the size of the student labor supply response to the federal student financial aid methodology.  Using Panel Data estimation methods we regress student labor supply variables (hours worked, summer hours worked, labor force participation, etc.) on a vector of variables that include each student’s federally determined Estimated Family Contribution to the student’s higher education costs (from the reported Free Application for Federal Student Aid – FAFSA- forms), human capital characteristics, demographic characteristics, academic class standing, and federal financial aid received from SEOG grants and Pell grants.  Our findings so far indicate that SEOG and Pell grants have different impacts on characteristics of student labor supply.  Pell grants appear to reduce student hours worked and labor force participation statistically significantly, and in rather large proportions.  SEOG grants appear to have a smaller, statistically insignificant, negative impact on student hours worked and labor force participation.  We contend that the differing structures of these grants may explain why.  By federal formula, the size of a Pell grant falls as a student’s Estimated Family Contribution rises.  SEOG grant distributions are given over to individual colleges and universities that may use methods less tied to a student’s estimated ability to pay.