Higher education subsidies and heterogeneity: a dynamic analysis

In this paper, we develop a simple dynamic general equilibrium framework to address the effects of increasing higher education subsidies in the US, from their already substantial levels, on inequality, welfare, and efficiency. We focus on three policies. The first is a tax and subsidy scheme that ensures that the parental decision to send a child to college is independent of income. Such a policy decreases the efficiency of the utilization of education resources, while the welfare gain is minimal. The second policy maximizes the fraction of college educated labor. This results in a large drop in the above-mentioned efficiency with little or no welfare gain. The third is the provision of merit-based aid to the poor as opposed to purely need-based aid. This policy can increase education efficiency with little decrease in welfare. Based on these experiments, we conclude that the case for further increases in higher education subsidies might have been overstated.