Inequality in Parental Transfers and Optimal Need-Based Financial Aid

Last updated: September 2025

This paper studies optimal need-based financial aid when parental transfers—unobserved by policymakers—vary across and within families of similar means. Using data on U.S. college students, I document substantial inequality in parental transfers, especially among wealthier families. I then analyze how this affects aid design aimed at reducing inefficiencies from borrowing constraints and the aid itself. Greater inequality in parental transfers among wealthier families weakens the progressivity of the aid, providing more relief to students with low transfers despite their affluent background. Moreover, aid shifts toward two-year colleges, which students with limited parental help are more likely to attend.