Some economists have argued against need-based scholarships because they work as an implicit tax on parents’

salaries and hence discourage saving for college.

a. If the marginal tax rate parents face is 20 percent, and 5 percent of parents’ assets will be deducted from a student’s financial aid each year for the four years a child is in school, what is the implicit marginal tax on that portion of income that is saved? (For simplicity assume the interest rate is zero and the parents’ contribution is paid at the time the child enters college.)

b. How would your answer differ if parents had two children with the second entering college right after the first one graduated? (How about three?)

(Remember that the assets will likely decrease with each child graduating.)

c. When parents are divorced, how should the contribution of each parent be determined? If your school has need-based scholarships, how does it determine the expected contributions of divorced parents?

d. Given the above, would you suggest moving to an ability-based scholarship program? Why or why not?