Conventional Wisdom holds that financial aid helps poor students afford higher education. This is certainly true. However, does financial aid truly help the entire distribution of poor families in the United States. A study by Hansen and Weisbrod in their 1969 book Benefits, Costs and Finance of Public Higher Education seeks to analyze how financial aid is distributed among different segments of society. They focus on the California. In 1965, the average income of families with children enrolled in the University of California system was $12,000. In the California State College system the average was $10,000 and the average for families without children in either system was $7,900. The average amount of state taxes paid by each group was $350, $260 and $182 respectively.
When Hansen and Weisbrod calculated the net taxes paid, discounting the benefits received from higher education financial aid, families in the UC system receive a net subsidy of (+$1,350), families in the Cal State system received a subsidy of (+$1,140) and those without children in either system still owed the tax (- $182). This does not seem to be distributionally fair.
When we look at medical school admission today, 50.8% of entrants in private schools and 44.0% of public school entrants come from families which earn over $100,000. Medical School financial aid is thus targeted almost exclusively towards the rich. While financial helps the few poor students who wish to become doctors, in general the financial aid is a subsidy to the rich.
If one really wants to help young Americans get an education, a grant to people who are 18 years old would be an improvement. This could either 1) help them afford an education, 2) give them some start-up capital to being a business, or 3) save some money for the future (including going back to college later). This would be a more efficient way to allocate aid for college since it would not distort college tuition prices and would allow individuals to decide how to best maximize their welfare.
Much of the background for my analysis was found in Health Care Economics by Paul J. Feldstein, 6th edition; Thompson Delmar Learning, 2005.