The impact of and justification for using federal grants to carry out national policies in education is explored in this document. The paper opens by noting that the locally-made decisions typical of our federal system of government do not always take into account such national interests as those in increasing equality of opportunity, providing for economic growth and full employment, minimizing spillover costs among states and regions, encouraging cultural and scientific progress, promoting democratic processes, and defending the nation. The paper next reviews the theoretical effects of different types of grants, focusing on assumptions about state and local fiscal behavior and about fiscal responses to federal grants, and on the characteristics of revenue sharing, general aid, and categorical, block, and matching grants. The authors then assess the potential effects of these grant types empirically, using four criteria: increases in state and local spending prompted by federal grants, the variability in response among different spending units, the potential of each grant form for promoting specific educational goals, and the extent of the associated regulations. Finally, the paper considers alternative objectives for federal grant policies and assesses the impact of the Reagan administration's "new federalism," which discards grants as an effective policy tool. (Author/PGD)