The Economics of Student Aid

By Dynarski, Susan M. | NBER Reporter, January-February 2007 | Go to article overview

The Economics of Student Aid


Dynarski, Susan M., NBER Reporter


My research focuses on the incentives and distributional effects created by government policy toward education. In a series of papers, I have examined the various methods that governments use to subsidize post-secondary education and how the choice of instrument mediates the final impact of the subsidy. I am particularly interested in how different instruments intensify or ameliorate racial, gender, and income inequality in educational and labor market outcomes. My goal is the establishment of a body of well-identified empirical research that informs us about these questions.

A wide array of policy instruments is now used to subsidize college attendance, including need-based grants, subsidized loans, merit scholarships, low public tuition, and tax incentives. Every state now has a tax-free college savings plan, or 529 savings plan. Many states also provide merit aid to a large proportion of their college students; these programs are distinct from the traditional merit scholarships (such as the National Merit Program or New York Regents Scholarships) in that they are aimed at students with moderate academic skills.

These innovations have outpaced our understanding of how different methods for subsidizing education affect schooling decisions, an evidentiary gap that my research agenda seeks to close. Theory and common sense suggest that different forms of subsidy will have different behavioral and distributional effects.

For example, the paperwork requirements of the federal, need-based aid programs are quite high, comparable to those of a complicated income tax return. (1) If low-income families find such forms particularly difficult, then need-based aid--which requires gathering extensive information about income and expenses--may have a smaller effect on this population than less-targeted forms of subsidy with fewer application requirements and lower transaction costs.

College Entry and Student Aid

In "Does Aid Matter? Measuring the Effect of Student Aid; (2) I establish that a transparent grant program with low transaction costs had a substantial impact on college entry. Existing, well-identified studies had found no effect of grant aid on schooling behavior, so this paper made a substantial contribution to the field. From 1965 to 1982, the Social Security Administration paid for millions of students to go to college. Under this program, the 18- to 22-year-old children of deceased, disabled, or retired Social Security beneficiaries received monthly payments while enrolled full-time in college. The average annual payment in 1980 to the child of a deceased parent was $6,700. At the program's peak, 12 percent of full-time college students aged 18 to 21 were receiving Social Security student benefits.

In 1981, Congress voted to eliminate the program. Except for the introduction of the Pell Grant program in the early 1970s, and the various GI Bills, this is the largest and sharpest change in grant aid for college that has ever occurred in the United States. The program's demise provides an opportunity to measure the incentive effects of financial aid. Using difference-in-differences methodology, and with the death of a parent during an individual's childhood as a proxy for benefit eligibility, I find that the elimination of the Social Security student benefit program reduced college attendance probabilities among this group by more than a third. These estimates suggest that an offer of $1,000 in grant aid will increase the probability of attending college by about 3.6 percentage points.

I have also examined the effect of recent innovations in state post-secondary policy on schooling decisions. Since the early 1990s, more than a dozen states have established broad-based merit aid programs. The typical program waives tuition and fees at public colleges and universities in one's home state. Unlike traditional, elite merit programs, such as the National Merit Scholarship, the new merit aid requires relatively modest academic credentials and annually funds hundreds of thousands of students. …

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