Commentary
Oded Gurantz and Oded Gurantz Assistant Professor - Truman School of Public Affairs, University of Missouri Eric Bettinger Associate Professor of Economics of Education - Stanford Graduate School of Education, Research Associate - National Bureau of Economic Research
April 4, 2019
- 6 min read
Tuition and fees at four-year colleges havemore than doubled in the last 20 years, rising significantly faster than median wages.Although college attendance rates have increased over thistime period, the gap between low-income and high-income familieshas notnarrowed.
Financial aid programsare one way tohelp low-incomestudentsovercometheshort-term challenges ofpaying for higher education.Beginning with early work on thePellGrantand otheraidprograms, research has pointed to aid havingpositive impacts on college attendance, persistence,and, in a few studies, degree completion.Yet research to date has likely understated the total societal returnstofinancial aid programs,as some of the benefitscannotbe observeduntilmany years after students leavethe college campus.State support of higher education often comes under scrutiny due to budget concerns. Yet, if these subsidies lead to better job prospects and higher earnings, and produce a positive return to the state in the form of tax revenues, the state could possibly beunderinvestingin students’ higher education.
To investigatefinancialaid’s long-term impacts,we developed a relationship with the California Student Aid Commission,whichadministerstheCal Grantprogram, one ofthe largeststate-basedfinancialaidprogramsin the nation.State programs that allocate aid based on either financial need or academic merit have become more prominent over the past two decades, with funding increasing by 83% from 2002 to 2012.At the timeof our study(full paper here), students were eligible for theCal Grantifthey submitted the FAFSA, were low- or middle-income (e.g., the income limit for a family of three was $59,000 in 2000,which would be about$87,000 in 2019), and had a high school GPAofroughly 3.0 or higher. Theprogramwasextremely generous, offering four years of full tuition at any in-state public college or close to $10,000 per year to attend anin-stateprivate college. Low-income studentswerealso givena cash subsidy of roughly $1,500 per year for any student, including thoseattendingcommunity colleges.
Weidentifiedtens of thousands ofstudents who graduated from high school from 1998 through 2000 andexaminedtheir college enrollment,degreecompletion, and wage outcomes for 14 years after high school. This approach was feasiblefor two reasons. First, wewere able to link theFAFSA applications of Cal Grant students to federal tax return data held by theU.S. Department of the Treasury.Having federaltax dataenabled ustotrack students across the country,which would not have been possible with state-specificdata.Second, eligibility for the Cal Grantwas determinedbya series of income and GPAcutoffsthat were unknown to applicants. Weproducedcausal estimates ofCal Grantimpacts by comparing essentially identical students whofelljust below and above these eligibility thresholds(usinga regression discontinuity design).
Results
Overall,we found that financial aid led to positive long-term impactsonobtainingbothbachelor’sand graduate degrees and, for some students, raised longer-run annual earnings and the likelihood thattheyresided in California.Students withthe lowestincomeand GPAwere10% (4.6 percentage points) more likely to earn a bachelor’s degree.This is not due to increases in college enrollment, but rather thataid reducedthe likelihood that students dropped out along the way.Students did not stop there,as theywere 27% (3.1 percentage points) more likely tocontinue their schooling andearn a graduate degree.As a result of these changes, earnings reported on 1098 tax forms were about 3 to 4% higher between the ages of 28 to 32.
We observed more muted effects amonghigher-income and higher-GPA students.Many of thesestudents used state money to shift into more expensive—but not necessarily higher quality—private colleges. Bachelor’s and graduate degree completion increased but by smaller amounts, and we were unable to detect changes in earnings.(Our project lacks statistical power to detect small gains or losses in earnings.)Yet states might still be interested in subsidizing these students,as they wereabout1% (2.4 percentage points)more likely to reside in California, thus making significant contributions to the state’s tax base.
Oneimportant finding inour study is that financial aid may have only small impacts on student debt. We find that the size of student’s federal loans is unchanged after 10years,likely as the Cal Grant raisedstudentexpendituresby increasing undergraduate persistence, increasing graduate school enrollment, andinducing some studentsto attendmore expensive institutions.One shortcomingis that we do not observe all debt, just federal loans;moreresearchis neededin this area.
Conclusion
State sponsored merit- and need-based aid constitutes one of the most important and fastest growing sources of student assistance for postsecondary education. Using California’s large and generous state-aid program, we find that aid eligibility led to long-term increases in degree completion and wages, particularly for the neediest students.We estimate that the programcouldincrease individual earnings ofeligiblelow-income, low-GPA studentsbya net present value of$40,000to $50,000 over their lifetime, yetin our datathe state paidjustover $4,000 pereligiblestudent(only a share of eligible students participate and persist for all four years; estimates of costs and benefits to participating students are higher).Althoughonly a fraction of these increased wages would be returned to the state through taxes, the results suggest that thebenefitsof aid programs may be frequentlyunderstatedwithouttaking these long-term impacts into account.Similar work onthe long-term impacts ofstate aid inWest Virginiaand federal aid inTexasgenerallysupports our findings.
“State sponsored merit- and need-based aid constitutes one of the most important and fastest growing sources of student assistance for postsecondary education.”
We believe our results are likely to hold broadly,even though we only study California-based students in the late 1990s.At the time, California had a highly subsidized postsecondary system with high attendancerates, suggesting that students in states with more expensive and less heavilyattended institutionsmaysee equal or larger impactson degree completion.Equally important is thatwe focus only on a subset ofrelatively highly motivatedstudentswho have taken the time to file a FAFSA form and a Cal Grant application; gettingfinancial aid tostudents who do not typically take these steps may lead tostrongerattendance and completion outcomes.
How can we ensure that financial aid programs best support student success?The current version of the Cal Grant program uses transparenteligibility criteria, subsidizes enrollment in every postsecondary sector, and is a “first-dollar” scholarship, meaning that state aid is appliedbefore other financial aid programs. Transparency matters,because offering studentsa clearand earlymessage that college is affordable typicallyincreases access, as in the case of“Promise” programsor targeted outreach programs such asMichigan’s HAIL scholarship. Programs that restrict aidto a subset of postsecondaryinstitutions, such asMassachusetts’s Adams Scholarship, may lead students to enroll in less selective colleges, ultimately decreasing graduation rates. Programs that take a“last-dollar”approach,where existing forms of aid such as the Pell Grant are applied prior to the newly allocated funds, are oftencriticizedasregressivefor directingmore moneytomiddle-income studentsthan those most in need.
Our results suggest thatafinancialaidprogram like Cal Grantcanindeed produce long-term impacts on both educational and labor force outcomes,with particular benefits for low-income students with low GPAs.States should consider these potential benefits when designing or weighing the explicit costs of these programs.
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Authors
Oded Gurantz Assistant Professor - Truman School of Public Affairs, University of Missouri
Eric Bettinger Associate Professor of Economics of Education - Stanford Graduate School of Education, Research Associate - National Bureau of Economic Research
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