Financial Aid Policy: Lessons from Research

In a recent report, leading financial aid researchers Susan Dynarski and Judith Scott-Clayton review what is known and not known about the effectiveness of student aid programs. While evidence suggests that lowering the price of college can improve college access and completion, the authors argue that the complexity of aid programs and the way the aid is awarded and distributed can mitigate the impact on enrollment and persistence. The report looks at the last few decades of student aid programs and analyzes the extent to which these programs have been researched and improved student outcomes.

Among the report’s findings:

• The effect of financial aid can be difficult to separate from the effect of other factors based on student demographics and background.
  • For instance, those who are eligible for Pell are less likely to go to college for reasons other than Pell eligibility (e.g., weaker academic skills, less likely to have parents who went to college, attended lower quality high schools).
  • Those who are eligible for state merit-based grants, typically used to attract high achieving students, are very likely to go to college regardless of grant awards.
• The report’s authors outline four major lessons from the research on financial aid effectiveness.
  • When students know they will receive a tuition discount, enrollment rates increase.
    • Research has shown that a $1,000 decrease in tuition can increase attendance by 3 to 5 percentage points, while a $1,000 increase in grant aid can increase enrollment by 4 percentage points.
  • The aid programs that are the most effective tend to have simple, easy-to-understand rules and application procedures.
    • This may help explain why studies have found little conclusive evidence regarding the impact of the Pell Grant, which requires students to complete the FAFSA to establish eligibility. Not only is the FAFSA complex, but after completing it students still do not how much student aid they are eligible to receive.
  • If financial aid is contingent on a student’s academic performance or college completion, it can increase achievement, persistence, and graduation rates.
    • In one study of the West Virginia PROMISE program, once the achievement incentives were removed in the final year of the program, the program’s effect disappeared.
  • Little research is available on the impact of loans.  While debt aversion may be one important explanation for why loans do not appear to affect college access as much as grants, future research is needed to consider if it is possible to make loans more attractive and less risky without increasing costs as well as to determine  which loans and loan features are effective and which are not.
• Finally, while research in general has shown that student financial aid has an impact on student outcomes, far more information and research are needed on which programs work best and why.