Do Institutions Respond Asymmetrically to Changes in State Need- and Merit-Based Aid?

Abstract

In the past two decades, states have implemented quite different financial aid policies with respect to whether they support the academic merit or financial need of students. However, there is still limited knowledge of the distributive consequences of these practices and the connection between state policy goals and actual net costs faced by students. This study builds upon our previous research by asking whether institutions respond through changing net price disproportionately to the policy priorities established through alternative merit- and/or needs-based state financial aid programs. We find that both public and private institutions lowered their listed tuition's and fees levels when states increased merit-based financial aid, indicating that institutions may be competing with each other for high ability students. Conversely, we find that higher education institutions raise net-price and lower their average institutional financial aid award when their states increase need-based awards, and indication that they are capturing increased state financial generosity. Our study highlights one of the mechanisms through which state spending on student aid may, or may not contribute to the achievement of the declared objectives of state government, such as increased access, increased retention, and an increase in the number of graduates in particular geographic and employment areas.

Keywords: Higher Education, State Policy, Financial Aid, Tuition Pricing

JEL Classification: I22, I28, D73