The Behavioral and Distributional Implications of Aid for College

Abstract

Subsidizing the cost of education is one of the most common, and expensive, activities of governments. While primary and secondary schooling is available tuition-free in the United States, among post-secondary students the direct cost of schooling is quite heterogeneous. First, tuition prices vary widely across schools. During the 2000-2001 academic year, college tuitions varied from zero at some community colleges to over $27,000 at Ivy League institutions. Second, institutions heavily discount these sticker prices for many students, using detailed information on family finances and academic merit to engage in finely tuned price discrimination.' Third, the federal and state governments provide individual subsidies, such as the Pell Grant and low-interest Stafford loan, that are portable across institutions. The standard model of human capital clearly predicts that such cost subsidies will raise the optimal level of schooling. While the theoretical predictions are clear, it is an empirical question how much a given dollar of subsidy affects behavior. Answering this empirical question is a challenge, since eligibility for subsidies is certainly not random and, in fact, is likely to be correlated with many other determinants of schooling. As a result, estimates based on the cross-sectional correlation of aid eligibility with schooling are subject to multiple sources of bias. This paper examines work that has used quasi-experimental methodology to isolate exogenous sources of variation in schooling costs in order to determine their effect on schooling decisions.