Information Constraints and Financial Aid Policy

One justification for public support of higher education is that prospective students, particularly those from underprivileged groups, lack complete information about the costs and benefits of a college degree. Beyond financial considerations, students may also lack information about what they need to do academically to prepare for and successfully complete college. Yet until recently, college aid programs have typically paid little attention to students' information constraints, and the complexity of some programs can exacerbate the problem. This chapter describes the information problems facing prospective students as well as their consequences, drawing upon economic theory and empirical evidence.

Pell Grants as Performance-Based Scholarships? An Examination of Satisfactory Academic Progress Requirements in the Nation's Largest Need-Based Aid Program

The Federal Pell Grant Program is the nation’s largest need-based grant program. While students’ initial eligibility for the Pell is based on financial need, renewal is contingent on meeting minimum academic standards similar to those in models of performance-based scholarships, including a grade point average (GPA) requirement and ratio of credits completed compared to those attempted. In this study, we describe federal satisfactory academic progress (SAP) requirements and illustrate the policy’s implementation in a statewide community college system. Using state administrative data, we demonstrate that a substantial portion of Pell recipients are at risk for Pell ineligibility due to their failure to meet SAP GPA or credit completion requirements. We then leverage the GPA component of the policy to explore the impacts of failure to meet standards on early college persistence and achievement, earning a credential, and transferring to a four-year college using two methodological approaches: regression discontinuity (RD) and difference-in-differences (DD). Our results across the two approaches are mixed, with the RD providing null estimates and the DD indicating some statistically significant impacts, including a negative effect on early college persistence. We conclude by discussing the implications for future research.Educational Leadership and Polic

The Role of Financial Aid in Promoting College Access and Success: Research Evidence and Proposals for Reform

Since the passage of the Higher Education Act of 1965, great progress has been made in increasing college enrollment rates for qualified students. But gaps in enrollment and completion by family income have persisted and even widened over time. These gaps are both troubling, given the high returns gained by attending college, and puzzling, given the growing availability of financial aid. This essay discusses key lessons that have emerged from decades of research on the impacts of student aid, suggests high-priority directions for federal policy reform, and examines implications for financial aid administrators

What Explains Trends in Labor Supply Among U.S. Undergraduates, 1970-2009?

Recent cohorts of college enrollees are more likely to work, and work substantially more, than those of the past. October CPS data reveal that average labor supply among 18 to 22-year-old full-time undergraduates nearly doubled between 1970 and 2000, rising from 6 hours to 11 hours per week. In 2000 over half of these “traditional” college students were working for pay in the reference week, and the average working student worked 22 hours per week. After 2000, labor supply leveled off and then fell abruptly in the wake of the Great Recession to an average of 8 hours per week in 2009. This paper considers several explanations for the long-term trend of rising employment—including compositional change and rising tuition costs—and considers whether the upward trend is likely to resume when economic conditions improve.

The Cost of Complexity in Federal Student Aid: Lessons from Optimal Tax Theory and Behavioral Economics

The federal system for distributing student financial aid rivals the tax code in its complexity. Both have been a source of frustration and a focus of reform efforts for decades, yet the complexity of the student aid system has received comparatively little attention from economists. We describe the complexity of the aid system, and apply lessons from optimal tax theory and behavioral economics to show that complexity is a serious obstacle to both efficiency and equity in the distribution of student aid. We show that complexity disproportionately burdens those with the least ability to pay and undermines redistributive goals. We use detailed data from federal student aid applications to show that a radically simplified aid process can reproduce the current distribution of aid using a fraction of the information now collected.

Do High-Stakes Placement Exams Predict College Success?

Community colleges are typically assumed to be nonselective, open-access institutions. Yet access to college-level courses at such institutions is far from guaranteed: the vast majority of two-year institutions administer high-stakes exams to entering students that determine their placement into either college-level or remedial education. Despite the stakes involved, there has been relatively little research investigating whether such exams are valid for their intended purpose, or whether other measures of preparedness might be equally or even more effective. This paper contributes to the literature by analyzing the predictive validity of one of the most commonly used assessments, using data on over 42,000 first-time entrants to a large, urban community college system. Using both traditional correlation coefficients as well as more useful decision-theoretic measures of placement accuracy and error rates, I find that placement exams are more predictive of success in math than in English, and more predictive of who is likely to do well in college-level coursework than of who is likely to fail. Utilizing multiple measures to make placement decisions could reduce severe misplacements by about 15 percent without changing the remediation rate, or could reduce the remediation rate by 8 to 12 percentage points while maintaining or increasing success rates in college-level courses. Implications and limitations are discussed

What Accounts for Gaps in Student Loan Default, and What Happens After

A substantial proportion of student loan borrowers default on their repayment within 12 years of initial college entry. Default rates vary dramatically by race/ethnicity and institution sector: Black entrants and for-profit entrants experience default at much higher rates than others. This Brookings Institution report examines whether these disparities can be explained by other factors and what happens after a default. Differences in student and family background characteristics, including family income and wealth, can account for about half of the Black-White gap in defaults. But even accounting for differences in degree attainment, college GPA, and post-college income and employment cannot fully explain the gap, which remains large and statistically significant at 11 percentage points in the most complete model. Similarly, differences in student and family background characteristics can account for nearly half of the gap in default rates between borrowers from for-profits and public two-year colleges. But the gap is not fully explained by differences in attainment, employment, or earnings. Entering a for-profit is associated with a 10-point higher rate of default, even after accounting for everything else in the model. Fifty-four percent of all defaulters resolved at least one of their defaulted loans via rehabilitation, consolidation, paying in full, or having a loan discharged. At least 14 percent emerged from default and re-enrolled in school. While there is no Black-White difference in resolution rates, White defaulters are more likely to rehabilitate defaulted loans, while Black defaulters are more likely to consolidate. Similarly, defaulters from for-profit institutions were more likely to consolidate and less likely to rehabilitate a defaulted loan than defaulters from public two-year institutions

Does the Federal Work-Study Program Really Work—and for Whom?

In this brief, the authors discuss current research regarding both the effectiveness of the Federal Work-Study (FWS) program and its equity in terms of the distribution of funds. The authors highlight findings from recent CAPSEE research which suggests that the program does positively influence students’ college attainment and post-college outcomes. The evidence also suggests that these impacts may be greatest for low-income students and students at public institutions. The authors then discuss how the current process for allocating FWS funds to institutions leaves these very students—those who are most likely to benefit—with the least access to the program. The authors conclude with implications for policy, including potential channels that might be used to maximize the effectiveness of the program

Performance Requirements in Need-Based Aid: What Roles Do They Serve, and Do They Work?

Satisfactory academic progress (SAP) requirements have existed in some form in the federal student aid programs for nearly 40 years—and have become increasingly strict—yet only limited research exists regarding their motivations and consequences. In this brief, the authors discuss two recent CAPSEE studies they conducted that examine the consequences of SAP policy for first-time community college students in two separate, anonymous states. They discuss the underlying motivations for the policy, examine how students are affected, and assess the implications for program efficiency and equity