Innovating for Success in Financial Aid

Most education researchers and policymakers would likely agree that the current financial aid distribution system is both inefficient and not as effective as it could be. Under current rules, the vast majority of students do not learn about their eligibility for need-based financial aid until their senior year of high school. While waiting this long can help the federal and state governments make sure their aid dollars are targeted toward students who are currently the most financially needy, waiting that long to notify students of their aid awards makes little sense for students from persistently poor families.

There have been numerous efforts to streamline the financial aid process over the past several years, but they have neglected the importance of timing. If students know their financial aid package well before reaching college age, they can both academically and financially prepare for college should that be a match with their career and personal ambitions. However, most research fails to suggest possible solutions to important informational deficiencies.

Today, I am pleased to release a working paper with my frequent co-author (and political opposite) Sara Goldrick-Rab that seeks to advance the research agenda on the importance of timing in the financial aid process.  Under current policy, students whose families receive federal means-tested benefits in grade 12 currently are awarded the maximum Pell Grant (which results in the maximum award for many state and institutional grants). In our paper, we estimate what could happen to both college enrollment rates and government revenue if the aid award would happen in grade 8 instead of grade 12.

Pell Grant program costs would increase under this policy change for two reasons—because some students would likely be induced to attend college by the promise of financial aid and because about 30% of students would likely receive more money than under current law. But the federal government would also see an increase in tax revenue through the additional earnings of these students. Under a fairly conservative set of assumptions in a Monte Carlo simulation (make your own assumptions here and here), the program is fairly likely to result in positive net fiscal benefits over the long run.

Even though the initial results from this study appear to be promising, I still lose sleep at night about whether people will respond in the expected ways and whether any perverse incentives could be in play. As a result, any such policy change should be explored in a demonstration program to see whether the program is cost-effective in real life.

This paper will get a fair amount of media attention, which will hopefully result in useful feedback from smart people in the academic and policy communities. I would also love to hear your thoughts on the paper as well as the fun methodological assumptions.

Author: Robert

I am an a professor at the University of Tennessee, Knoxville who studies higher education finance, accountability policies and practices, and student financial aid. All opinions expressed here are my own.

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