Uses student-level administrative data from four-year public colleges in Texas to estimate the effect of Pell Grants on low-income college students’ educational achievement, and develops a theoretical model to determine the long-term social welfare effects and the financial returns of government expenditures on Pell Grants.

“Federal and state governments provide substantial funds to support college students in the United States. During the 2015-2016 academic year alone, low- and middle-income college students received $28 billion in federal Pell Grants, while state governments spent $10.5 billion on student grant aid. Numerous studies have examined the effect of grant aid on student outcomes, but less is known about the social return to these expenditures” (p.2).

The authors use a quasi-experimental design to “estimate the effect of grant aid on poor college students’ attainment and earnings using student-level administrative data from four-year public colleges in Texas….To clarify how these estimates relate to social welfare” (p.1), the authors develop a theoretical model that “offers a general framework for assessing the welfare implications of changes in higher education prices” (p.3).

“Whether additional grant aid increases welfare depends on

  1. net externalities from recipients’ behavioral responses and
  2. a direct effect of mitigating credit constraints or other frictions that inflate students’ in-school marginal utility” (p.1).

“Potential students make discrete choices over whether to enroll, in which college, and at what intensity…and these choices may vary in both their current levels of subsidy and the extent to which they are affected by the reform under scrutiny. Thus, the model allows for grants to affect a variety of intermediate outcomes, e.g., reducing borrowing…and in-school labor supply…, crowding out other sources of grant aid…, and inducing changes in choice of institution” (p.3-4). “In [the] model, constraints are of a general form that would allow for lack of information, market-imposed credit limits related to creditworthiness, or self-imposed constraints” (p.4).

“[The] empirical findings contribute to a broad literature examining how college costs and financial assistance affect student outcomes” (p.4).

“[The authors’] approach shows how a small number of statistics can be used to infer the welfare effect of a policy change in an area of major government expenditure, similar to applications in health insurance markets…and place-based subsidies” (p.5).

(Abstractor: Author and Website Staff)

Major Findings & Recommendations

“Using student-level administrative data from Texas and a regression discontinuity design, [the authors] show that eligibility for additional grant aid at college entry - approximately $700 on average - substantially increases poor students’ postsecondary attainment and earnings….The benefits to students…are substantial, and increasing support for these students pays for itself through financial gains for the public” (p.32). “Among low-income bachelor’s degree-seeking students in Texas, qualifying for the maximum Pell Grant at college entry has small and statistically insignificant effects on enrollment and initial attainment. However, in later years, [the authors] find significant increases in credits attempted, graduation, and earnings. Attaining eligibility for the maximum Pell Grant at entry also increases the amount of grant aid received in later years, an added cost driven by behavioral responses. Nonetheless, effects on tax receipts are sufficiently large that the government should fully recover its financial investment within 10 years” (p.2). “Calibrating [the] model using nationally representative consumption data suggests that increasing grant aid for the average college student by $1 could generate negative externalities as high as $0.50 and still improve welfare. Applying [the authors’] welfare formula and estimated direct effects to [the study’s] setting and [other settings] suggests considerable welfare gains from grants that target low-income students” (p.1). “[The authors’] theoretical model offers a general framework for assessing the welfare implications of changes in higher education prices” (p.3). (Abstractor: Author)