Panel Paper: Effects of Removing State Grant Aid on for-Profit Colleges: State and Federal Policy Interactions

Saturday, November 8, 2014 : 2:05 PM
Galisteo (Convention Center)

*Names in bold indicate Presenter

Christa Gibbs and Ryne Marksteiner, University of Wisconsin, Madison
In response to tightened budgets and rising concerns about higher education costs, the federal government and several states have implemented or considered rules to limit the use of need-based grant aid at some schools. These reductions in publicly-funded aid alleviate pressure on budgets, but the effect on schools and students is unclear. While there is evidence supporting the Bennett hypothesis (that colleges respond to increases in financial aid by increasing tuition or decreasing institutional aid), there has been little work on the effect of reducing or removing need-based aid. Instead of decreasing or maintaining tuition levels, for-profit colleges may have incentives to increase tuition when they lose access to state grant aid programs in order to maintain federal student aid eligibility. In this paper, we model how schools may respond differently to this subsidy reduction based on their distance to federal aid eligibility thresholds and the opportunity to regain eligibility for the subsidy in the future, which is a possibility under California’s new Cal Grant eligibility rules. We use difference-in-differences to assess how tuition, spending, retention, loan use, and enrollments change at newly ineligible colleges. Preliminary results suggest heterogeneous effects of the policy based on proximity to financial aid eligibility thresholds.