Association for Public Policy Analysis & Management

College attendance is a risky investment. But students may not recognize when they are at risk for failure, and financial aid introduces the possibility for moral hazard. Academic performance standards can serve three roles in this context: signaling expectations for success, providing incentives for increased student effort, and limiting financial losses. Such standards have existed in the Pell Grant program for over 35 years in the form of Satisfactory Academic Progress (SAP) requirements, yet have received virtually no academic attention. While numerous studies have examined performance-based aid, their findings may not generalize to SAP because SAP standards are lower than typical targets for state merit aid and other performance-based scholarships. Moreover, penalties for failure may have different consequences than rewards for high performance. To illustrate the potential consequences of performance standards in need-based aid, we develop a simple model that combines elements of Benabou and Tirole’s (2000) theory of performance standards with Manski’s (1988, 1989) models of optimal financial aid design. We show that at least some performance standard is desirable in the context of need-based aid, but the stringency will depend upon factors including the distribution of student ability and aid generosity.

We use administrative data from over 20 community colleges in a single state, combined with regression discontinuity (RD) and difference-in-difference (DID) designs, to examine the consequences of failing SAP. We examine students’ second-year performance (and beyond) as a function of first year GPA: students with a GPA below 2.0 will receive an academic warning and are at risk of eventually losing aid, while those earning a 2.0 or above are considered to be in good standing. The RD compares aid recipients just above and below the cutoff, while the DID compares the difference in outcomes above and below the cutoff for students receiving and not receiving financial aid. These two approaches are complementary: the RD is arguably more causally rigorous, but is limited to estimating effects for students near the threshold. The DID is of greater policy relevance because it examines impacts for a broader range of affected students, even though more vulnerable to confounding factors. The DID also isolates the *additional* effect of academic warning for aid recipients, over and above the effects that non-recipients might experience.

We find heterogeneous effects of SAP failure, with negative impacts on persistence but positive effects on grades for students who remain enrolled. The negative effects on persistence appear to be largest for students furthest below the threshold, as theory would predict. After three years, we find clear negative effects on credits attempted, but little effect on credits completed. Effects on degree completion are sometimes positive, but sensitive to specification. Overall, the net benefit of the policy depends on the weights policymakers attach to these positive and negative outcomes. While it appears that SAP policy substantially reduces aid expenditures with only limited negative consequences in the long term, it also may exacerbate inequality in higher education by pushing out low-performing low-income students faster than their higher-income peers.