Association for Public Policy Analysis & Management

Over the last two decades, the explosion of merit aid programs in various states has radically transformed the higher education landscape in the United States. In about half of U.S. states, college-bound students who attend in-state colleges have witnessed a drastic reduction of their net-tuition expenses. In this paper we analyze a hitherto-unexplored impact of state merit aid programs, that on K-12 spending.

Potentially, there are a number of channels through which post-secondary spending under merit aid programs can affect K-12 spending. Merit aid programs, by increasing state funding for post-secondary spending, can crowd-out K-12 spending. Alternatively, states aiming to increase their college-going student pool (one of the objectives of merit aid programs) can inject more money into K-12 education to improve the quality of education and hence increase chances that students may qualify for merit aid and chose the college-path. Local revenue may respond in a compensatory manner to state aid, or local governments may vote for higher K-12 spending to maximize the chances for merit aid for the students. Thus, it is a priori not clear how merit aid programs may affect K-12 funding. This is more of an empirical question which is the route we take in this paper.

Using the adoption of state merit aid programs as a natural experiment, and exploiting the cross-state and across time variation in a difference-in-differences estimation strategy framework, we investigate whether such scholarship programs affected K-12 funding and spending. We find robust evidence that merit aid programs led to a perceptible decline in K-12 state funding and a corresponding increase in K-12 local funding. Spending was also affected, and interestingly spending in instructional categories saw a marked increase suggesting that the school districts may have chosen to divert more resources to instruction. These patterns are stronger in states that had “strong” or “broad based” merit aid programs, suggesting that design matters not only for impacts on post-secondary education but also on K-12 education.