Association for Public Policy Analysis & Management

In more than half of U.S. states over the last two decades, the implementation of merit aid programs has dramatically reduced tuition expenses for college-bound students who attend in-state colleges. In this paper, we analyze a hitherto-unexplored impact of these programs: whether merit aid programs led to changes in state support for higher education and K-12 education, and whether and how school districts responded to such changes. Exploiting the staggered adoption of state merit aid programs as a natural experiment, we employ two methodologies to study whether this has been the case: a difference-in-differences model and a synthetic control estimation strategy. We find robust evidence that implementation of merit aid programs led to an economically (and statistically) significant decline in state funding for K-12 education, underlining a potential trade-off between limited state resources and competing priorities. The decline in state aid was mostly offset through increases in local revenues by school districts, underscoring the importance of a compensatory relationship between these two forms of revenues. In states that implemented a `strong' merit aid program, these effects, particularly on state revenue, were of both an economically and statistically significant larger magnitude relative to states with weaker programs.