Need-Based Aid and College Persistence

Abstract

This article exploits a natural experiment to estimate the effects of need-based aid policies on first-year college persistence rates. In fall 2006, Ohio abruptly adopted a new state financial aid policy that was significantly more generous than the previous plan. Using student-level data and very narrowly defined sets of students, I estimate a difference-in-differences model to identify the program effects. Students who benefited from the program received awards about US$800 higher than they would have received under the prior program. These students’ drop-out rates fell by 2% as a result of the program. The new program also increased the likelihood that students attend 4-year campuses and increased their first-year grade point averages. The program may not have been cost-effective given the combination of its generosity and inability to target the marginal students who would be most sensitive to financial aid.