Does Merit-Based Aid Improve College Affordability? Testing the Bennett Hypothesis in the Era of Merit-Based Aid

Abstract

This study tested the Bennett hypothesis by examining whether four-year colleges changed listed tuition and fees, the amount of institutional grants per student, and room and board charges after their states implemented statewide merit-based aid programs. According to the Bennett hypothesis, increases in government financial aid make it easier for colleges to raise their tuition. Because many statewide merit-based aid programs covered full tuition and fees for students enrolled in their state colleges, I hypothesized that colleges in states that implemented merit-based aid programs would raise student charges or reduce institutional aid for more revenue. Using the difference-indifferences method, I analyzed data from the Integrated Postsecondary Education Data System (IPEDS) from 1987 to 2009. My results showed that colleges significantly changed their prices, but did not always increase the net price that students had to pay. Public colleges in many states with merit-based aid reduced published tuition and fees and increased the amount of institutional grants per student. These results suggest that the implementation of merit-based aid programs could make college education more affordable for those who receive the aid, and may not harm non-recipients. Keywords: merit-based aid, Bennett hypothesis, tuition, institutional aid ollege affordability has become an important concern across the country. According to a national survey in 2009, more than half of American adults surveyed believe that academically qualified students do not have enough opportunities for college education in spite of its importance to their future success (Immerwahr et al., 2010). Rising college costs and student debt levels also suggest that college education is out of reach even for those coming from middle-income households. To mitigate the financial burden of students and families, governments and colleges have spent a huge amount of money on financial aid. In 2010, federal and state governments invested approximately $141.3 billion, and colleges spent $29.7 billion on undergraduate financial aid (College Board, 2011). Among many scholarship programs, statewide merit-based aid is a new type of financial aid that covers tuition and fees for in-state college students exclusively based on their academic merit. Due to its simple rules and broad coverage, statewide merit-based aid has become widely available across the country and gained lots of attention from researchers. To date, researchers have shown that merit-based aid largely increased freshman enrollments across all racial groups, particularly in four-year public colleges (Cornwell, Mustard, & Sridhar, 2006; Dynarski, 2002). Given these results, it seems that merit-based aid is successful at boosting freshman enrollments. However, little is known about its other potential, and possibly negative, effects on students and colleges.