Does State Financial Aid Affect Institutional Aid? An Analysis of the Role of State Policy on Postsecondary Institutional Pricing Strategies

Abstract

Abstract This study investigates whether higher education institutions alter their pricing strategies due to changes state‐based financial aid generosity. Using fixed effects and instrumental variables estimation strategies with an institutional‐level panel dataset for the years 2002‐2008 we estimate whether institutions adjust net‐tuition and fees, list tuition and fees, and average institutional financial aid awards as their home states alter their levels of state‐based financial aid programs. Our findings show that public institutions’ pricing strategies are reinforcing state policies, primarily through downward adjustments in tuition levels. Further, we find that public institutions in states with weak higher education governance structures lower their net‐price in response to increased state financial aid. In contrast, private institutions net‐price is unresponsive to state financial aid award levels, although we find evidence that they lower institutional aid awards in response.