Who Benefits Most from Financial Aid? The Heterogeneous Effect of Need‐Based Grants on Students' College Persistence*

Abstract

Objectives. This study assesses whether need‐based grants are equally conducive to the college persistence of students from various economic strata and the extent to which a redistribution of funds can narrow economic‐based inequality in college persistence.Methods. To estimate the causal effect of need‐based grants on several persistence outcomes the discontinuity created in the dollar amounts of Pell grants when the students have siblings attending college is exploited. The analyses use a nationally representative sample of students enrolled at four‐year institutions in 1995.Results. While the allocation of Pell Grants responds to students' pecuniary constraints, institutional and state grants expand the circle of recipients to more well‐off students. Yet, it is only the persistence of students from the bottom half of the income distribution that is sensitive to aid amounts. If the need‐based funds granted to affluent students had been diverted to these students, the gap in first‐year persistence would have been closed.Conclusions. For a redistribution of funds to boost degree attainment and achieve equality of educational opportunity it must be based on stricter means‐tested allocations of nonfederal funds as they are the main source of need‐based aid.