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Researchers take a hard look at whether financial aid reduces—or perpetuates—inequality

A handful of high-profile researchers and commentators this week put the U.S. financial aid system under the microscope. 
Photo by BDoss928 via Shutterstock

A handful of high-profile researchers and commentators this week put the U.S. financial aid system—always a hot-topic in higher education—under a particularly-intense microscope. 

Kevin Carey, a vice president at New America, took a hard look at aid packaging at selective institutions in Slate, calling the system a “sham” that dresses up dynamic pricing as student aid. Meanwhile, Art Hauptman, a policy consultant specializing in higher education finance, and three leading researchers in the field took more sweeping looks at the financial aid structure and how it impacts access and education and workforce outcomes.

The big idea: Across their different perspectives and approaches, all the authors focused on financial aid’s role in promoting equity and economic advancement—not just access, or even more limited measures of student success like graduation rates. And all found major areas for improvement.

Three themes jumped out: the importance of program design, competition among different types of aid, and the idea that financial aid alone can’t address longstanding inequities in education and work.

What we’re talking about 

  • A new working paper tying together the research to-date on financial aid’s impact on college access and outcomes, written by Susan Dynarski, Lindsay C. Page, and Judith Scott-Clayton, which was published in the National Bureau of Economic Research.
  • The first in a series from policy consultant Art Hauptman on fixing what he sees as the financial aid system’s misplaced policy incentives that drive up costs without improving outcomes.
  • A reported analysis in Slate from Kevin Carey, vice president for education policy and knowledge management at New America, examining how dynamic pricing—advertised as student aid—disadvantages low-income students and instead serves the interests of wealthier students and institutions themselves.

What they say

All the authors take their own approach to the interplay of aid and economic mobility, and each is worth a deeper read. The NBER paper is particularly rich and nuanced in its examination of the research on how financial aid impacts access, education success, and workforce outcomes.

Across them all, however, common themes emerge:

First, redesigning financial aid to improve access, completion, and workforce outcomes doesn’t necessarily need to cost more money. The NBER review, for example, found that program design, not just award amounts, has a significant impact on access and student outcomes. Learners are particularly responsive to up-front guarantees of aid.

Hauptman, for his part, argues that the system could be greatly improved by better targeting both financial aid and state funding to support the students who need it most.

“State funding subsidies favor institutions with more well-to-do students,” he writes, “and federal aid benefits tend to leak up the income scale to gain greater political support.”

Second, in the U.S. system, federal aid often displaces other aid—often resulting in no net gains for students. Last-dollar scholarships in the states, which only provide aid once all federal aid has been exhausted, have been gaining in popularity. And many colleges and universities do the same with institutional aid.

  • Dynarski, Page, and Scott-Clayton cite one particular study, which found that up to three-quarters of federal Pell Grant awards are clawed back from students through reductions in institutional grant aid at selective private institutions. 

Third, all access isn’t equal. Dynarski, Page, and Scott-Clayton are particularly pointed in saying that the research is clear that access to certain kinds of institutions—ones that do a good job of supporting and graduating students, especially lower-income students—is far more critical than just access in general.

Typically, they found that financial aid programs have a greater impact on degree attainment and income when they are designed to open up access to institutions with more resources to support students and higher graduation rates.

For that reason, they sound a cautionary note about “free” community college programs that might encourage students who would otherwise attend a four-year institution to instead start at a community college. That kind of enrollment switching, they note, has occurred in states like Tennessee that have been leaders in the free community college movement—though likely not at levels high enough to offset the larger gains from overall increases in college-going.

Their larger point is that the effectiveness of financial aid is inextricably tied to institutional quality and resources. Hauptman, in his critique of the financial aid system, agrees wholeheartedly on the quality piece, but questions policies that equate resources with quality. The country’s wealthiest institutions don’t serve large numbers of low-income students. Thus, he writes, policy incentives that reward colleges for high spending per student tend to widen, not narrow, inequities, by funding institutions with more privileged students.

Fourth, institutional quality ties directly to a large theme: financial aid doesn’t operate in a vacuum. Students with financial need often face other disadvantages that have accrued over time and impact their odds of success in college. Successful approaches account for that, pairing financial aid with wraparound supports like tutoring, counseling, mentoring, and services for basic needs.

“Inequality in educational outcomes begins in childhood, and grows with each transition from elementary school to secondary school,” write Dynarski, Page, and Scott-Clayton.

“Even if the direct costs of college are equalized for all, students’ academic preparation, networks, and family supports are not.”

The pandemic, they write, has only exacerbated those inequalities. Without thoughtful interventions—pairing financial aid with other research-backed supports—an entire generation schooled during Covid is less likely to attend college and to succeed when they do.

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