HOPE for the Pell? Institutional effects in the intersection of merit-based and need-based aid.

• Author: Singell, Larry D., Jr.
• Position: Georgia's Helping Outstanding Pupils Educationally scholarship - Pell Program

1. Introduction

   There is increasing concern by policy makers and administrators regarding the access of financially needy students to higher education. In particular, two trends with regard to need-based aid have been documented as critical--Pell grants representing a decreasing share of the average financial aid package (Ehrenberg 2000) and students increasingly relying on unsubsidized loans to finance college (Duffy and Goldberg 1998; McPherson and Schapiro 1998; Dynarski 2003). Concurrently, state governments and universities have begun to place greater emphasis on non-need-based aid in an attempt to attract and retain the best students (McPherson and Schapiro 1994). Since receiving federal need-based aid often precedes and precludes receipt of other forms of state aid, non-need-based aid programs such as Georgia's Helping Outstanding Pupils Educationally (HOPE) scholarship afford a relative advantage to the financially well to do (e.g., Clotfelter 2004). The purpose of this paper is to examine whether and how the introduction of the HOPE scholarship affected the enrollment of Pell students within the higher educational system of Georgia. This paper therefore sheds light on whether broad-based, merit-aid programs have harmed the access objectives of needy students.

   Among state-level, non-need-based aid programs, Georgia's HOPE scholarship is the most generous, having dispensed over $2.7 billion in aid to more than 850,000 students since the program's inception in 1993. Conditional on graduating from a Georgia high school with a B average or better, the HOPE scholarship covers tuition, fees, and book expenses for those attending Georgia public postsecondary institutions. Overall, the HOPE scholarship represents a significant source of merit-based financial aid within Georgia.

   Existing research on the Georgia HOPE scholarship indicates that the introduction of merit-based aid has significantly increased overall college attendance. For example, Comwell, Mustard, and Sridhar (2006) use Integrated Postsecondary Education Data System (IPEDS) to show that the HOPE scholarship has increased the college enrollment rate of first-time freshmen by roughly 6% in Georgia relative to the surrounding southern states. Likewise, with Current Population Survey (CPS) data on 18- to 19-year-old youth, Dynarski (2004) finds that the HOPE scholarship has increased Georgia students' likelihoods of attending college by 7% to 9% relative to the treatment group in other southern states. The literature, therefore, provides evidence regarding HOPE's efficacy for broad student populations.

   In general, despite the size of the Pell program and the significant changes in the environment facing needy students targeted by Pell resources, prior research has noted a paucity of formal evidence associated with how the movement toward non-need-based aid has affected their access to a college education (e.g., Balderston 1997; Clotfelter 2004). While not measuring need directly, prior work has shown that the impact of merit aid in Georgia appears larger among relatively higher income groups and among institutions that attract relatively well-to-do students. Specifically, Dynarski (2004) finds a 12% post-HOPE enrollment effect for white students, but no increase in African-American enrollments. Cornwell, Mustard, and Sridhar (2006) find that the enrollment effects of HOPE are concentrated among four-year (as opposed to two-year) institutions. Further, prior literature on Pell enrollments also leaves some question about how responsive needy students are to increases in aid generally and the types of institutions at which responses are potentially found (e.g., Hansen 1983; Manski and Wise 1983; Kane 1995; Seftor and Turner 2002).

   Collectively, the literature's silence regarding the influence of merit aid on needy-student outcomes, the size and increasing prominence of non-need-based programs, and the suggestion in the literature that needy students may be less responsive to increases in aid, are cause for potential concern. Using new data on annual Pell enrollments by institution that span the 1993 introduction of HOPE (i.e., 1988 to 1997), we document differential responses to the HOPE scholarship based on a well-defined and consistent measure of need that is exogenous to institutions. Contrary to the findings of prior work, we find that the number of Pell recipients increased at institutions in Georgia after HOPE, as compared with other southern universities, consistent with broad merit-based scholarship programs improving college access for needy students.

   In addition to our analysis of enrollment, we find that HOPE has differential effects on average and total Pell receipts in Georgia relative to other southern institutions. Specifically, the average Pell award is lower at Georgia institutions after HOPE, suggesting that HOPE draws students of lesser need into the Pell program. Moreover, we find that total Pell revenues increase in Georgia relative to other southern institutions after HOPE, which suggests that broad merit-aid programs are effective at leveraging scholarships with greater federal funding paid to needy students who may have not otherwise attended college. Contrary to the findings of Cornwell, Mustard, and Sridhar (2006) for the broader population of college students, our analysis indicates that institution-level increases in Pell student enrollment and Pell aid occur at both two-year and four-year schools.

   The paper proceeds as follows. In section 2, we describe the institutional details that are pertinent to our empirical analysis and that motivate our tests. Section 3 describes the data and empirical models of the institutional enrollment effects of the HOPE scholarship. The observed enrollment effects of HOPE in section 3 motivate our analysis of average and total Pell revenue accruing to Georgia institutions, which we explore in section 4. Finally, section 5 concludes.

2. Institutional Attributes of the Pell Program and the Georgia HOPE Scholarship

   To receive federal aid in the form of a Pell grant, a student must first complete a Free Application for Federal Student Aid (FAFSA) form, which provides financial aid administrators with the information needed to determine the eligibility and size of an applicant's Pell grant. The award value is formulaic, determined by the student's expected family contribution (EFC) and the institution-specific cost of attendance (COA), which includes tuition, room, board, and other expenses such as books and travel. For dependent students, the EFC is a function of parent income and wealth and the number of siblings in college. Conditional on being above the federally mandated minimum grant, the level of an individual student's grant in any given year is the minimum of (i) the difference between the federal maximum Pell grant and the student's EFC; (ii) the difference between the institution's COA and the student's EFC; and (iii) prior to 1993, 60% of the institution's COA. (1) Given the sequential distribution of aid--federal preceding state preceding institution--in no way is a student's Pell status or award value dependent on state or institution aid. Except in the case where low-cost institutions could potentially increase their COA in response to HOPE, Pell status and award values can safely be exploited as exogenous to the introduction of HOPE. Further, Long (2002) studies a time series of Georgia institutions spanning the introduction of HOPE and finds no significant tuition response at public universities, which we also confirm in our data. (2)

   All else equal, the advent of Georgia's HOPE scholarship increased the likelihood that the average in-state high school student received financial aid in attending college within the State of Georgia. It follows that the HOPE scholarship lowered the expected cost of attending Georgia colleges and universities for the average in-state high school student. Thus, the empirical analysis tests the expectation that the HOPE scholarship has induced a general increase in the enrollment of both Pell and non-Pell students in Georgia, which is presented in section 3.

   Given our particular interest in the prospects of needy students, two key dimensions of the scholarship are integral to our current analysis and may have generated an asymmetric response to HOPE across levels of need. First, over the period of our sample, low-income students were required to complete a FAFSA, and the receipt of a Pell award preceded the HOPE scholarship and reduced its value dollar for dollar. (3) It follows that the HOPE scholarship was relatively generous to the financially well to do, who potentially gained a merit award without the implied reduction in need-based aid. (4) Second, being merit-based, HOPE is by definition relatively generous to the academically able, which might alone be expected to expand competition over access for a given quality institution. Accordingly, the introduction of HOPE granted to some of the most financially and academically able high school students in Georgia a relative advantage in the financing of college by lowering their costs of attending college in comparison with those with fewer financial resources, who were more likely to qualify for need-based aid programs. (5)

   While the predicted behavioral responses to HOPE are strictly at the student level, data limitations restrict our analysis to institutions. As such, we are unable to directly address potential asymmetries across an ex ante distribution of student ability. However, any systematic change in the ex post distribution of college costs brought about by the introduction of the HOPE scholarship may have nonetheless changed the distribution of needy students over the quality spectrum of universities in Georgia. (6) Specifically, the scholarship may have increased the propensity for the most academically able students, who may otherwise have attended out-of-state schools, to...