Who benefits most from financial aid? The heterogeneous effect of need-based grants on students' college persistence

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.