Student Aid Packages and College Choices

"The results suggest that students make rational choices."

Colleges work hard to lure exceptionally high achieving students. Typically, high achieving students can expect to receive individualized packages of loans, grants, and work opportunities from each school where they apply. The package structure will depend on parents' ability to pay, the student's demonstrated ability, and how well the college thinks the student fits its needs. If students are rational investors, then they will look beyond the superficial aspects of college aid, and refuse to attend schools offering good aid packages but reduced human capital investments that will affect their lifetime earnings.

In Do and Should Financial Aid Packages Affect Students' College Choices? (NBER Working Paper No. 9482), co-authors Christopher Avery and Caroline Hoxby followed a specially constructed sample of high achieving students through the college admissions process in 1999-2000. Mean SAT scores for the sample were in the 90th percentile nationally. The data included parental preferences, the schools to which the students applied, and the schools where they enrolled. Information on aid was collected by questionnaire, and information on college costs and administration was gathered from the college students themselves.

The results suggest that students make rational choices, overall. They are more likely to attend more selective colleges that offer larger grants, larger loans, and larger work-study opportunities. Students are also more likely to enroll in a college that is the most selective that they applied to, is their father's alma mater, or is one a sibling attends. Having SAT scores above a college's mean SAT scores make students less likely to attend a college.

Family circumstances also condition student choices. Students with parents who attended very selective colleges are less attracted to a sibling's college, less attracted to in-state colleges, and more attracted by a college with a median SAT above their own. Students who attended a private school and come from high income families will focus more on a college's selectivity and are relatively insensitive to college costs and less attracted by aid.

Still, some students did not respond rationally when evaluating the value of loans and work-study programs versus grants. Marketing also appears to make a difference. Calling a grant a scholarship, or front-loading it by making it worth more in a student's freshman year, increased a college's attractiveness.

This behavior can be explained either by credit constraints or by lack of sophistication. The authors believe that lack of sophistication is the culprit. They report that their parent surveys were rife with complaints about the complexity of the aid process, and the demands for records that parents said "they did not expect to need and cannot readily assemble." Though Avery and Hoxby caution against too much reliance on anecdotal evidence, they "think that it is revealing that words like ‘bewildering' and' confusing' are the modal words" in parents' comments on the aid process.

-- Linda Gorman

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