Equilibrium Price Responses to Targeted Student Financial Aid

Nano Barahona, Caue Dobbin and Sebastián Otero

No 33833, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study supply-side responses to student financial aid, focusing on how tuition responds to the targeting of aid. Our framework identifies two mechanisms: a direct effect, which raises tuition, and a composition effect, which can lower tuition if aid targets price-sensitive students. Leveraging a reform in Brazil's student loan program, we provide descriptive evidence that both mechanisms are quantitatively important. We then estimate an equilibrium model of higher education to quantify the impact of alternative targeting schemes. We find that a loan program with merit-based targeting increases tuition by 3%, while need-based targeting raises tuition by only 0.4%. This difference arises because low-income students—targeted under the need-based scheme—are more price-sensitive. These price adjustments have a strong impact on enrollment decisions, emphasizing the importance of targeting in student financial aid policy design.

JEL-codes: H22 H52 I22 I23 I24 L10 (search for similar items in EconPapers)
Date: 2025-05
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