College Success: Understanding the Roles of Financial Aid, Loans, Preparation, and Incentives

Douglas N. Harris, Christopher R. Taber and Yu (Alan) Yang

No 35930, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Over the past four decades, the earnings gap between college graduates and non-graduates has widened substantially, prompting interest in policies aimed at promoting higher education among low-income students. A key challenge for these policies is the high college dropout rate. This paper develops a dynamic model of college enrollment and completion with rich individual heterogeneity to assess how various factors influence college attendance, dropout, and graduation. We estimate the model using data from longitudinal surveys, results of quasi-experimental studies on grant aid, and large-scale randomized controlled trials. We use the model to simulate the effects of tuition subsidies, college loans, financial incentives, and increased pre-college skills on attendance and completion. We find moderate effects of most unconditional financial policies on attendance, with small effects on completion conditional on attendance. By contrast, some merit-based incentives, such as forgiving student loans upon receipt of a bachelor’s degree, have substantial effects. However, this type of policy and other financial subsidies accrue even more than the others to students from relatively wealthy backgrounds. Overall, it appears infeasible to design a financial aid policy that is simultaneously effective in raising attainment and fiscally progressive. By comparison, we find that the greatest potential for increasing attainment could come from better preparing students for college.

JEL-codes: I21 I22 J24 (search for similar items in EconPapers)
Date: 2026-10
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