Do and Should Financial Aid Packages Affect Students' College Choices?

Christopher Avery and Caroline Hoxby

No 9482, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Every year, thousands of high school seniors with high college aptitude face complicated menus' of scholarship and aid packages designed to affect their college choices. Using an original survey designed for this paper, we investigate whether students respond to their menus' like rational human capital investors. Whether they make the investments efficiently is important not only because they are the equivalent of the Fortune 500' for human capital, but also because they are likely to be the most analytic and long-sighted student investors. We find that the typical high aptitude student chooses his college and responds to aid in a manner that is broadly consistent with rational investment. However, we also find some serious anomalies: excessive response to loans and work-study, strong response to superficial aspects of a grant (such as whether it has a name), and response to a grant's share of college costs rather than its amount. Approximately 30 percent of high aptitude students respond to aid in a way that apparently reduces their lifetime present value. While both a lack of sophistication/information and credit constraints can explain the behavior of this 30 percent of students, the weight of the evidence favors a lack of sophistication.

JEL-codes: I2 J0 (search for similar items in EconPapers)
Date: 2003-02
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Published as Hoxby, Caroline M. and Christopher Avery. "Do and Should Financial Aid Decisions Affect Students' College Choices?" College Choices: The New Economics of Choosing, Attending, and Completing College, C. Hoxby, ed. University of Chicago Press, 2004.
Published as Do and Should Financial Aid Packages Affect Students' College Choices? , Christopher Avery, Caroline Minter Hoxby. in College Choices: The Economics of Where to Go, When to Go, and How to Pay For It , Hoxby. 2004

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