Bettinger (2004) studies the effect of the provision of Pell Grants on student retention in Ohio public colleges for the cohort of students who filed a FAFSA between 1999-2000 and attended college for the first time in that school year. The identification strategy imputes the expected Pell Grant aid in 2000-2001 using family and financial information from 1999-2000, which limits variation in aid from Pell Grants to formula-based changes arising from increases in family size, tuition, or sibling college attendance between the two academic years. Bettinger (2004) estimate that a $1000 increase in Pell Grant aid leads to a 6.4 (s.e.: 0.3) percentage point decrease in the likelihood that the student withdraws from a four-year college (The estimates capture the effects of Pell Grants conditional on initial enrollment and therefore does consider the effects on initial enrollment).

Hendren and Sprung-Keyser (2020) use these estimates to project the impact of the policy on lifetime earnings and tax revenue. They utilize estimates from Zimmerman (2014) on the impact attendance of college on earnings and assume that the returns to college are constant in percentage terms over the lifecycle.

MVPF = 2.5

Bettinger (2004) reports all effects in terms of a $1000 increase in Pell Grant aid, so Hendren and Sprung-Keyser (2020) normalize the direct cost of Pell Grants to $1000. Hendren and Sprung-Keyser (2020) then add the cost of increased educational attainment, net of the effective family contribution. They calculate government costs per full time enrollee in Ohio based on data from the Delta Cost Project. They also account for the changes in taxes paid and transfers received based on the earnings gain calculated in the willingness to pay section. This results in a fiscal externality of $530, and, when combined with the educational expenditures from decreased withdrawals of $686, a total net cost of $1156.

$1.2K
Net Cost

1.6K Upper Margin
795.5 Lower Margin

To calculate the willingness to pay, Hendren and Sprung-Keyser (2020) transform the effect of Pell grants on withdrawal into additional years of schooling by assuming that individuals who did not withdraw complete one additional year of college education on average. Hendren and Sprung-Keyser (2020) then use estimates from Zimmerman (2014) to estimate the impact on lifetime earnings, using the average family income of dependents who receive Pell grants in 1998-1999 as the parental income, $21,863, as approximating parental income for the sample. Hendren and Sprung-Keyser (2020) use the results from Zimmerman to estimate a decline in earnings in years 2-7 from college enrollment and then an increase in earnings over the rest of the lifecycle. Zimmerman (2014) observes earnings gains in years 8-14 and Hendren and Sprung-Keyser (2020) project those gains over the rest of the lifecycle. Relative to other earnings forecasts, the decline in earnings starts later because the population studied are students who have already entered college and have an average age of 18.8. Hendren and Sprung-Keyser (2020) calculate the fiscal externality at 20.0% over the bulk of the lifecycle. This figure comes from their calculation of the effective marginal tax rates based on estimates from the Congressional Budget Office. Hendren and Sprung-Keyser (2020) subtract out the individual cost contribution, which is determined by the effective family contribution that they take to be the the nationwide average family effective family contribution for all Pell Grant dependents for 1998-1999. The projected earnings gains provide the willingness to pay for all individuals induced to change their behavior and receive more education as a result of the grants. Hendren and Sprung-Keyser (2020) calculate total willingness to pay by summing those earnings gains with the simple value of the transfer for the fraction of individuals not induced to change their behavior. The resulting WTP is $2879.

$2.9K
WTP

4.4K Upper Margin
1.3K Lower Margin

Combining these estimates, Hendren and Sprung-Keyser (2020) obtain an MVPF of 2.49 with a 95% confidence interval of [0.82, 5.54].

Hendren and Sprung-Keyser (2020) also consider several alternate specifications for their MVPF calculation. They consider a specification where the scholarship is valued at the cost of the transfer rather than based on the change in long-term earnings. This conservative method for calculating willingness to pay ignores any effect from increases in earnings. Instead, it applies the envelope theorem to those induced to get more schooling and assumes they are indifferent to the expenditure. All those who do not change their behavior as a result of the scholarship value it as a dollar-for-dollar transfer. The resulting MVPF for this alternate specification is 0.80 with a 95% confidence interval of [0.59,1.16]. Hendren and Sprung-Keyser (2020) also consider an alternate specification that is less conservative with regard to government educational costs. In particular, they assume that the government’s contribution to educational expenditures at private colleges is limited to the Pell Grant. This leads to an MVPF of 0.83 [0.62,1.21] .

2.5
MVPF

5.5 Upper Margin
0.8 Lower Margin

Bettinger, Eric (2004). “How Financial Aid Affects Persistence,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It. University of Chicago Press, 207-238. https://www.nber.org/books-and-chapters/college-choices-economics-where-go-when-go-and-how-pay-it/how-financial-aid-affects-persistence

Hendren, Nathaniel and Ben Sprung-Keyser (2020). “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318. DOI: https://doi.org/10.1093/qje/qjaa006

Zimmerman, Seth D. (2014). “The Returns to College Admission for Academically Marginal Students.” Journal of Labor Economics, 32(4), 711-754. DOI: https://doi.org/10.1086/676661

- Category
- Education
- Sub-Category
- College Child
- Beneficiary Type(s)
- Children and Youth, College enrollees, Students
- Average Age
- 18
- Average Income
- 21199
- Country of Implementation
- United States
- Year of Implementation
- 2000
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- No
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614