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

In: College Choices: The Economics of Where to Go, When to Go, and How to Pay For It

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  • Christopher Avery
  • Caroline Minter Hoxby

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.
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Suggested Citation

  • Christopher Avery & Caroline Minter Hoxby, 2004. "Do and Should Financial Aid Packages Affect Students' College Choices?," NBER Chapters,in: College Choices: The Economics of Where to Go, When to Go, and How to Pay For It, pages 239-302 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:10102
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    1. George R. Parsons & GAndrew J. Plantinga & GKevin J. Boyle, 2000. "Narrow Choice Sets in a Random Utility Model of Recreation Demand," Land Economics, University of Wisconsin Press, vol. 76(1), pages 86-99.
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    7. Bridget Terry Long, 2003. "The Impact of Federal Tax Credits for Higher Education Expenses," NBER Working Papers 9553, National Bureau of Economic Research, Inc.
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    9. Dominic J. Brewer & Eric Eide & Ronald G. Ehrenberg, 1996. "Does It Pay To Attend An Elite Private College? Cross Cohort Evidence on the Effects of College Quality on Earnings," NBER Working Papers 5613, National Bureau of Economic Research, Inc.
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    JEL classification:

    • I2 - Health, Education, and Welfare - - Education
    • J0 - Labor and Demographic Economics - - General

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