Staff Reports
Getting Ahead by Spending More? Local Community Response to State Merit Aid Programs
Number 872
October 2018

JEL classification: H4, I2, J00

Authors: Rajashri Chakrabarti, Nicole Gorton, and Joydeep Roy

In more than half of U.S. states over the past two decades, the implementation of merit aid programs has dramatically reduced net tuition expenses for college-bound students who attend in-state colleges. Although the intention of these programs was to improve access to enrollment for high-achieving students, it is possible that they had unanticipated effects. We analyze whether state funding for higher education and K-12 education changed as a result of program implementation, and whether local school districts attempt to counter any such changes. We employ two methodologies to study whether this has been the case: a difference-in-differences model and a synthetic control estimation strategy. We find robust evidence that implementation of state merit aid programs led to an economically (and statistically) significant decline in state funding for K-12 education, which was mostly offset through increases in local revenues by school districts. These results have important implications for understanding how merit aid policies could have unintended consequences for the students they aim to support.

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AUTHOR DISCLOSURE STATEMENT(S)
Rajashri Chakrabarti
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Nicole Gorton
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Joydeep Roy
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.