College Costs, Financial Aid, and Student Decisions

The increasing tension between the perceived necessity of a college degree and the challenge of paying for it has led to a proliferation of financial aid policy in the United States and around the world. More students are receiving more aid today, and more different types of aid, than ever before. Half a century of policy experimentation has led to an equally impressive accumulation of research evidence facilitated by methodological advances and the widespread availability of student-level administrative data. In this chapter, we present the economic rationale for financial aid, a summary of how aid works in the US context, and common methodological challenges in the study of financial aid. We then review the evidence from both inside and outside the United States on the causal impact of a variety of financial aid policies and programs on students’ college decisions, attainment, and postcollege outcomes and summarize the overarching themes with respect to margins of impact, mechanisms, and heterogeneity. We conclude with a discussion of future directions for research.