Does Merit-Based Aid Improve College Affordability? Testing the Bennett Hypothesis in the Era of Merit-Based Aid

This study tested the Bennett hypothesis by examining whether four-year colleges changed listed tuition and fees, the amount of institutional grants per student, and room and board charges after their states implemented statewide merit-based aid programs. According to the Bennett hypothesis, increases in government financial aid make it easier for colleges to raise their tuition. Because many statewide merit-based aid programs covered full tuition and fees for students enrolled in their state colleges, I hypothesized that colleges in states that implemented merit-based aid programs would raise student charges or reduce institutional aid for more revenue. Using the difference-in-differences method, I analyzed data from the Integrated Postsecondary Education Data System (IPEDS) from 1987 to 2009. My results showed that colleges significantly changed their prices, but did not always increase the net price that students had to pay. Public colleges in many states with merit-based aid reduced published tuition and fees and increased the amount of institutional grants per student. These results suggest that the implementation of merit-based aid programs could make college education more affordable for those who receive the aid, and may not harm non-recipients.