July 2003

IZA DP No. 820: The Effects of Merit-Based Financial Aid on Course Enrollment, Withdrawal and Completion in College

Since Georgia unveiled its HOPE Scholarship in 1993, at least 15 other states have implemented or proposed merit-aid programs based on the HOPE model. A common justification for these actions is to promote and reward academic achievement, thereby inducing greater investments in human capital. However, grade-based eligibility and retention rules encourage other behavioral responses. Using data extracted from the longitudinal records of all undergraduates who enrolled at the University of Georgia (UGA) between 1989 and 1997, we estimate the effects of HOPE on course enrollment, withdrawal and completion, and the diversion of course taking from the academic year to the summer, treating non-residents as a control group. First, we find that HOPE decreases full-load enrollments and increases course withdrawals among resident freshmen. The combination of these responses results in a 12% lower probability of full-load completion and an annual average reduction in credits completed of about 0.8 or 2%. The latter implies that between 1993 and 1997 Georgia resident freshmen completed almost 12,600 fewer credit hours than non-residents, or about 2,520 individual course enrollments. Second, the scholarship’s influence on course-taking behavior is concentrated on students whose GPAs place them on or below the scholarship-retention margin. Third, program effect increased with the lifting of the income cap. Fourth, these freshmen credit-hour reductions represent a general slowdown in academic progress and not just intertemporal substitution. Finally, residents diverted an average of .5 credits from the regular academic year to the summer in each of their first two summers after matriculation, which amounts to a 22% rise in summer course taking.