Higher education aid and its impact on long-term prosperity

Professor of Economics Basit Zafar and his partner in the project are the first to examine the impacts of grant aid on homeownership, neighborhood characteristics, and credit outcomes in early adulthood.

We hear a lot currently about student loans and the debt incurred to gain a higher education. Many argue that it places an undue burden on graduates as they seek to build their professional and financial futures. This has led to calls from some for more financial aid in the form of grants that don’t have to be repaid. But how effective are such grants?

Before this study, research had focused primarily on the effect of grants on college enrollments and the completion of coursework for degrees. But that is only one measure of the efficacy of grants for higher education. The larger question to be answered isn’t just whether students graduate, but how well they do, in real-life financial terms, after they graduate.

The desire to shed light on these issues led Professor of Economics Basit Zafar and his partner in the project, Judith Scott-Clayton of Teachers College at Columbia University, to conduct some groundbreaking research. Their study, “Financial Aid, Debt Management, and Socioeconomic Outcomes: Post-College Effects of Merit-Based Aid,” is the first to examine the impacts of grant aid on homeownership, neighborhood characteristics, and credit outcomes in early adulthood.

Accessing a unique data set

They were able to do this by examining college and financial aid information, and linking educational data to credit bureau data later in life. This unique confluence of data came about almost accidentally. Before joining ASU, Zafar served for more than eight years in the Research Group at the Federal Reserve Bank of New York. At the New York Fed, Zafar learned about the availability of information from the Equifax Credit Bureau on students who’d received grants. Zafar was able to conceive of this research because he knew of the availability of that data. Together with Scott-Clayton’s access to educational records from West Virginia, they were able to perform the necessary analysis.

“That’s the nature of research,” Zafar says, “The environment around you influences your agenda. If I had not been at the New York Fed, I wouldn’t have arrived at this study.”

A case for taxpayer-funded aid

Fortunately, he did, because the findings are compelling. The study focused on recipients of the West Virginia PROMISE Scholarship, a broad-based state merit aid program. Using the Equifax data, along with data provided by the state of West Virginia, allowed Zafar and Scott-Clayton to follow the performance of grant recipients up to 10 years after college entry. In this way, they were able to show several positive outcomes.

These recipients are much more likely to get graduate degrees. But also, beyond academia, they are much more likely to become homeowners, live in higher-income areas, and maintain higher credit scores. These all can be viewed as evidence of significantly better overall financial health. “The impacts are quite sizable,” says Zafar.

What this means in real-world terms is that programs like the West Virginia PROMISE Scholarship, funded by taxpayers, pay off. In the case of West Virginia, grant recipients’ annual earnings were about 10% higher than nonrecipients. With a break-even point of approximately a 1% earnings increase, taxpayers seem ahead on this one.

And the benefits are long term. Cohorts who entered college in 2001 were tracked for 10 years, from 2005 to 2015, showing the impact was not just early on, but still in effect 10 years later.

It should be noted that the study intentionally compared those who barely qualified for the grants with those who barely missed qualifying. This meant that in terms of sheer academic performance, the haves and the have-nots were highly comparable. The difference was in the impact of the grants themselves.

Brain drain is not a problem

The most surprising aspect of the findings may be that these grant recipients did better while staying home in West Virginia at an equivalent rate to nonrecipients. “The state was able to retain this talent for the most part,” says Zafar. “It even drew back some students who otherwise would have gone out of state for college by making it more affordable.”

While the outcomes are beneficial, it’s hard to isolate the specific factors that led to these positive results. Findings suggested that substantial reductions in time to degree are a greater factor than reduced student debt upon graduation.

“More time in the labor market is one driver,” Zafar says, “but also you’re more likely to get a graduate degree if you have a grant. A bunch of good stuff happens. It’s hard to pinpoint any one cause.”

The study serves as an endorsement of West Virginia’s program and others like it that exist in several states around the country. It’s also opened the door for more future research along these lines. “Since we did the study, we have been approached by others who want to do similar merges to link educational records with credit bureau data,” says Zafar. “Right now it’s the only one.”