LOSING HOPE Financial Aid and the Line Between College and Work February 2013 Celeste K. Carruthers and Umut Ozek University of Tennessee and AIR/CALDER 1

Essential Questions Financial aid has been shown to increase college enrollment, persistence, and graduation 1 Caveat: results are not universal 2 Why is financial aid important for students? Why do students work so hard to avoid losing aid? 3 Non-pecuniary loss aversion? Financial need? 1 Dynarski 2000,2003; Deming & Dynarski 2009; Scott-Clayton 2011; Castleman & Long Hansen 1983; Cohodes & Goodman 2012; Sjoquist & Winters Cornwell et al. 2005; Scott-Clayton

Contributions To date, we know that students who lose Georgia's HOPE accumulate fewer credits and receive fewer degrees (Henry et al. 2004) and tend to be concentrated in more technical majors (Dee & Jackson 1999). We provide the first causal evidence of students' college/work substitution patterns in the wake of losing financial aid. Preview: less college, more work Beyond the scope of this paper: normative statements on optimal scholarship retention policies. 3

The Tennessee HOPE scholarship Financed by the state lottery First available to fall 2004 freshman (and some sophomores) Up to $4,000/year grant for four-year students, $2,000 for two-year students Low eligibility threshold and (comparatively) high renewal threshold. Renewed with continuous enrollment, GPA of 2.75 after 24 hours, 3.0 after 48, 72, and 96 hours. About 1/2 of HOPE scholars lose their scholarship midway through college. 4

Data Administrative records for entering cohorts in Tennessee two-year and four-year institutions, followed through fall Scholarship status, credits attempted per term, major(s), college GPA, demographics, distance from permanent address. Merged with FAFSA and ACT records for income and ACT controls. Merged with quarterly earnings data for every quarter (enrolled or not), Merged with full-time undergraduate tuition and fees (IPEDS). 5

Descriptive Statistics All 4-year students 2-year students Credit load (attempted credits this term) (3.4)(2.7)(3.9) Different major from last term Any earnings while enrolled (half-year) Earnings while enrolled (half-year, thousands, 2005$) (3.2)(2.9)(3.4) Exiting college: working but not enrolled next term Undeclared major Student-years584,925369,044215,881 Students116,44073,81667,823 Standard deviations in parentheses below continuous variable means 6

Descriptive Statistics All4-year students2-year students Lost HOPE Scholarship value (in thousands) (1.82)(1.98)(0.88) Cumulative GPA (1.32)(1.26)(1.36) Missing GPA Tuition and fees (000s) (1.33)(0.60)(0.20) Male Black White Family income $<$ 60, Missing family income Student-years584,925369,044215,881 Students116,44073,81667,823 Standard deviations in parentheses below continuous variable means 7

Empirical Strategy 8

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Identifying Variation in HOPE cohorts Deviations from mean HOPE status or value, across and within students. Within-student, across α t. Within-semester sequence, across α i Within-student variation is from the failure to renew HOPE cohort Deviations from mean HOPE status or value, across and within students. This cohort was eligible to gain HOPE in 2004, then held to renewal standards thereafter. 10

Internal Validity Challenges Students who lose HOPE are of lower ability. α i controls for this class of heterogeneity. Students about to lose HOPE are on Y it trajectories that confound treatment with other factors. η 1 (t-t 0 )*1(before it ) + η 2 (t-t 0 )*1(after it ) controls for pre-loss and post- loss trends common to students who lose the scholarship. Typically, GPA starts low and climbs just before HOPE loss. 11

College GPA before and after HOPE loss 12

Credits attempted before and after HOPE loss (regression-adjusted) 13

Exit rates before and after HOPE loss (regression-adjusted) 14

Results – cohorts (1)(2)(3)(4) OutcomeCredits this termChanged major (0,1) Lost HOPE (0,1) *** (0.025) ** (0.003) HOPE value (000s) 0.684*** (0.007) 0.012*** (0.001) Four-year public (0,1) 1.573*** (0.117) 0.408*** (0.107) 0.109*** (0.010) 0.088*** (0.010) Terms until loss (negative) 0.149*** (0.012) 0.390*** (0.012) 0.007*** (0.001) 0.014*** (0.001) Terms since loss 0.067*** (0.009) 0.167*** (0.009) (0.001) 0.002* (0.001) Tuition and fees (000s) 0.734*** (0.045) 0.772*** (0.040) ** (0.004) ** (0.004) Adjusted R N it = 421,615 student-years. Cluster-robust standard errors in parentheses 15

The impact of HOPE loss versus an equivalent tuition increase on attempted credits 16

Results – cohorts (1)(2)(3)(4) OutcomeAny earnings this term (0,1)Earnings (000s) Lost HOPE (0,1) * (0.003) 0.170*** (0.019) HOPE value (000s) 0.001* (0.001) *** (0.004) Terms until loss (negative) 0.005*** (0.002) 0.005*** (0.001) 0.022** (0.009) 0.042*** (0.008) Terms since loss (0.001) (0.001) (0.073) 0.032** (0.012) Adjusted R N it = 421,615 student-years. Cluster-robust standard errors in parentheses 17

Results – cohorts (1)(2)(3) OutcomeUndeclared major (0,1) Work but no college next term, and no degree (0,1) Lost HOPE (0,1) 0.054*** (0.003) 0.070*** (0.002) HOPE value (000s) *** (4.5E-05) Terms until loss (negative) *** (0.002) *** (0.001) *** (0.001 Terms since loss * (0.001) *** (0.001) (0.001) Adjusted R N it = 421,615 student-years. Cluster-robust standard errors in parentheses 18

Results – 2003 cohort (1)(2)(3)(4) OutcomeCredits this term Changed major (0,1) Earnings (000s)Leaving college (0,1) HOPE value (000s) 0.334*** (0.012) 0.013*** (0.001) *** (0.008) *** (0.001) Terms until loss (negative) *** (0.012) 0.009*** (0.001) (0.010) *** (0.001) Terms since loss 0.123*** (0.018) * (0.002) (0.018) *** (0.001) Adjusted R N it = 163,310 student-years. Cluster-robust standard errors in parentheses 19

Inference For students who stay in college after HOPE, the first term without HOPE is associated with fewer credits (7.6% of the mean) $170 additional earnings (6.4% of the mean) 5.4 ppt higher likelihood of not declaring a major (23.2% of the mean) Little to no impact on labor force participation. Extensive margin impacts appear much stronger than intensive margin impacts. In the first term without HOPE, there is a 7.0 ppt higher likelihood of exiting college for the workforce without a degree (58.8% of the mean exit rate) 20

Heterogeneous Impacts of Losing HOPE: cohorts (1)(2)(3) OutcomeCredits this termEarnings (000s)Leaving college (0,1) All students-0.996*** (0.025) 0.170*** (0.019) 0.070*** (0.002) Family income < 60, *** (0.038) 0.150*** (0.027) 0.090*** (0.004) Family income at least 60, *** (0.036) 0.199*** (0.028) 0.054*** (0.003) Started in a four- year college *** (0.028) 0.184*** (0.025) 0.050*** (0.003) Started in a two- year college *** (0.056) 0.116*** (0.033) 0.114*** (0.005) N it = 421,615 student-years. Cells report “lost HOPE” coefficient estimates for different subgroups. Cluster-robust standard errors in parentheses 21

Conclusions Loss of financial aid decreases engagement with college and shifts the college/work margin towards work. Attempted hours decrease. The likelihood of declaring a major decreases. Earnings increase. The propensity to leave college increases. Findings are pronounced for the lower-income half of students, and for students who start in two-year colleges. Implications: money matters, especially at the extensive margin of college enrollment. 22