CAPPS - Avocacy and Communication Professional Development

California Association of Private Postsecondary Schools

Grants vs. Loans

04/04/2014

Inside Higher Ed. April 4, 2014.

Much of the debate about encouraging college completion has focused on academic requirements, advising or the curriculum. Many experts commonly say that completion rates are about much more than money. But a study released here Thursday at the annual meeting of the American Educational Research Association suggests that money, and different kinds of money, matter a lot in the graduation of low-income students.

Specifically, the study found a direct positive relationship between government aid and the graduation rates of low-income students from four-year colleges. And the study found a negative relationship between obtaining unsubsidized student loans and graduation rates.

Ray Franke, the author, is an assistant professor of education at the University of Massachusetts at Boston, and he used two databases from the National Center for Education Statistics to track low-income students, and to control for various experiences.

Among his findings:

  • For every $1,000 in additional aid received, federal grants increase the chances of a low-income student graduating within six years by 2.42 percent to 2.82 percent.
  • State need-based aid has a similar impact, with each $1,000 increasing the chances of graduation by 2.4 percent to 2.59 percent.
  • Institutional need-based grants have a similar, but smaller, impact, with each $1,000 increasing graduation odds by 1.31 percent to 1.62 percent.
  • Each additional $1,000 in unsubsidized federal loans, however, makes low-income students 5.66 percent less likely to graduate in six years.

Franke also found that non-need-based aid -- increasingly popular with states and individual colleges and universities -- does not have a significant impact on the graduation rates.

In the paper's conclusion, Franke argues that his findings should be considered by policy makers. "[F]inancial aid effects found in this study provide further evidence that need-based grant programs are effective in fostering low-income student success, and respective programs at the federal and state level weigh the long-term effects on the state’s economy when reducing funding for crucial need-based aid programs," Franke writes.

"[T]he large negative effect found for unsubsidized federal loans on degree attainment is important for the discussion on loan programs and interest rates, and provides evidence that rates should be kept low. Given the results in this study, unsubsidized loans seem not only detrimental for low-income students’ chances to graduate, they also appear to be inefficient as they counteract positive effects found for need-based grants."