Redesigning Federal Student Aid in Sub-Baccalaureate Education

We study the equilibrium impact of student aid design in the United States market for sub-baccalaureate higher education. Using novel instrumental variables, we estimate how prices and advertising of for-profit and community colleges respond to federal aid and impact enrollment, providing the first causal estimate of the advertising elasticity in college choice. To evaluate the impact of aid designs on student outcomes, we estimate the value-added of each college in terms of long-term earnings. We then develop an equilibrium model of college supply and demand, and use this model to evaluate alternative aid designs, including a targeted voucher policy aimed at maximizing total value-added. This policy highlights that for-profit colleges, despite having lower quality, are more adept at increasing enrollment in response to increased federal aid. Consequently, these schools can play an important role in improving student outcomes under a well-targeted aid design.