When Need Meets Merit: The Effect of Increasing Merit Requirements in Need-Based Student Aid

Merit requirements in need-based student aid may exacerbate inequality in higher education but at the same time improve efficiency of aid expenditure by increasing on-time graduation, for instance. Disentangling the effect of the two building blocks of student aid ("need" and "merit") is therefore of key interest to policy makers. In this paper, we seek to estimate the causal effect of tightening the academic requirements embodied in need-based student aid on short-term and long-term student academic performance. This is done leveraging a reform in an Italian region that increased by 40% (i.e. from 25 to 35 out of a maximum of 60) the number of credits to be earned in the first academic year to maintain aid eligibility. Using administrative data from an Italian public university mainly offering STEM degrees, this study reveals that tightening merit requirements had a statistically significant, positive effect on various dimensions of performance of the "average" aid recipient. However, an analysis of treatment heterogeneity unveils winners and losers from the policy: the positive effects are indeed concentrated among higher and medium-ability students, while lower-ability students receiving financial assistance are discouraged from continuing in their studies.