UC Riverside

States support higher education affordability by providing direct funding to higher education institutions (i.e., state appropriations) and students (i.e., financial aid). However, research examining the effectiveness of these state expenditures on higher education – and which types students receive the greatest benefit from these expenditures – is sparse. In this study, I examine the relationship between state higher education student financial aid policy and institutional pricing behaviors, focusing on pricing differences across student need and academic ability. Drawing on concepts from the principal-agent framework, resource dependence theory, and previous research on this state-institution relationship (i.e., Doyle, Delaney, & Naughton, 2009), I hypothesize that institutional pricing behaviors respond to changes in state aid in one of three ways: comply with, compensate for, or absorb state financial aid expenditures. Using a combination of state-, institutional-, and student-level data for the academic years 2003-04, 2007-08, and 2011-12, I examine the interactive effects of state financial aid expenditures and student characteristics on institutional pricing behaviors. In addition, I explore the possibility that the direction and magnitude of these interactive effects differ depending on the degree of institutional dependence on state appropriations.

I find that institutions respond to changes in state need-based and non-need-based student financial aid expenditures in systematic ways. Findings indicate that institutional aid and net price shift toward alignment with changes in state need- and non-need-based aid expenditures. Moreover, in the analyses that examined differences by institutional appropriation dependence, results suggest that less appropriation dependent institutions are most responsive to state financial aid changes. As public higher education tuition levels continue to rise (Baum, 2013) and affordability among the neediest students declines (Burd, 2014), state higher education finances will continue play central role in the future of higher education access and student success. Findings from this study highlight the importance of continued state investment in need-based student financial aid to promote higher education affordability.