The effect of state sponsered HOPE-like scholarships on state sponsered need-based aid
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A frequent criticism of state-sponsored HOPE-like merit-aid programs is that they “crowd out” need-based aid within the state. If these programs were strong substitutes for need-based aid, they would adversely affect low-income and historically disadvantaged minority students. This paper intends to empirically test this claim using state-level panel data from 1988 through 2002. Since the adoption of merit programs is not related to the amount of need-based aid, this paper uses a natural experiment framework that compares the level of funding for need-based aid in states with merit programs to other states. Merit programs are shown to have no effect on funding with a model that accounts for state and year fixed effects. Even when only merit programs funded from general, as opposed to dedicated, funds are compared to the control states, there is no indication that merit-based programs are directly or indirectly crowding out need-based aid.