Financial Aid and Student Dropout in Higher Education: A Heterogeneous Research Approach

Over the past several decades, a large body of research has studied student outcomes in higher education. Among them, many examined the relationships between financial aid and student dropout behavior. But this line of research focuses primarily on the effects of financial aid in general, paying limited attention to the differences in dropout behavior across socioeconomic and racial/ethnic groups and how financial aid influences these gaps. In this chapter, I argue that it is important to consider the economic and racial/ ethnic diversity of students when evaluating the effects of financial aid on student dropout. Given the heterogeneous nature of the student population, researchers in higher education need to explore the possible variations in aid effects on dropout risks across different subgroups rather than just specify average effects for the population as a whole. To achieve this goal, a comprehensive conceptual framework and a more appropriate analytic approach are needed. In addition, since St. John et al.’s (2000) extensive review of the economic influence on persistence research, an updated review of this line of research will help us continue to re-conceptualize student departure models from an economic perspective. In this chapter, I develop an alternative approach for investigating the differential effects of financial aid on student departure risks by integrating economic theories with theoretical frameworks from other disciplines. This heterogeneous approach pays particular attention to the role that financial aid plays in reducing dropout risk gaps across income and racial/ ethnic groups. The chapter first describes the importance of examining the variation in the effects of aid on student departure. It then reviews and critiques various theoretical approaches, particularly the economic approach, for examining student dropout risk. Third, although prior empirical studies and methodologies have generally promoted a better understanding of how financial aid affects student departure, they are nevertheless limited. This chapter highlights some of the merits and limitations of prior persistence/dropout literature, and provides a few suggestions for future research. Third, by expanding Heller’s (1997) notion of price-demand, the chapter imports three economic concepts—liquidity constraints, price elasticity, and debt