In recent years, federal spending on financial assistance programs for college students in the form of tax credits, loans, work study, or direct grants-in-aid has expanded rapidly. Whether or not these programs are effective is debatable. According to one study, aid in the first year of college is the most important year of aid.

This study found that once students pass through their first year of college, they are more likely to continue schooling later in life than if they had never attempted college at all. Consequently, financial assistance is most effective in the first year of college.

Using data from the National Longitudinal Survey of Youth, the study found:

• Each $1,000 of benefits increased the share of overall high school graduates who attended college by about 3.6 percentage points.

• Just one additional year of schooling increases lifetime earnings by $15,000.

• The $15,000 lifetime increase in earnings cost $7,600 per student assisted, making it cost effective.

The study concludes that an efficient aid program would grant generous subsidies for the first year of college, unlike Pell grants and Stafford loans.

Source: Susan M. Dynarski, "Does Aid Matter? Measuring the Effect of Student Aid on College Attendance and Completion," National Bureau of Economic Research, Working Paper 7422, November 1999.

For NBER Abstract: http://www.nber.org/digest/apr00/w7422.html