How Institutional Financial Aid Relates to College Performance: A European Context

Abstract This study explores the relationship between institutional financial aid and undergraduate academic performance within a European context, grounded in Rational Choice Theory. Analysing data from 1776 Business Administration students at a selective European university, the research reveals that financial aid recipients achieve higher first‐year grade point average (GPA) than non‐recipients, with class attendance partially mediating this relationship. Unexpectedly, the study identifies a non‐linear relationship between aid amount and GPA, where GPA improves with low to moderate aid levels but plateaus at higher amounts. Both merit‐based and need‐based aid similarly increase GPAs. These findings suggest that financial aid recipients invest more effort in college, with some interesting nuances. Given that financial aid is a significant expense for institutions, these findings have substantial policy implications. They underscore the importance of institutional financial aid, the impact of class attendance, the determination of the optimal amount of aid, and the choice between merit‐based and need‐based aid.