When aid falls short: the impact of resource rationing on student outcomes

We estimate the effect of financial aid in a cohort of students enrolled at the Polytechnic of Turin (Northwest Italy) in 2011/ 2012. We exploit a cut in local government spending that occurred in 2011, which led to an unprecedented break in the series of funds available for financial aid. As a consequence, in the academic year 2011/2012 only 30.8% of eligible students received a scholarship vs 100% in the previous years. We use administrative university data and apply a regression discontinuity design to compare the academic performance (i.e., credits and average GPA) and the dropout probability at the end of the first year of eligible students who obtained the scholarship and eligible students who did not. The results point to positive but non-significant effects of the scholarship on the two performance indicators and to large and marginally statistically significant negative effects on the risk of dropping out. This result is driven by students who are just above the income threshold to receive the grant, and who show a noticeably higher risk of leaving university during the first year. We interpret this finding as a result of a loss of motivation and discuss the policy implications for financial aid.