THE GOOD, THE POOR AND THE WEALTHY: WHO RESPONDS MOST TO COLLEGE FINANCIAL AID? * Larry D. Singell, Jr. and Joe A. Stone Department of Economics, University of Oregon ABSTRACT Financial aid programmes for students in the United States focus increasingly on academic merit, rather than financial need. There is little empirical evidence, however, on the distributional effects of merit-based aid – who benefits or responds most. We develop a bivariate probit model of the enrolment process estimated using data for a large public university over several years. Results show that merit-based aid increases enrolment for all students, but that financially-able students respond disproportionately, even with academic merit held constant. Thus, increased emphasis on merit in financial aid may exacerbate the trend toward greater income inequality in the US, even among students of equal academic merit. I. INTRODUCTION In many countries academic merit rather than financial need is the primary factor in determining public aid to students who attend college. Since aid solely based on academic merit is not contingent on income, one might expect the benefits or responses to merit-based aid to be the same across students of varying income levels, at least among students of equal ability. This question, however, is an empirical issue since theory provides ambiguous predictions based on the interplay of marginal interest rates at various levels of borrowing, threshold financial costs of college 393 # Blackwell Publishers Ltd and the Board of Trustees of the Bulletin of Economic Research 2002. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA Bulletin of Economic Research 54:4, 2002, 0307–3378 *The authors are indebted to Randy Eberts and David Figlio for helpful comments, to Martha Pitts and Jim Buch for access to institutional data, and to Charles Clotfelter and other participants in the Higher Education Program of the National Bureau of Economic Research.