The Effects of Merit-Based Financial Aid on Drinking in College

A growing literature provides evidence that alcohol consumption in college adversely affects academic performance.  However, little is known about whether students curtail their drinking when incentives to maintain high performance increase. Over the last 20 years, many U.S. states have implemented broad-based merit aid scholarship programs that provide substantial subsidies to attending college in-state. These scholarships are initially awarded based on high-school GPA and/or college entry exam scores, and renewal is typically contingent on keeping a sufficiently high college GPA (among other requirements). We examine whether the implementation of merit aid programs has influenced collegiate alcohol consumption by (1) raising students' disposable income and (2) increasing the incentive to maintain a minimum GPA in college (in order to retain the scholarship).

Using a difference-in-differences regression approach that exploits state by time variation in the adoption of merit aid scholarship programs across the U.S., we find that the presence of a merit aid program in one's state leads to an overall increase in drinking among college students. This increase is concentrated among individuals who are above the minimum GPA threshold necessary for the scholarship; individuals who are below the threshold GPA experience no increase (and in some cases a small reduction) in their alcohol use. We use our results to estimate an income elasticity of alcohol consumption among college students.