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Student grants may induce students to work harder in school, according to a psychological phenomenon known as reciprocity.

Credit: Carson Kahoe

Wharton professor Peter Cappelli has some good news for proponents of free college: Loan-free college doesn’t just make students happier. It seems to make their grades better, too.

In a recent study of 1993 university graduates, Cappelli and his co-author 2016 Wharton graduate Shinjae Won found that, even after controlling for other factors like family income, race or academic background before entering college, students who received only grants performed significantly better in college — with GPAs between 0.8 and 0.15 points higher than their peers.

“What we find is basically the opposite of what the literature on people getting financial aid suggests: even though they’re poorer ... people who got grants tended to perform better than people who didn’t [get financial aid], and people who got loans tended to do worse,” Cappelli said.

But some people would argue that student loan — in modest amounts — isn’t all bad.

“A modest amount of debt shows there’s skin in the game. It invests you into the outcome,” said Jim Kessler, senior vice president for policy at the centrist Democratic think-tank Third Way.

In a 2015 paper, Third Way and The Ohio State University professor Rachel Dwyer argued that a modest level of student loan debt — about $10,000 — actually improved graduation rates.

The question of whether student debt could actually be motivational and improve student performance was one of Cappelli’s hypotheses when he started his own study. But the results seemed to show the opposite.

Cappelli speculated that this effect could be due to a psychological phenomenon known as “reciprocity,” where the perception of receiving a favor — like a financial aid grant — creates pressure to reciprocate by, in this case, working harder in school.

Some employers may have already begun trying to capitalize on connections between student debt and reciprocity. Boston-based employer Fidelity announced in 2016 that it would begin offering a “perk” meant to decrease student loan debt, following in the footsteps of companies like Pricewaterhouse Coopers or Chegg, which have announced similar initiatives.

Even more than for employers, though, Cappelli’s findings have serious implications for schools and policymakers.

“The implications for policy here are straight-forward,” Cappelli and Won wrote in the conclusion to their paper. “The tendency in recent years to shift financial aid to loans may well come with a cost in terms of student achievement. The general notion that making students pay for their education will also make them take it more seriously and that this, in turn, will make them perform better should be questioned.”

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