Large-scale financial aid programs targeted at disadvantaged students are generally tied to weak performance requirements for renewal. This may raise moral hazard concerns and efficiency losses. Using a reform in the Spanish need-based grant program in higher education, this paper tests the causal effect of receiving the same amount of grant under different intensities of academic requirements (i.e., having passed a certain number of credits) on student performance and degree completion. I use administrative micro-data on the universe of applicants to the grant in a large Spanish university. Exploiting sharp discontinuities in the grant eligibility formula, I find strong positive effects of being eligible for a grant on student performance when combined with demanding academic requirements. Students enhance their final exams attendance rate, their average GPA in final exams, their probability of completing a degree, and reduce the fraction of subjects that they have to retake. In contrast, the grant has no effects on student performance when academic requirements are low and typically comparable to those set out by national need-based student aid programs around the world. Overall, these results suggest that academic requirements in the context of higher education financial aid, may be an effective tool to help overcoming moral hazard concerns and improve aid effectiveness.
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