This study extends two bodies of research, one that analyzes institutional price response to student financial aid and a second that examines the effect of state merit-based aid programs on institutions, by examining changes in tuition and fees, room and board charges, and institutional aid expenditures following the introduction of the Bright Futures merit-based aid program in Florida. Applying an economic theoretical framework to postsecondary education pricing, this study explores how institutions respond to the introduction of a new aid subsidy and how this response varies for different types of postsecondary institutions. Using descriptive and ordinary least squares regression analyses that include year fixed-effects and other controls, this study uses institutional data for the 1993-1994 to 2000-2001 academic years from the Integrated Postsecondary Education Data System and the Florida Bright Futures program to explore postsecondary price changes in Florida relative to a control group of institutions in selected southeastern states.

The findings show that the introduction of Bright Futures was associated with an increase in tuition and fees at public four-year and public two-year institutions in Florida as well as an increase in room and board rates in public four-year institutions in Florida but no change in price at private four-year institutions in Florida. Some caution is warranted in interpreting these findings to mean that the aid subsidy alone caused the increase in price because the analyses show no change in price at institutions in Florida with the highest concentration of Bright Futures scholarship recipients. One explanation for the change in price in public sector institutions is that Florida had such low tuition rates relative to the U.S. average that Florida policymakers acted to close the price gap with surrounding states. The absence of a significant price change at private four-year institutions in Florida and institutions with high concentrations of Bright Futures recipients may suggest that these institutions responded to the increased flow of scholarship recipients by becoming more academically selective rather than by increasing their price.

The study's findings have implications for policy and research. Specifically, the findings highlight the need for states to monitor the effect of state financial aid programs on prices in each sector in order to determine what portion of the subsidy is captured by students and what portion is captured by institutions. The study also identifies directions for future research.