PRICE SENSITIVITY OF COLLEGE APPLICATION DECISIONS

A small change in the cost of sending test scores to colleges can have a large impact on the number of schools to which students apply and consequently, students may end up attending more selective colleges, according to Small Differences that Matter: Mistakes in Applying to College (NBER Working Paper No. 19480) by Amanda Pallais.

For years, students taking the ACT, a standard college-entrance exam, were allowed to send test scores to three colleges for free. In the fall of 1997, the ACT raised this number to four. The share of test-takers sending four reports soared from 3 percent for the class of 1996 to 74 percent for the class of 2000.

Pallais finds that allowing students to send a fourth score report to colleges for free not only led them to apply to more colleges, but it also widened the range of colleges that students considered and increased the likelihood that students would attend a more selective college. Most of the widening -- about 60 percent -- occurred on the upside, as students sent their extra score to a more selective college than their other picks. Particularly for low-income students, defined as those with family incomes of less than $40,000 per year, sending an extra application resulted in students' attendance at colleges of higher average selectivity.

The study reports that on average, the low-income ACT-takers in the class of 1998 attended colleges where the average ACT scores of incoming students were 0.26 ACT points higher than the schools attended by the previous year's crop of test takers. In contrast, middle- and high-income students attended slightly less selective colleges after the fourth test score report became free. The author writes that "[t]his estimate is relatively small (about one fourth of the effect for low-income students), but suggests that some higher-income students may have been crowded out of selective colleges by lower-income students." Attending more selective colleges could substantially increase low-income students' earnings. Drawing on a variety of parameter estimates from previous studies, the author estimates that even the small rise in college selectivity generated by this policy change could mean an increase of $10,000 in earnings over a low-income student's lifetime.

The study notes that ACT test takers didn't have to wait for the test rules to change to send scores to a fourth school. They could have paid an extra $6 to do so before 1997. Given that the benefits of sending an additional score report for low-income students seems much greater than this cost, why didn't many students spend the extra $6? "[M]any students use rules of thumb to determine which colleges to apply to," the author writes. "[S]tudents may interpret the ACT providing three (or four) free score reports as a signal that sending three (or four) applications is recommended and use that signal as a rule of thumb about how many colleges to apply to."