Merit scholarship programs like Georgia's HOPE scholarships - which pay full tuition and fees at any public university or community college in the state (or an equivalent amount for students attending private institutions) for state residents who maintain a grade point average of 3.0 in high school and college - get criticized because they tend to benefit students from well-off families more than students from low-income families. Several papers presented at the American Economic Association's recent conference have identified other effects of the scholarship programs: they apparently induce college students to take fewer credit hours per semester in order to keep their GPA's above the minimum; they are associated with an increase in attrition rates at some four-year schools, perhaps because they attract some students to universities who might have been better off at community colleges; they have been associated with steep increases in tuition at private universities; and they are associated with an increase in car registrations, possibly because well-off parents bribe their children to attend state universities rather than out-of-state schools by buying them new cars! One defender of the scholarship programs, John Bishop of Cornell University, notes that they are well-targeted to get students to work harder in high school and yield significant gains in the percentage of high school graduates who go on to college.
"Merit-aid programs like Georgia's HOPE scholarships can distort students' incentives, scholars say," by David Glenn, Chronicle of Higher Education, January 6, 2003
Surf to http://www.terry.uga.edu/hope/research.html to read some the papers on HOPE scholarships presented at the AEA conference.