Racial diversity in higher education enriches students’ educational experience through exposure to people with diverse backgrounds and perspectives. Financial aid offers a potential to increase diversity by enabling students, who may otherwise be excluded, the opportunity to afford college. We examine the effect of government and institutional financial aid on student diversity at 114 US colleges from 2010 to 2018. After controlling for institutional characteristics, we find that government aid increases racial diversity on campuses while institutional aid decreases racial diversity on campuses. This suggests that the government is more effective than institutions at targeting its aid dollars to underrepresented groups.