A New Test of Borrowing Constraints for Education

TitleA New Test of Borrowing Constraints for Education
Publication TypeJournal Article
Year of Publication2012
AuthorsBrown, M, Scholz, JKarl, Seshadri, A
JournalThe Review of Economic Studies
Volume79
Issue2
KeywordsAdult children, Demographics, Education, Methodology
Abstract

We discuss a simple model in which parents and children make investments in the children's education and investments for other purposes and parents can transfer cash to their children. We show that for an identifiable set of parent-child pairs, parents will rationally underinvest in their child's education. For these parent-child pairs, additional financial aid will increase educational attainment. The model highlights an important feature of higher education finance, the expected family contribution (EFC) that is based on income, assets, and other factors. The EFC is neither legally guaranteed nor universally offered: our model identifies the set of families that are disproportionately likely to not provide their full EFC. Using a common proxy for financial aid, we show, in data from the Health and Retirement Study, that financial aid increases the educational attainment of children whose families are more likely than others to underinvest in education. Financial aid has no effect on the educational attainment of children in other families. The theory and empirical evidence identifies a set of children who face quantitatively important borrowing constraints for higher education. PUBLICATION ABSTRACT

Notes

ProQuest document ID: 2645380061

Endnote Keywords

economic models/higher education/higher education/education finance/education finance/intergenerational transfers/socioeconomic factors

Endnote ID

62876

Citation Key7697