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Borrowing Trouble? Human Capital Investment with Opt-In Costs and Implications for the Effectiveness of Grant Aid

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  • Benjamin M. Marx
  • Lesley J. Turner

Abstract

We estimate the effect of grant aid on City University of New York (CUNY) students' borrowing and attainment using a regression discontinuity/kink design based on the federal Pell Grant formula. Each dollar of grant aid reduces loans by $1.80 among borrowers. We only find crowd-out of this magnitude in colleges that, like CUNY, "offer" no loan aid and require students to opt into borrowing. We develop and empirically support a model that shows opt-in or other fixed borrowing costs can lead grants to crowd out large amounts of loan aid, lowering some students attainment by reducing their liquid resources.

Suggested Citation

  • Benjamin M. Marx & Lesley J. Turner, 2018. "Borrowing Trouble? Human Capital Investment with Opt-In Costs and Implications for the Effectiveness of Grant Aid," American Economic Journal: Applied Economics, American Economic Association, vol. 10(2), pages 163-201, April.
    • Handle: RePEc:aea:aejapp:v:10:y:2018:i:2:p:163-201
    Note: DOI: 10.1257/app.20160127
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    Citations

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    Cited by:

    1. Stephanie R. Cellini & Rajeev Darolia & Lesley J. Turner, 2020. "Where Do Students Go When For-Profit Colleges Lose Federal Aid?," American Economic Journal: Economic Policy, American Economic Association, vol. 12(2), pages 46-83, May.
    2. Alonso Bucarey & Dante Contreras & Pablo Muñoz, 2018. "Labor Market Returns to Student Loans," Working Papers wp464, University of Chile, Department of Economics.
    3. Brent J. Evans & Angela Boatman & Adela Soliz, 2019. "Framing and Labeling Effects in Preferences for Borrowing for College: An Experimental Analysis," Research in Higher Education, Springer;Association for Institutional Research, vol. 60(4), pages 438-457, June.
    4. Jeffrey T. Denning & Benjamin M. Marx & Lesley J. Turner, 2019. "ProPelled: The Effects of Grants on Graduation, Earnings, and Welfare," American Economic Journal: Applied Economics, American Economic Association, vol. 11(3), pages 193-224, July.
    5. José Montalbán, 2023. "Countering Moral Hazard in Higher Education: The Role of Performance Incentives in Need-Based Grants," The Economic Journal, Royal Economic Society, vol. 133(649), pages 355-389.
    6. Catherine, Sylvain & Yannelis, Constantine, 2023. "The distributional effects of student loan forgiveness," Journal of Financial Economics, Elsevier, vol. 147(2), pages 297-316.
    7. Anderson, Drew M., 2020. "When financial aid is scarce: The challenge of allocating college aid where it is needed most," Journal of Public Economics, Elsevier, vol. 190(C).
    8. José Montalbán, 2019. "Countering moral hazard in higher education: The role of performance incentives in need-based grants," Working Papers halshs-02160365, HAL.
    9. George Bulman & Robert Fairlie & Sarena Goodman & Adam Isen, 2021. "Parental Resources and College Attendance: Evidence from Lottery Wins," American Economic Review, American Economic Association, vol. 111(4), pages 1201-1240, April.
    10. Michael S. Kofoed, 2022. "Pell Grants and Labor Supply: Evidence from a Regression Kink," Upjohn Working Papers 22-363, W.E. Upjohn Institute for Employment Research.
    11. Sandra E. Black & Jeffrey T. Denning & Lisa J. Dettling & Sarena Goodman & Lesley J. Turner, 2023. "Taking It to the Limit: Effects of Increased Student Loan Availability on Attainment, Earnings, and Financial Well-Being," American Economic Review, American Economic Association, vol. 113(12), pages 3357-3400, December.
    12. Maarten De Ridder & Simona Hannon & Damjan Pfajfar, 2020. "The Multiplier Effect of Education Expenditure," Finance and Economics Discussion Series 2020-058, Board of Governors of the Federal Reserve System (U.S.).
    13. Rodríguez-Planas, Núria, 2022. "Hitting where it hurts most: COVID-19 and low-income urban college students," Economics of Education Review, Elsevier, vol. 87(C).
    14. Jack Britton & Monica Costa Dias & David Goll, 2023. "Can higher education policy boost intergenerational mobility? Evidence from an empirical matching model," IFS Working Papers W23/06, Institute for Fiscal Studies.
    15. Veronica Rattini, 2022. "The Effects of Financial Aid on Graduation and Labor Market Outcomes: New Evidence from Matched Education-Labor Data," CESifo Working Paper Series 10010, CESifo.
    16. Matsuda, Kazushige & Mazur, Karol, 2022. "College education and income contingent loans in equilibrium," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 100-117.
    17. David Card & Alex Solis, 2022. "Measuring the Effect of Student Loans on College Persistence," Education Finance and Policy, MIT Press, vol. 17(2), pages 335-366, Spring.
    18. Charles Beach & Frank Milne, 2018. "Challenges To Higher Education In Canada And Australia," Working Paper 1407, Economics Department, Queen's University.
    19. Zachary Mabel, 2020. "Aiding or Dissuading? The Effects of Reducing Lifetime Eligibility Limits for Need-Based Aid on Bachelor’s Degree Attainment and Time to Completion," Research in Higher Education, Springer;Association for Institutional Research, vol. 61(8), pages 966-1001, December.
    20. José Montalbán, 2019. "Countering moral hazard in higher education: The role of performance incentives in need-based grants," PSE Working Papers halshs-02160365, HAL.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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