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

Author

Listed:
  • 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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    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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