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Optimism about Graduation and College Financial Aid

Author

Listed:
  • Emily G. Moschini
  • Gajendran Raveendranathan
  • Ming Xu

Abstract

In the United States, college dropout risk is sizable. We provide new empirical evidence that beliefs about the likelihood of earning a bachelor's degree predict college enrollment, and that the distribution of these beliefs exhibits widespread optimism. We incorporate this distribution of beliefs into an overlapping generations model with college as a risky investment that can be financed via federal loans, grants, family transfers, or earnings. We then examine the welfare impact of access to federal student loans. We find that access can reduce welfare for young adults who are low-skilled, poor, and optimistic, due to their mistaken beliefs.

Suggested Citation

  • Emily G. Moschini & Gajendran Raveendranathan & Ming Xu, 2026. "Optimism about Graduation and College Financial Aid," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(2), pages 148-187, April.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:2:p:148-87
    DOI: 10.1257/mac.20230303
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    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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