Does Student Aid Improve Educational Mobility?

Universal education systems are often said to promote intergenerational mobility in education. However, despite tax-financed post-secondary education and generous student aid, educational mobility in Denmark remains low. To rationalize this, we develop a structural life cycle model in which education choice depends on preferences, graduation probabilities, and parental transfers, which in turn vary by child ability and parental education. After estimating the model on Danish register data, we first disentangle the drivers of intergenerational persistence in education. Subsequently, we conduct counterfactual policy experiments to assess the potential of education policy to improve mobility. We find that increasing current subsidies has only small positive effects on educational attainment and mobility. Similarly, relaxing the student debt limit has virtually no effect. Our decomposition exercises suggest that this is because the persistent transmission of ability and preference heterogeneity dominate immediate pecuniary incentives.