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Borrowing Trouble? Student Loans, the Cost of Borrowing, and Implications for the Effectiveness of Need-Based Grant Aid

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  • Benjamin M. Marx
  • Lesley J. Turner

Abstract

We use regression discontinuity and regression kink designs to estimate the impact of need-based grant aid on the borrowing and educational attainment of students enrolled in a large public university system. Pell Grant aid substantially reduces borrowing: among students who would borrow in the absence of a Pell Grant, every dollar of Pell Grant aid crowds-out over $1.80 of loans. A simple model illustrates that our findings are consistent with students facing a fixed cost of incurring debt. The presence of such a fixed cost may lead to the unintended consequence of additional grant aid decreasing some students' attainment. Empirically, we rule out all but modest average impacts of Pell Grant aid on attainment, and we provide suggestive evidence of heterogeneous effects consistent with our fixed-borrowing-cost model. We estimate an augmented Tobit model with random censoring thresholds to allow for heterogeneous fixed borrowing costs, and find that eliminating the fixed cost would increase borrowing by over 250 percent.

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  • Benjamin M. Marx & Lesley J. Turner, 2015. "Borrowing Trouble? Student Loans, the Cost of Borrowing, and Implications for the Effectiveness of Need-Based Grant Aid," NBER Working Papers 20850, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20850
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    Cited by:

    1. Jeffrey T. Denning & Todd R. Jones, 2021. "Maxed Out?: The Effect of Larger Student Loan Limits on Borrowing and Education Outcomes," Journal of Human Resources, University of Wisconsin Press, vol. 56(4), pages 1113-1140.
    2. Martin Gervais & Nicolas L. Ziebarth, 2019. "Life After Debt: Postgraduation Consequences Of Federal Student Loans," Economic Inquiry, Western Economic Association International, vol. 57(3), pages 1342-1366, July.
    3. Goodman, Sarena & Isen, Adam & Yannelis, Constantine, 2021. "A day late and a dollar short: Liquidity and household formation among student borrowers," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1301-1323.
    4. Karthik Krishnan & Pinshuo Wang, 2019. "The Cost of Financing Education: Can Student Debt Hinder Entrepreneurship?," Management Science, INFORMS, vol. 65(10), pages 4522-4554, October.
    5. David O Lucca & Taylor Nadauld & Karen Shen, 2019. "Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs," The Review of Financial Studies, Society for Financial Studies, vol. 32(2), pages 423-466.
    6. Juliana Londono-Velez & Catherine Rodriguez & Fabio Sánchez?, 2017. "The Intended and Unintended Impacts of a Merit-Based Financial Aid Program for the Poor: The Case of Ser Pilo Paga," Documentos CEDE 15466, Universidad de los Andes, Facultad de Economía, CEDE.
    7. Adeline Delavande & Basit Zafar, 2014. "University choice: the role of expected earnings, non-pecuniary outcomes, and financial constraints," Staff Reports 683, Federal Reserve Bank of New York.
    8. Weber, Andrea & Manoli, Dayanand, 2016. "The Effects of the Early Retirement Age on Retirement Decisions," CEPR Discussion Papers 11491, C.E.P.R. Discussion Papers.
    9. Raj Chetty & John N. Friedman & Emmanuel Saez & Nicholas Turner & Danny Yagan, 2017. "Mobility Report Cards: The Role of Colleges in Intergenerational Mobility," NBER Working Papers 23618, National Bureau of Economic Research, Inc.
    10. Abraham, Katharine G. & Filiz-Ozbay, Emel & Ozbay, Erkut Y. & Turner, Lesley J., 2020. "Framing effects, earnings expectations, and the design of student loan repayment schemes," Journal of Public Economics, Elsevier, vol. 183(C).
    11. Joshua Angrist & David Autor & Sally Hudson & Amanda Pallais, 2014. "Leveling Up: Early Results from a Randomized Evaluation of Post-Secondary Aid," NBER Working Papers 20800, National Bureau of Economic Research, Inc.
    12. Dylan Conger & Lesley J. Turner, 2015. "The Impact of Tuition Increases on Undocumented College Students' Attainment," NBER Working Papers 21135, National Bureau of Economic Research, Inc.
    13. Benjamin M. Marx & Lesley J. Turner, 2019. "Student Loan Choice Overload," NBER Working Papers 25905, National Bureau of Economic Research, Inc.
    14. Day Manoli & Nicholas Turner, 2018. "Cash-on-Hand and College Enrollment: Evidence from Population Tax Data and the Earned Income Tax Credit," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 242-271, May.
    15. Lindsay C. Page & Judith Scott-Clayton, 2015. "Improving College Access in the United States: Barriers and Policy Responses," NBER Working Papers 21781, National Bureau of Economic Research, Inc.
    16. Raj Chetty & John N. Friedman & Emmanuel Saez & Nicholas Turner & Danny Yagan, 2020. "The Determinants of Income Segregation and Intergenerational Mobility: Using Test Scores to Measure Undermatching," NBER Working Papers 26748, National Bureau of Economic Research, Inc.
    17. Conger, Dylan & Turner, Lesley J., 2017. "The effect of price shocks on undocumented students' college attainment and completion," Journal of Public Economics, Elsevier, vol. 148(C), pages 92-114.
    18. Page, Lindsay C. & Scott-Clayton, Judith, 2016. "Improving college access in the United States: Barriers and policy responses," Economics of Education Review, Elsevier, vol. 51(C), pages 4-22.
    19. Carruthers, Celeste K. & Welch, Jilleah G., 2019. "Not whether, but where? Pell grants and college choices," Journal of Public Economics, Elsevier, vol. 172(C), pages 1-19.
    20. Ganong, Peter & Jäger, Simon, 2014. "A Permutation Test and Estimation Alternatives for the Regression Kink Design," IZA Discussion Papers 8282, Institute of Labor Economics (IZA).
    21. Serge Herzog, 2018. "Financial Aid and College Persistence: Do Student Loans Help or Hurt?," Research in Higher Education, Springer;Association for Institutional Research, vol. 59(3), pages 273-301, May.
    22. Ben Ost & Weixiang Pan & Douglas Webber, 2018. "The Returns to College Persistence for Marginal Students: Regression Discontinuity Evidence from University Dismissal Policies," Journal of Labor Economics, University of Chicago Press, vol. 36(3), pages 779-805.
    23. Anderson, Drew M. & Goldrick-Rab, Sara, 2018. "Aid after enrollment: Impacts of a statewide grant program at public two-year colleges," Economics of Education Review, Elsevier, vol. 67(C), pages 148-157.

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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