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Credit Constraints and Demand for Higher Education: Evidence from Financial Deregulation

  • Teng Sun, Stephen
  • Yannelis, Constantine

This paper uses staggered bank branching deregulation across states in the United States to examine the impact of the resulting increase in the supply of credit on college enrollment from the 70s to early 90s. A significant advantage of our research design is that it produces estimates that are not confounded by wealth effects. We find that lifting branching restrictions raises college enrollment by about 2 percentage points (4%). Our results rule out alternative interpretations to the credit constraints channel. First, the effects are largest for low and middle income families, while insignificant for upper income families as well as bankrupt families who would have been unaffected by the increased access to private credit. Second, the effect of lifting branching restrictions subsided immediately following periods of increased loan limit through government student loan programs. We also show that household educational borrowing increased as a result of lifting branching restrictions. Our results provide novel evidence that credit constraints play an important role in determining household college enrollment decisions in the United States.

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File URL: https://mpra.ub.uni-muenchen.de/48726/1/MPRA_paper_48726.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 48726.

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Date of creation: 30 Jul 2013
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Handle: RePEc:pra:mprapa:48726
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  1. Michael F. Lovenheim & C. Lockwood Reynolds, 2013. "The Effect of Housing Wealth on College Choice: Evidence from the Housing Boom," Journal of Human Resources, University of Wisconsin Press, vol. 48(1), pages 1-35.
  2. Susan McLaughlin, 1995. "The impact of interstate banking and branching reform: evidence from the states," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 1(May).
  3. Yuliya Demyanyk & Charlotte Ostergaard & Bent E. Sørensen, 2007. "U.S. Banking Deregulation, Small Businesses, and Interstate Insurance of Personal Income," Journal of Finance, American Finance Association, vol. 62(6), pages 2763-2801, December.
  4. Todd R. Stinebrickner & Ralph Stinebrickner, 2007. "The Effect of Credit Constraints on the College Drop-Out Decision: A Direct Approach Using a New Panel Study," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20071, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
  5. Carneiro, Pedro & Heckman, James J., 2002. "The Evidence on Credit Constraints in Post-Secondary Schooling," IZA Discussion Papers 518, Institute for the Study of Labor (IZA).
  6. Michael F. Lovenheim, 2011. "The Effect of Liquid Housing Wealth on College Enrollment," Journal of Labor Economics, University of Chicago Press, vol. 29(4), pages 741 - 771.
  7. Huang, Rocco R., 2008. "Evaluating the real effect of bank branching deregulation: Comparing contiguous counties across US state borders," Journal of Financial Economics, Elsevier, vol. 87(3), pages 678-705, March.
  8. William R. Kerr & Ramana Nanda, 2009. "Banking Deregulations, Financing Constraints and Firm Entry Size," Harvard Business School Working Papers 10-010, Harvard Business School, revised Oct 2009.
  9. Mathias Hoffmann & Iryna Shcherbakova, 2008. "Consumption risk sharing over the business cycle: the role of small firms' access to credit markets," IEW - Working Papers 363, Institute for Empirical Research in Economics - University of Zurich.
  10. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
  11. Belley, Phillippe & Lochner, Lance, 2009. "The Changing Role of Family Income and Ability in Determining Educational Achievement," CLSSRN working papers clsrn_admin-2009-9, Vancouver School of Economics, revised 02 Feb 2009.
  12. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1437-1467.
  13. John Bound & Sarah E. Turner, 1999. "Going to War and Going to College: Did World War II and the G.I. Bill Increase Educational Attainment for Returning Veterans?," NBER Working Papers 7452, National Bureau of Economic Research, Inc.
  14. Beck, T.H.L. & Levine, R. & Levkov, A., 2009. "Big Bad Banks? The Winners and Losers From Bank Deregulation in the United States," Discussion Paper 2009-56, Tilburg University, Center for Economic Research.
  15. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 517-555.
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