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Grants or Loans? Theoretical Issues Regarding Access and Persistence in Postsecondary Education


  • Lorne Carmichael

    () (Queen's University)

  • Ross Finnie

    (University of Ottawa)


Most economic investigations of access to education treat an investment in college or university as if it were a financial investment offering a particular expected rate of return. Since the average measured rates of return are quite favourable, other factors such as lack of information, contrary parental influence, or "debt aversion" must be invoked to explain the unwillingness of some qualified students from poorer backgrounds to borrow money and attend. However, a model that recognizes the hardship associated with low levels of expenditure suggests that, ceteris paribus, poorer students will actually need a higher measured rate of return before they will decide to attend. The result holds even when there is an efficient student loan system. This approach can provide some normative guidance for decisions about the choice of grants or loans as vehicles for student aid, and has positive implications about the effects of grants and loans on access and persistence.

Suggested Citation

  • Lorne Carmichael & Ross Finnie, 2007. "Grants or Loans? Theoretical Issues Regarding Access and Persistence in Postsecondary Education," Working Papers 1154, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1154

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    References listed on IDEAS

    1. Andrea Bassanini & Stefano Scarpetta, 2001. "Does Human Capital Matter for Growth in OECD Countries?: Evidence from Pooled Mean-Group Estimates," OECD Economics Department Working Papers 282, OECD Publishing.
    2. Sveinbjörn Blöndal & Simon Field & Nathalie Girouard, 2003. "Investment in human capital through upper-secondary and tertiary education," OECD Economic Studies, OECD Publishing, vol. 2002(1), pages 41-89.
    3. Moretti, Enrico, 2004. "Estimating the social return to higher education: evidence from longitudinal and repeated cross-sectional data," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 175-212.
    4. Kenkel, Donald S, 1991. "Health Behavior, Health Knowledge, and Schooling," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 287-305, April.
    5. Lance Lochner & Enrico Moretti, 2004. "The Effect of Education on Crime: Evidence from Prison Inmates, Arrests, and Self-Reports," American Economic Review, American Economic Association, vol. 94(1), pages 155-189, March.
    6. H. Lorne Carmichael, 1999. "Restructuring the University System: What Level of Public Support?," Canadian Public Policy, University of Toronto Press, vol. 25(1), pages 133-140, March.
    7. Hoenack, Stephen A, 1971. "The Efficient Allocation of Subsidies to College Students," American Economic Review, American Economic Association, vol. 61(3), pages 302-311, June.
    8. Johnson, George E, 1984. "Subsidies for Higher Education," Journal of Labor Economics, University of Chicago Press, vol. 2(3), pages 303-318, July.
    9. McPherson, Michael S & Schapiro, Morton Owen, 1991. "Does Student Aid Affect College Enrollment? New Evidence on a Persistent Controversy," American Economic Review, American Economic Association, vol. 81(1), pages 309-318, March.
    10. Gary S. Becker, 1975. "Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education, Second Edition," NBER Books, National Bureau of Economic Research, Inc, number beck75-1, January.
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    More about this item


    postsecondary education; educational subsidies; student loans; equal access; hyperbolic preferences;

    JEL classification:

    • I20 - Health, Education, and Welfare - - Education - - - General
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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