The Credits that Count: How Credit Growth and Financial Aid Affect College Tuition and Fees

Abstract:     
Using a two-stage least squares model, we build a macroeconomic model of supply and demand for US higher education as measured by enrollment. We find that college education benefits (e.g. relative earnings and employment level), credit factors (e.g. student loan amounts and household debt), and financial aid shift demand. Higher tuition prices increase appeal of higher education for students but credit constraints put a barrier on demand growth. Tuition prices and debt levels are highly correlated, suggesting that students respond to higher tuition prices by borrowing. School's operating costs as well as tuition and non-tuition revenue drive supply. Schools can use tuition prices to signal quality, and relative demand-side price in-elasticity allows them to raise prices. For the private institution sector alone, we see a higher level of consumer price sensitivity, with schools determining enrollment levels and adjusting tuition price accordingly.

Number of Pages in PDF File: 50

Keywords: demand for schooling, educational economics, educational finance, state and federal aid, student financial aid

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