Education Inequality with Free Higher Education: Evidence from Iran

Abstract

We examine why educational inequality persists even if universities are tuition-free. Using nationally representative microdata from Iran, we document steep income gradients in university entry-exam preparation and outcomes. We develop and estimate a model of college choice with tuition subsidy and endogenous exam preparation and college admission, separating the roles of finance and admission channels. Results show that free tuition only modestly changes the socioeconomic composition at selective universities because entry-level competition drives costly preparation; wealthier households secure top ranks and selective seats through better preparation. Counterfactuals suggest that targeted pre-college support is far more effective than universal tuition subsidies.

Keywords: Higher Education, Educational Inequality, Educational Finance, Financial Aid, College Admissions

JEL Classification: I22, I24, I28, H52, H81