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

56 Pages Posted: 20 Jan 2015 Last revised: 22 Dec 2021

See all articles by Benjamin Marx

Benjamin Marx

University of Illinois at Urbana-Champaign

Lesley J. Turner

Columbia University

Date Written: January 2015

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.

Suggested Citation

Marx, Benjamin and Turner, Lesley J., Borrowing Trouble? Student Loans, the Cost of Borrowing, and Implications for the Effectiveness of Need-Based Grant Aid (January 2015). NBER Working Paper No. w20850, Available at SSRN: https://ssrn.com/abstract=2551658

Benjamin Marx (Contact Author)

University of Illinois at Urbana-Champaign ( email )

Lesley J. Turner

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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