Student Aid Design, Academic Achievement, and Labor Market Behavior: Grants or Loans?
50 Pages Posted: 30 Aug 2017 Last revised: 28 Aug 2020
Date Written: August 29, 2019
How does financial aid design affect student behavior and achievement? We first estimate the impact of a study-aid reform that caused students to work more and accumulate less debt. To quantify mechanisms and perform counterfactuals, we estimate a dynamic model of college enrollment, work, and loan take-up decisions. We find that grants have stronger effects on student behavior, student debt, and human capital when alternative income and borrowing opportunities are costlier. Loan repayment conditions affect dropout rates 3-4 times more when grants are 5% of aid compared to 50%. Individuals with lower endowments find income-contingent loans more beneficial and their human capital is more sensitive to aid policies. Financial aid design can close the initial endowment gap in dropout rates, but it only reduces the gap in 4-year college degrees by 12% as most of the marginal graduates attain shorter degree programs with low labor market return.
Keywords: Student Aid, Grants and Loans, Education and Labor Market Outcomes, Dynamic Discrete Choice
JEL Classification: D90, H52, I21, I22, I28, J22, J24, J31
Suggested Citation: Suggested Citation