Student Loan Supply, Parental Saving & Portfolio Allocation

Abstract

I show that an expansion of student loan supply affects parents' saving decisions and portfolio allocation. By exploiting policy-induced variation on expected student aid, I find a 2.2 pp increase in the parental saving rate, from 4.9% to 6.1%. The mechanism that drives this result is the positive effect of student aid on students’ college enrollment. Consistent with this interpretation, I find a disproportionate increase in college enrollment for children of families affected by the reform. The positive saving response is largest among lower- and middle-income families, in areas with higher average college expenses and for parents with strong saving preferences. A placebo test validates that the effect is absent in families without children. Moreover, I show that affected parents shift the allocation of saving flows towards riskier assets.

Keywords: Student loans, household finance, saving behavior, portfolio choice

JEL Classification: D13, D14, E21, G11, I22