Student Loans and Social Mobility

57 Pages Posted: 27 Aug 2020 Last revised: 12 Nov 2020

See all articles by Mehran Ebrahimian

Mehran Ebrahimian

University of Pennsylvania - The Wharton School

Date Written: November 1, 2020

Abstract

Students of poor families invest much less than rich families in college education. To assess the role of financing constraints and subsidy schemes in explaining this gap, I structurally estimate an IO/finance model of college choice in the presence of financing frictions. The estimation uses novel nationally representative data on US high-school and college students. I propose a novel identification strategy that relies on bunching at federal Stafford loan limits and differences between in- and out-of-state tuition. I find that the college investment gap is mainly due to fundamental factors—heterogeneity in preparedness for college and the value-added of college—rather than financing constraints faced by lower-income students. Making public colleges tuition-free would substantially reduce student debt, but it would disproportionately benefit wealthier students, and it would entail more than $15B deadweight loss per year by distorting college choices. Expanding Pell grants, in contrast, would benefit lower-income students at a much lower cost.

Keywords: Student Loans, Social Mobility, Financing Friction, Higher Education Policy, Household Finance

Suggested Citation

Ebrahimian, Mehran, Student Loans and Social Mobility (November 1, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3680159 or http://dx.doi.org/10.2139/ssrn.3680159

Mehran Ebrahimian (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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