Student Loans and Social Mobility

79 Pages Posted: 27 Aug 2020 Last revised: 26 Apr 2022

Date Written: February 21, 2022

Abstract

Students of lower-income families invest much less in college education than higher-income families. To assess the role of financing constraints and subsidy schemes in explaining this gap, I structurally estimate a 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 (perceived) value-added of college. Frictionless access to student loans would substantially increase consumption during college but would leave the investment in college education mainly unaffected. I show that making public colleges tuition-free would mitigate financing constraints, but it would overall entail more than $15B deadweight loss per year and would disproportionately benefit wealthier students. 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 (February 21, 2022). 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)

Stockholm School of Economics ( email )

Drottninggatan 98
Swedish House of Finance
Stockholm, Stockholm 11160
Sweden

HOME PAGE: http://www.mehranebrahimian.com/

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