Student Loans and Social Mobility
57 Pages Posted: 27 Aug 2020 Last revised: 12 Nov 2020
Date Written: November 1, 2020
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
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