Student Loans and Social Mobility

Abstract

Students from poor families invest much less in college education than rich families. To assess the role of finance and subsidy schemes, I estimate a model of college choice with financing frictions. I find that the college education gap is mainly due to heterogeneity in preparedness for college; frictionless access to student loans would substantially increase consumption during college but would only marginally affect the investment gap in college education. Making public colleges tuition-free would mitigate financing constraints, but overall it would entail more than $15B deadweight loss per year and would disproportionately benefit wealthier students. Expanding federal Pell grants, in contrast, would benefit lower-income students at a much lower cost.

Keywords: Education Finance, Human Capital, Intergenerational Mobility, Student Loans, Financial Aid, Financing Frictions, Household Finance

JEL Classification: I22, I24, G18, H52, H81, J24, J62, D14