Student Loans and Social Mobility

Abstract

Students from low-income families invest much less in college education than high-income 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. I show that making public colleges tuition-free would mitigate financing constraints, but overall it would entail $11 billion deadweight loss per year and would disproportionately benefit wealthier students.

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

JEL Classification: I22, I24, H52, H81, J24, J62, G51