State Investment in Higher Education: Effects on Human Capital Formation, Student Debt, and Long-Term Financial Outcomes of Students

86 Pages Posted: 22 Sep 2020 Last revised: 18 Nov 2022

See all articles by Rajashri Chakrabarti

Rajashri Chakrabarti

Federal Reserve Bank of New York

Nicole Gorton

Federal Reserve Banks - Federal Reserve Bank of New York

Michael Lovenheim

Cornell University - Department of Policy Analysis and Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2020

Abstract

Most public colleges and universities rely heavily on state financial support. As state budgets have tightened in recent decades, appropriations for higher education have declined substantially. Despite concerns expressed by policymakers and scholars that the declines in state support have reduced the return to education investment for public sector students, little evidence exists that can identify the causal effect of these funds on long-run outcomes. We present the first such analysis in the literature using new data that leverages the merger of two rich datasets—consumer credit records from the New York Fed’s Consumer Credit Panel (CCP) sourced from Equifax, and administrative college enrollment and attainment data from the National Student Clearinghouse. We overcome identification concerns related to the endogeneity of state appropriation variation using an instrument that interacts with the baseline share of total revenue that comes from state appropriations at each public institution with yearly variation in state-level appropriations. Our analysis is conducted separately for two-year and four-year students, and we analyze individuals into their mid-30s. For four-year students, we find that state appropriation increases lead to lower student debt originations and reduce adverse debt events, but we find little effect on other outcomes. In the two-year sector, state appropriation increases lead to more collegiate and post-collegiate educational attainment as well as lower student debt originations, delinquency, and default. State support also leads to better long-run outcomes, such as higher probability of homeownership, higher spending (both durable and non-durable), lower delinquencies, and increases in credit scores and in the quality of the neighborhood in which people live in their 30s. Examining mechanisms, we find state appropriations are passed on to students in the form of lower tuition in the four-year sector with little institutional spending response. For community colleges, we find evidence of both price and quality mechanisms, the latter captured in higher educational resources in key spending categories. These results are consistent with the different pattern of effects we document in the four-year and two-year sectors. Our results underscore the importance of state support for higher education in driving student debt outcomes and the returns to postsecondary investments students experience.

Keywords: postsecondary education, state appropriations, student loans, returns to education, delinquency, home ownership

JEL Classification: H72, H75, I2

Suggested Citation

Chakrabarti, Rajashri and Gorton, Nicole and Lovenheim, Michael, State Investment in Higher Education: Effects on Human Capital Formation, Student Debt, and Long-Term Financial Outcomes of Students (September 1, 2020). FRB of New York Staff Report No. 941, Available at SSRN: https://ssrn.com/abstract=3696679 or http://dx.doi.org/10.2139/ssrn.3696679

Rajashri Chakrabarti (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/chakrabarti

Nicole Gorton

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Michael Lovenheim

Cornell University - Department of Policy Analysis and Management ( email )

Ithaca, NY
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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