Early Cost Realization and College Choice

Abstract

Student loans defer the cost of college until after graduation, allowing many students access to higher lifetime earnings and colleges and universities they otherwise could not afford. Even with student loans, however, we find students psychologically realize the financial costs of a college education long before their loan repayments begin. We theorize this early cost realization frames financial decisions between most pairs of colleges as an intertemporal tradeoff. Students choose between investments with (a) smaller short-term costs but smaller long-term returns (a Low Cost-Low Return college) and (b) larger short-term costs but larger long-term returns (a High Cost-High Return college). We find early cost realization increases preferences for LC-LR colleges—preferences that could reduce lifetime earnings—in both simulations and experiments. Preferences for LC-LR colleges are pronounced among financially impatient students and in choice pairs of LC-LR and HC-HR colleges where the equilibrium is set at a low discount rate threshold. A return-on-investment strategy, future uncertainty, and debt aversion cannot explain our results. A decision aid synchronizing the psychological realization of costs and benefits reduced preferences for LC-LR colleges, illustrating the preference is constructed and receptive to interventions.

Keywords: Intertemporal Choice, Student Debt, Higher Education, Mental Accounting, Decision Aids

JEL Classification: I00, I22, D15, D91