Journal Article

A New Test of Borrowing Constraints for Education

Meta Brown, John Karl Scholz and Ananth Seshadri

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 2, pages 511-538
Published in print April 2012 | ISSN: 0034-6527
Published online November 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdr032
A New Test of Borrowing Constraints for Education

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  • Economics of Health
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We discuss a simple model in which parents and children make investments in the children's education and investments for other purposes and parents can transfer cash to their children. We show that for an identifiable set of parent–child pairs, parents will rationally underinvest in their child's education. For these parent–child pairs, additional financial aid will increase educational attainment. The model highlights an important feature of higher education finance, the “expected family contribution” (EFC) that is based on income, assets, and other factors. The EFC is neither legally guaranteed nor universally offered: our model identifies the set of families that are disproportionately likely to not provide their full EFC. Using a common proxy for financial aid, we show, in data from the Health and Retirement Study, that financial aid increases the educational attainment of children whose families are more likely than others to underinvest in education. Financial aid has no effect on the educational attainment of children in other families. The theory and empirical evidence identifies a set of children who face quantitatively important borrowing constraints for higher education.

Keywords: Education; Borrowing constraints; H52; I18

Journal Article.  14911 words. 

Subjects: Economics of Health ; National Government Expenditures and Related Policies

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