Borrowing Trouble? Student Loans, the Cost of Borrowing, and Implications for the Effectiveness of Need-Based Grant Aid

Benjamin Marx and Lesley Turner

No 20850, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use regression discontinuity and regression kink designs to estimate the impact of need-based grant aid on the borrowing and educational attainment of students enrolled in a large public university system. Pell Grant aid substantially reduces borrowing: among students who would borrow in the absence of a Pell Grant, every dollar of Pell Grant aid crowds-out over $1.80 of loans. A simple model illustrates that our findings are consistent with students facing a fixed cost of incurring debt. The presence of such a fixed cost may lead to the unintended consequence of additional grant aid decreasing some students' attainment. Empirically, we rule out all but modest average impacts of Pell Grant aid on attainment, and we provide suggestive evidence of heterogeneous effects consistent with our fixed-borrowing-cost model. We estimate an augmented Tobit model with random censoring thresholds to allow for heterogeneous fixed borrowing costs, and find that eliminating the fixed cost would increase borrowing by over 250 percent.

JEL-codes: D14 H52 I22 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-edu
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Citations: View citations in EconPapers (29)

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