Grants or Loans? Theoretical Issues Regarding Access and Persistence in Postsecondary Education

Lorne Hugh Carmichael () and Ross Finnie
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Ross Finnie: University of Ottawa

No 1154, Working Papers from Queen's University, Department of Economics

Abstract: Most economic investigations of access to education treat an investment in college or university as if it were a financial investment offering a particular expected rate of return. Since the average measured rates of return are quite favourable, other factors such as lack of information, contrary parental infl‡uence, or "debt aversion" must be invoked to explain the unwillingness of some qualified students from poorer backgrounds to borrow money and attend. However, a model that recognizes the hardship associated with low levels of expenditure suggests that, ceteris paribus, poorer students will actually need a higher measured rate of return before they will decide to attend. The result holds even when there is an efficient student loan system. This approach can provide some normative guidance for decisions about the choice of grants or loans as vehicles for student aid, and has positive implications about the effects of grants and loans on access and persistence.

Keywords: postsecondary education; educational subsidies; student loans; equal access; hyperbolic preferences (search for similar items in EconPapers)
JEL-codes: I20 I22 J24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-edu and nep-hrm
Date: 2007-12
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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:1154

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