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Borrowing Trouble? Human Capital Investment with Opt-In Costs and Implications for the Effectiveness of Grant Aid

Benjamin Marx and Lesley Turner

American Economic Journal: Applied Economics, 2018, vol. 10, issue 2, 163-201

Abstract: We estimate the effect of grant aid on City University of New York (CUNY) students' borrowing and attainment using a regression discontinuity/kink design based on the federal Pell Grant formula. Each dollar of grant aid reduces loans by $1.80 among borrowers. We only find crowd-out of this magnitude in colleges that, like CUNY, "offer" no loan aid and require students to opt into borrowing. We develop and empirically support a model that shows opt-in or other fixed borrowing costs can lead grants to crowd out large amounts of loan aid, lowering some students attainment by reducing their liquid resources.

JEL-codes: D14 I22 I23 I26 J24 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/app.20160127
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American Economic Journal: Applied Economics is currently edited by Alexandre Mas

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Handle: RePEc:aea:aejapp:v:10:y:2018:i:2:p:163-201