A New Test of Borrowing Constraints for Education

Meta Brown, John Scholz and Ananth Seshadri

No 2011-003, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: We discuss a simple model in which parents and children make investments in the children's education, 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 under-invest 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 disproportionately likely to under-invest 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.

Date: 2010
Note: M
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://humcap.uchicago.edu/RePEc/hka/wpaper/Brown_ ... _new-test-borrow.pdf First version, July 2010 (application/pdf)

Related works:
Journal Article: A New Test of Borrowing Constraints for Education (2012)
Working Paper: A New Test of Borrowing Constraints for Education (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hka:wpaper:2011-003

Access Statistics for this paper

More papers in Working Papers from Human Capital and Economic Opportunity Working Group Contact information at EDIRC.
Bibliographic data for series maintained by Jennifer Pachon ().