A New Test of Borrowing Constraints for Education

Meta Brown, John Scholz and Ananth Seshadri

No 14879, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We discuss a simple model of intergenerational transfers with one-sided altruism: parents care about their child but the child does not reciprocate. Parents and children make investments in the child's education, investments for other purposes, and parents can transfer cash to their child. 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, using of 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.

JEL-codes: I22 J24 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-edu and nep-lab
Note: CH ED PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as Meta Brown & John Karl Scholz & Ananth Seshadri, 2012. "A New Test of Borrowing Constraints for Education," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 511-538.

Downloads: (external link)
http://www.nber.org/papers/w14879.pdf (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 (2010)
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:nbr:nberwo:14879

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w14879

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().