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Self-financing, Parental Transfer, and College Education

Sunha Myong and Jungho Lee
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Sunha Myong: Singapore Management University
Jungho Lee: Singapore Management University

No 106, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study a college-financing problem by a family when children can self-finance by working. We develop and estimate a model in which children's human-capital accumulation depends on both monetary and time investment. The model explains how endogenous interactions between parental transfer, student loans, and self-financing lead to heterogeneous human-capital accumulation during college. Consumption smoothing is an important motive for self-financing if children can borrow only for education but not for consumption (the tied-to-investment constraint). When the constraint binds, parental transfer can increase children's monetary and time investment by reducing children's labor supply during college. This effect is more pronounced among high-ability students, and the model predicts the parental transfer in college financing increases by child ability, as observed in the data. Heterogeneous working hours by college students explain 14\% of the standard deviation of the within-group-income inequality among four-year-college attendees. Work-study program with a cap in working hours can effectively reduce income inequalities without substantial crowd-out by parents. Expanding loans for consumption are more effective in reducing income inequalities, but it results in substantial crowd-out by parents.

New Economics Papers: this item is included in nep-dge and nep-sea
Date: 2019
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