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"Borrowing Trouble? Student Loans, the Cost of Borrowing, and Implications for the Effectiveness of Need-Based Grant Aid”

Event Type
Institute of Government & Public Affairs
IGPA Giertz Conference Room, 1007 W. Nevada, Urbana
Apr 9, 2014   12:00 - 1:00 pm  
Ben Marx, Economics Department
Originating Calendar
Graduate College Funding and Financial Literacy

In this paper, we estimate the impact of need-based grant aid on City University of New York (CUNY) students' borrowing and educational attainment using regression discontinuity and regression kink designs. Pell Grant aid reduces borrowing: on average, an additional dollar of Pell Grant aid leads to $0.37 reduction in federal loans. Among borrowers, a dollar of Pell Grant aid crowds-out over $1.60 of loans. We develop a simple model that illustrates our findings are consistent with students facing a fixed cost of incurring debt. We show that in the presence of such a fixed cost, additional grant aid may decrease some students' educational attainment. Empirically, we find no evidence that Pell Grant aid increases educa-tional attainment, and can rule out impacts as small as a $1000 increase in Pell Grant aid leading to an additional 3 credits. Finally, we show that the fixed cost has economically meaningful impacts on behavior: we estimate that relaxing it would increase the borrowing rate by 60 percent.

Ben Marx joined the Department of Economics at the University of Illinois at Urbana-Champaign in 2013. He earned his doctorate in economics from Columbia University. Prior to graduate school, he taught in China and worked in refugee resettlement, after-school education, and nonprofit consulting. His research focuses on the provision of public goods and the funding and regulation of the nonprofit sector. This is a Brownbag Series. Bring your lunch if you wish. For more information on the series, visit igpa.uillinois.edu

Registration at igpa@uillinois.edu encouraged but not required.


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