Borrowing trouble? Human capital investment with opt-in costs and implications for the effectiveness of grant aid

Lesley J. Turner and Benjamin M. Marx , Working Paper , November 2015.

We estimate the impact of grant aid on borrowing and educational attainment of students enrolled in a large public university system using regression discontinuity and regression kink designs. Each dollar of Pell Grant aid causes borrowers to reduce loans by $1.80. We show that this degree of crowd-out is due to a fixed cost of borrowing, primarily driven by opt- in costs. A fixed borrowing cost may lead grant aid to decrease some students’ attainment; we provide evidence of heterogeneous effects consistent with this prediction, and can rule out average impacts greater than an additional credit earned per $1,000. We estimate a structural model with unobserved, heterogeneous fixed borrowing costs and find that eliminating these would increase borrowing by over 250 percent. Our findings suggest that opt-in costs for student loans lead to underinvestment in human capital and can negate or even reverse the impact of grants on attainment 

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