Born Under a Lucky Star: Financial Aid, College Completion, Labor Supply, and Credit Constraints

“Attending college can have large impacts on students’ earnings as well as many other dimensions of students’ lives. Moreover, students who complete college have substantially higher wages than those who do not. The price of college may play a key role in determining college completion due to credit constraints and time costs of employment during college” (p.2).

 

“There are at least two interrelated mechanisms by which financial aid may change student outcomes: 1) student labor supply and 2) credit constraints….This study quantifies how much students adjust their labor supply when the price of college decreases using administrative Unemployment Insurance earnings data linked to higher-education administrative records” (p.8). “Financial aid may reduce time to degree because it eases binding credit constraints. This paper estimates to what degree increased financial aid eases these constraints” (p.9).

 

“This study makes two main contributions. First, it examines the effect of additional financial aid on graduation for inframarginal students [those whose enrollment was not affected by financial aid]” (p.2). “Most work on the effect of financial aid on graduation estimates an effect that combines an increase in enrollment and a potential increase in persistence. Far fewer papers have examined the effect of financial aid on enrolled students” (p.6).

Second, the study examines whether additional financial aid affects earnings while in college and course taking decisions.

 

“[An additional] contribution of this study is to focus on older students. It builds off of the work [of other authors] who examine the effect of financial independence on student enrollment and find that financial independence increases student enrollment.” (p.7).

 

The author uses “detailed administrative data from all public institutions of higher education in Texas from academic years 2003–2004 to 2013–2014 linked to earnings records from Texas’s Unemployment Insurance…system. Students who are 24 before January 1 are financially independent for the entire school year, whereas students who turn 24 on January 1 or later are financially dependent. Financial independence can induce large increases in federal financial aid such as Pell Grants as well as federal loans” (p.4). The author leverages this existing cutoff point in financial aid eligibility to “isolate the effect of financial aid on student outcomes” using a regression discontinuity design (p.4).

 

(Abstractor: Author and Website Staff)

This study found “that additional financial aid accelerates graduation for university seniors because they increase credits attempted and reduce earnings while in college….[The author’s] estimates…imply that roughly 50 percent of the observed increase in time to degree can be explained by changes in tuition” (p.1). “University students see substantial changes in financial aid arising from financial independence” (p.17). “This large change in financial aid allows an examination of whether student outcomes are affected by financial aid….[The study found that] financial independence increases student credit hours attempted by 0.39. In attempting more credits, students could see their GPA decrease if they do not change the time devoted to studying. However, in spite of this larger class load, the student GPAs are unaffected….Students are 1.8 percentage points more likely to graduate in the year they turn 24 as a result of additional financial aid” (p.18). “Overall, the evidence suggests that students reduce earnings when receiving additional financial aid” (p.20). The author argues that “[t]he effects of college price on inframarginal students are important because they affect many students and are implicitly included in every financial aid and tuition policy considered but are rarely measured” (p.26). The author concludes that “the change in financial aid associated with financial independence is poorly targeted. The largest increases in aid go to students who come from the most affluent backgrounds. As a result, the benefits from the change in independence (namely one additional year in the labor market) do not outweigh the costs for the sample as a whole. However, for poorer students who see smaller changes in aid, the effects on time to degree are comparatively larger. For students who had previously had a zero [Expected Family Contribution], time to degree is reduced simply by allowing additional borrowing of unsubsidized loans. The heterogeneous effects of financial aid by family income underscore how targeting financial aid to needier students improves student outcomes relative to aid for wealthier students. This is particularly important for evaluating policy that reduces the price of college for all students” (p.27). (Abstractor: Author and Website Staff)

• Last Updated:
• Created:
• Resource Publication Date: 2017
• Author(s): Denning, Jeffrey T.
• Organizational Author(s): W.E. Upjohn Institute for Employment Research, Brigham Young University
• Funding Source: W.E. Upjohn Institute
• Resource Availability: Publicly available
• Posted by: Wesley Peterson
• Posted in: Workforce System Strategies