Credit Constraints in the Demand for Education: Evidence from Survey Data

Sorokina, Olga V. (2008): Credit Constraints in the Demand for Education: Evidence from Survey Data.

Abstract

How important are liquidity constraints in the demand for college education in the U.S.? Who is most likely to be affected? Persistent credit constraints can lead to inefficient skill allocations and, given the wide gap between college and high school earnings, can work to perpetuate imbalances in the distribution of economic well-being. Unfortunately, empirical evidence regarding the pervasiveness of credit constraints in the demand for college education has not been consistent in part because constraints tend to be inferred indirectly and approaches for gauging them differ. In contrast with existing studies I use a measure that is more direct, namely self-reported financial constraints available in the National Longitudinal Survey of Youth. I find that about 13 percent of college-age individuals expect to underinvest in education because of financial limitations. These are the youths from less well-off families who live in areas with no universities in the vicinity. The findings of this paper suggest that liquidity constraints are potentially more pervasive than earlier studies indicate.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit Constraints, Expectations, Demand for Education
• Subjects: I - Health, Education, and Welfare > I2 - Education and Research Institutions; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity

References

Daron Acemoglu and Steffen Pischke. 2001. ”Changes in theWage Structure, Family Income, and Children’s Education,” European Economic Review, vol. 45, no. 4-6, pp. 890-904.

Averett, Susan L. and Mark L. Burton. 1996. ”College Attendance and the College Wage Premium: Differences by Gender,” Economics of Education Review, vol. 15, no. 1, pp. 37-49.

Belley Philippe and Lance Lochner. 2007. ”The Changing Role of Family Income and Ability in Determining Educational Achievement,” Journal of Human Capital, vol. 1, pp. 37-89.

Cameron, Stephen V. and James J. Heckman. 1998. ”Life-Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males,” Journal of Political Economy, vol. 106, no. 2, pp. 262 - 333.

Cameron, Stephen V. and James J. Heckman. 2001. ”The Dynamics Of Educational Attainment For Black Hispanic, And White Males,” Journal of Political Economy, vol. 109, no. 3, pp. 455-499.

Cameron, Stephen V. and Christopher Taber. 2004. ”Estimation of Educational Borrowing Constraints Using Returns to Schooling,” Journal of Political Economy, vol. 112, no. 1, pp. 132-182.

Cao, Honggao. 2008. ”Credit Constraints and Human Capital Investment in College Education,” Journal of Family and Economic Issues, vol. 29, no.1, pp. 41-54.

Card, David. 1995. ”Earnings, Schooling, and Ability Revisited,” in Solomon Polachek (ed.) Research in Labor Economics, vol. 14, Greenwich, Connecticut: JAI.

Card, David. 1995. ”Using Geographic Variation in College Proximity to Estimate the Return to Schooling,” in Louis Christofides, E. Kenneth Grant, and Robert Swindinsky (eds.), Aspects of Labour Economics: Essays in Honour of John Vanderkamp. Toronto, Canada: University of Toronto Press.

Card, David. 2001. ”Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems,” Econometrica, vol. 69, no. 5, pp. 1127- 60.

Carneiro, Pedro and James J. Heckman. 2002. ”The Evidence on Credit Constraints in Post-Secondary Schooling,” Economic Journal, vol. 112, pp. 705-734.

Carneiro, Pedro and James J. Heckman. 2003. ”Human Capital Policy,” NBER Working Paper 9495. Available from http://www.nber.org/papers/w9495 Accessed on March 17, 2008.

Cawley, John., James Heckman, Lance Lochner, and Edward Vytlacil. 2000. ”Understanding the Role of Cognitive Ability in Accounting for the Recent Rise in the Economic Return to Education,” in Kenneth Arrow, Samuel Bowles, Steven Durlauf (eds.), Meritocracy and Economic Inequality, Princeton, New Jersey: Princeton University Press.

College Board. 2008. Trends in College Pricing 2007, Washington: DC. Available from http://www.collegeboard.com/prod downloads/ about/news info/trends/trends pricing 07.pdf (Accessed on October 10, 2008).

DeNavas-Walt, Carmen, Bernadette Proctor, and Jessica Smith. 2008. ”Income, poverty, and health insurance coverage in the United States: 2007,” Current Population Reports, P60-235. Washington, DC: U.S. Census Bureau. Available from http://www.census.gov/prod/2008pubs/ p60-235.pdf (Accessed on October 10, 2008).

Dominitz, Jeff. 1998. ”Earnings Expectations, Revisions, and Realizations,” Review of Economics and Statistics, vol. 80, no. 3, pp. 374-388. Dominitz, Jeff and Charles Manski. 1996. ”Eliciting Student Expectations of the Returns to Schooling,” Journal of Human Resources, vol. 31, no. 1, pp. 1-26.

Dynarski, Susan. 2002. ”The Behavioral and Distributional Implications of Aid for College,” American Economic Review Papers and Proceedings, vol. 92, no. 2, pp. 279-285.

Ellwood, David T. and Kane, Thomas J. 2000. ”Who is Getting a College Education? Family Background and the Growing Gaps in Enrollment,” in Securing the Future, eds. Sheldon Danziger and Jane Waldfogel. New York, NY: Russell Sage Foundation.

Fender, John and Ping Wang. 2003. ”Educational Policy in a Credit Constrained Economy with Skill Heterogeneity,” International Economic Review, vol. 44, no. 3, pp. 939-964.

Goldin, Claudia and Lawrence F. Katz, ”Long-Run Changes in the U.S. Wage Structure: Narrowing, Widening, Polarizing,” NBER Working Paper No. W13568. Available from http://www.nber.org/papers/w13568 http://www.nber.org/papers/w13568. Accessed on December 18, 2007. Heckman, James J. 2000. ”Policies to Foster Human Capital,” Research in Economics, vol. 54, pp. 3-56.

Jappelli, Tullio. 1990. ”Who is Credit Constrained in the U.S. Economy?” Quarterly Journal of Economics, vol. 105, no. 1, pp. 219-234 .

Kane, Thomas J. 1994. ”College Entry by Blacks since 1970: The Role of College Costs, Family Background, and the Returns to Education”, Journal of Political Economy, vol. 105, no. 5, pp. 878-911.

Kane, Thomas J. 1996. ”College Costs, Borrowing Constraints, and the Timing of College Entry,” Eastern Economic Journal, vol. 102, no. 5, pp. 878-911.

Kane, Thomas J. 2004. ”College-Going and Inequality: A Literature Review,” in Kathryn Neckerman (ed.), Social Inequality, New York: Russell Sage Foundation.

Lee, John B. 1999. ”How Do Students and Families Pay for College,” in King, Jacqueline (ed.), Financing a College Education. Phoenix, AZ: American Council on Education, ORYX Press.

Leigh, Duane E. and Andrew M. Gill. 2004. ”The Effect of Community Colleges on Changing Students’ Educational Aspirations,” Economics of Education Review, vol. 23, pp. 95-102.

Manski, Charles F. 1992. ”Parental Income and College Opportunity,” Democratic Study Center Report Series, Washington, DC. Available from http://www.eric.ed.gov/ERICWebPortal/contentdelivery/ servlet/ERICServlet?accno=ED349919. Accessed on March 17, 2007.

Mayer, Susan. 1997. What Money Can’t Buy: Family Income and Children’s Life Chances. Cambridge, MA: Harvard University Press.

Morgan, Stephen, L. 2002. ”Modeling Preparatory Commitment and Non- Repeatable Decisions: Information Processing, Preference Formation, and Educational Attainment,” Rationality and Society, vol. 14, no. 4, pp. 387- 429.

Reisburg, Leo. 2000. ”Student Stress is Rising, Especially Among Women,” Chronicle of Higher Education, January 28, p. A49.

Reynolds, John R and Jennifer Pemberton. 2001. ”Rising College Expectation Among Youth in the United States,” Journal of Human Resources, vol. 36, no. 4, pp. 703 - 726.

Rouse, Cecilia. 2004. ”Low-Income Students and College Attendance: An Exploration of Income Expectations,” Social Science Quarterly, vol. 85, no. 5, pp. 1299 - 1317.

Stinebrickner, Todd R. and Ralph Stinebrickner. 2007. ”The Effect of Credit Constraints on the College Drop-Out Decision: A Direct Approach Using a New Panel Study,” NBER Working Paper No. W13340, Available from http://www.nber.org/papers/w13340. Accessed on December 17, 2007.

Van der Klaauw, Wilbert. 2002. ”Estimating the Effect of Financial Aid Offers on College Enrollment: A Regression-Discontinuity Approach,” International Economic Review, vol. 43, no. 4, pp. 1249-1287.

Willis, Robert J and Sherwin Rosen.1979. ”Education and Self-Selection,” Journal of Political Economy, vol. 87, no. 5, pp. S7 - 36.

U.S Department of Education, National Center for Education Statistics. Table 174: Total fall enrollment in degreegranting institutions, 2003. Washington: DC. Available from http://nces.ed.gov/programs/digest/d05/tables/dt05174.asp (Accessed on August 19, 2007).

U.S Census Bureau, Current Population Survey Historical Tables. Table A-2. Percent of People 25 Years and Over Who Have Completed High School or College, by Race, Hispanic Origin and Sex: Selected Years 1940 to 2007. Washington: DC. Available from http://www.census.gov/population/www/socdemo/educattn. html. Accessed on October 6, 2008.