Student Aid, Academic Achievement, and Labor Market Behavior

No 1102, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Does it matter whether study aid is provided as grants or loans? We provide a framework for quantifying the impacts of financial aid on student debt, academic capital, and labor market outcomes. We specify and estimate a dynamic discrete choice model of simultaneous education, work, and student loan take-up decisions. We use administrative panel data and exploit exogenous variation from the 2001 Swedish Study Aid reform for identification of the model parameters. This enables ex-ante evaluation of various changes to financial aid schemes. We find that additional years of aid and more generous means testing on student income substantially reduce dropout rates and increase graduation rates with more advanced degrees, but at the cost of students staying enrolled longer and accumulating more debt. Moving from an income-contingent to an annuity-based loan repayment scheme decreases student debt accumulation and improves the effectiveness of academic capital accumulation. If study aid consists mostly of grants, a reduction in loans and increase in grants reduces graduation rates. However, once loans are larger than grants, further changes have little impact on dropout and graduation rates. This means that in some cases, the government can decide who bears the college cost without affecting human capital accumulation.

Date: 2016
New Economics Papers: this item is included in nep-edu and nep-eur
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Working Paper: Student aid, academic achievement, and labor market behavior (2017)
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