Working Paper: NBER ID: w20850
Authors: Benjamin M. Marx; Lesley J. Turner
Abstract: We use regression discontinuity and regression kink designs to estimate the impact of need-based grant aid on the borrowing and educational attainment of students enrolled in a large public university system. Pell Grant aid substantially reduces borrowing: among students who would borrow in the absence of a Pell Grant, every dollar of Pell Grant aid crowds-out over $1.80 of loans. A simple model illustrates that our findings are consistent with students facing a fixed cost of incurring debt. The presence of such a fixed cost may lead to the unintended consequence of additional grant aid decreasing some students' attainment. Empirically, we rule out all but modest average impacts of Pell Grant aid on attainment, and we provide suggestive evidence of heterogeneous effects consistent with our fixed-borrowing-cost model. We estimate an augmented Tobit model with random censoring thresholds to allow for heterogeneous fixed borrowing costs, and find that eliminating the fixed cost would increase borrowing by over 250 percent.
Keywords: Pell Grant; student loans; educational attainment; financial aid; borrowing behavior
JEL Codes: D14; H52; I22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed cost of borrowing (G21) | crowding out effect (E62) |
| eliminating fixed cost of borrowing (G21) | increase in borrowing (H74) |
| Pell Grant aid (I22) | reduced borrowing (G51) |
| Pell Grant aid (I22) | educational attainment (I21) |
| Pell Grant aid (I22) | decrease in educational attainment (I21) |
| Pell Grant aid (I22) | credits attempted and earned (M41) |