Essays on Credit Constraints and Education

Abstract

What fraction of college-age youths in the United States comes from credit-constrained families? Can subjective assessments of financial difficulties inform the debate about pervasiveness of credit constraints in the demand for college education? My dissertation contains two essays addressing these questions. Credit constraints in education may lead to inefficient skill allocations and perpetuate imbalances in the distribution of economic well-being. Unfortunately, empirical evidence regarding their pervasiveness in the United States has not been consistent, in part because constraints tend to be inferred indirectly. The first essay evaluates how a potentially more direct measure can be used to enhance our understanding of the issue. I focus on subjective assessments of financial limitations available in the National Longitudinal Survey of Youth 1979 and find that about 12 percent of college-age individuals expect to underinvest in education because of financial reasons or the need to work. While the measure developed in this paper is noisy and not a precise indicator of credit constraints, it appears to capture important variations in educational choices, beyond these captured by the standard controls, such as parental income. The contribution of the second essay is the use of parents' reports of borrowing limitations in the NLSY79 Young Adult Supplement to evaluate the proportion of constrained college-age youths in the early 2000s. The focus on the 2000s is critical because the sharp increase in tuition costs and gradual erosion of real student borrowing limits over the past two decades have potentially made credit constraints in education more widespread. My analysis sample is limited to children of young mothers who are more likely to be disadvantaged economically and hence are of specific interest to policy-makers. Over one-fifth of youths in the sample come from families where mothers report borrowing limitations. Conditional on scholastic ability, family income, and family background characteristics, parental constraints have a strong negative correlation with children's college attendance. Although my results do not distinguish between alternative explanations for borrowing limitations, they do suggest that researchers interested in the connection between liquidity constraints and education might benefit from paying more attention to direct measures.