Economic fallout: The college loan crunch

PENN STATE (US) — The rising cost of a college education and limited access to financial aid may create a less productive workforce and steeper wealth inequity, a new study finds.

Students with low-income parents find it more difficult to find funds to pay for a college education now compared to students of similar economic backgrounds in the 1980s, says Alexander Monge-Naranjo, assistant professor of economics at Penn State.

“The consensus was that in the 1980s, credit constraints didn’t seem to matter for those who went to college. But according to the latest data, we see family income and parental wealth are making a big difference in who is attending college.”

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There are several reasons for the move away from affordability, Monge-Naranjo says. Over the last two decades, more higher-paying jobs required a college degree and the higher demand for a college education led universities to increase tuition.

At the same time, money available through government loan programs remained flat or, when adjusting for inflation, declined. During the 1990s, the percentage of undergraduates who borrowed from government lending programs increased significantly.

Of those students, the ones at the top limit of their borrowing capacity tripled to 52 percent. Many more students now rely on private lenders for loans, Monge-Naranjo says.

In the 1980s, credit constraints—factors that limit financial access to college funding, such as caps on financial assistance and family income—did not significantly stop students from attending college, once the researchers controlled for other factors, such as SAT score, age, and race.

Even poor students who had little financial resources to pay for college, but who were smart, could access credit to pursue an education, Monge-Naranjo says.

The researchers, whose findings are published in the journal American Economic Review, say a shift occurred in the 1990s as more low-income students began to struggle to access credit to pay for a college. During the 1990s, youths from high-income families were 16 percent more likely to attend college than youths from low-income families.

For the study, Monge-Naranjo and colleague Lance Lochner, associate professor of Western economics at University of Western Ontario, used the most recent data from the National Longitudinal Surveys of Youth and the Armed Forces Qualifying Test to examine the relationships between intelligence, family income, and college attendance.

Constraints on financial aid could have far-reaching economic impacts. When poor but intelligent workers are unable to earn a college degree, their career choices are restricted. That could mean less qualified and less productive workers will attain those positions.

“It’s a matter of economic efficiency. Are we choosing the best individuals for the job, or just the individual whose parents are wealthy?” Monge-Naranjo says.

“In the long-term that may have an effect on the economy, although it may take a couple of generations to find out and, even then, perhaps be hard to quantify.”

The National Science Foundation supported the work.

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