Student Loans and Social Mobility

Mehran Ebrahimian
Ph.D. Candidate of finance, Wharton School of the University of Pennsylvania

Abstract

Students of poor families invest much less than rich families in college education. To assess the role of financing constraints and subsidy schemes in explaining this gap, I structurally estimate an IO finance model of college choice in the presence of financing frictions. The estimation uses novel nationally representative data on US high-school and college students. I propose a novel identification strategy that relies on bunching at federal Stafford loan limits and differences between in- and out-of-state tuition. I find that the college investment gap is mainly due to fundamental factors—heterogeneity in preparedness for college and the value-added of college—rather than financing constraints faced by lower-income students. Making public colleges tuition-free would substantially reduce student debt, but it would disproportionately benefit wealthier students, and it would entail more than $15B deadweight loss per year by distorting college choices. Expanding Pell grants, in contrast, would benefit lower-income students at a much lower cost.

Biography

Mehran Ebrahimian is currently a PhD candidate in finance at the Wharton School of Business in University of Pennsylvania. He holds a B.Sc. in physics and a M.Sc. in economics from Sharif University of Technology. His research focuses on the implications of financing frictions in macroeconomics and specifically the role of finance in income and social inequalities.