ERIC Number: EJ1199977
Record Type: Journal
Publication Date: 2019
The Benefits of Borrowing
Marx, Benjamin M.; Turner, Lesley J.
Education Next, v19 n1 p70-76 Win 2019
The number of undergraduates in the United States has increased by more than 30 percent since 2000, with two-year institutions absorbing the majority of new students. At the same time, outstanding student-loan debt has grown nationwide, reaching $1.4 trillion in 2018. Although the federal student-loan program exists to provide such resources, the growth in student loan debt is often described as a "crisis," and many colleges and universities have implemented policies designed to reduce student borrowing. However, there is little rigorous evidence on the causal effect of loans on educational outcomes. As a result, it is not clear whether efforts to reduce borrowing will benefit or harm students. The authors address this question through a randomized experiment at a large community college. Colleges that participate in the federal student-loan program must make loans available to all of their students, and the amount that each student can borrow is determined by his or her class standing and dependence on parental support. However, colleges have discretion over how much loan aid, if any, to list on students' annual financial-aid award letters. Depending on the school's approach, a letter might provide a loan "offer" equal to the maximum dollar amount a student could borrow, zero, or anything in between. The authors designed their experiment to test whether the decision of the amount of loan aid to list--a choice being made every year by most community colleges--has meaningful effects on borrowing and student attainment. Specifically, the experiment varied whether students were offered a nonzero loan amount in their financial-aid award letters. This study provides the first rigorous evidence of the effect of loan offers on both borrowing and academic performance. The authors find that students whose aid letters offered nonzero loans were more likely to borrow, and those who borrowed did better in school. Students who received nonzero loan offers were 7 percentage points more likely to take out a loan (a 30 percent increase) and borrowed $280 more than students whose letters offered $0 in loans. Students who borrowed as a result of receiving a nonzero loan offer earned 3.7 additional credits and raised their grade point averages (GPAs) by more than half a grade on a four-point scale, both representing increases of roughly 30 percent. One year after the intervention, borrowers were 11 percentage points more likely to have transferred to a four-year public institution. Based on these results and past research on the earnings gains from college persistence and attainment, the authors estimate that borrowers are likely to see an increase in their future earnings of at least $370 per year.
Descriptors: Student Loan Programs, Debt (Financial), Community Colleges, Two Year College Students, Academic Achievement, Academic Persistence, Cost Effectiveness
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Publication Type: Journal Articles; Reports - Research
Education Level: Two Year Colleges; Higher Education; Postsecondary Education
Authoring Institution: N/A