Credit Constraints and Demand for Higher Education: Evidence from Financial Deregulation

Abstract

This paper uses staggered bank branching deregulation across states in the UnitedStates to examine the impact of the resulting increase in the supply of credit on college enrollment from the 70s to early 90s. A significant advantage of our research design is that it produces estimates that are not confounded by wealth effects. We find that lifting branching restrictions raises college enrollment by about 2 percentage points (4%). Our results rule out alternative interpretations to the credit constraints channel.First, the effects are largest for low and middle income families, while insignificant for upper income families as well as bankrupt families who would have been unaffected by the increased access to private credit. Second, the effect of lifting branching restrictions subsided immediately following periods of increased loan limit through government student loan programs. We also show that household educational borrowing increased as a result of lifting branching restrictions. Our results provide novel evidence that credit constraints play an important role in determining household college enrollment decisions in the United States.

Credit Constraints and Labor Supply: Evidence From Bank Branching Deregulation

“…This is consistent with Tewari (2014), who study the impact of bank branch expansion on homeownership rates. Similarly, Teng Sun and Yannelis (2016), who study the impact of relaxing credit constraints on demand for higher education, find the impact to be strongest for the second quartile.…”

“…In addition, given high income individuals are better able to self-insure via saving, insignificant labor supply adjustment for the top quintile is no surprise. As Teng Sun and Yannelis (2016) noted, there are generally two groups of credit constrained individuals: (1) who could not borrow enough to substitute leisure between states without the reform, and (2) who could but chose not to borrow due to the relatively high 15. However, we should interpret the result on the first quintile with reservations given a relatively small number of observations.…”

“…Empirical evidence from the United Kingdom, Italy, and Canada suggests labor supply decisions at the intensive and extensive margins are partially driven by liquidity constraints. 1 Regarding the United States, several recent papers-building upon the work of Kroszner and Strahan (1998), who study the motivations behind relaxing bank branching restrictions-explore the implications of credit market improvements for various aspects of economic growth; see, for example, Teng Sun and Yannelis (2016) and Tewari (2014). Aside from Demyanyk (2008), who studies the impact of banking deregulation on self-employment, preceding studies do not directly assess how labor supply responds to implied changes in credit access.…”

A Crisis in Student Loans?: How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults

“…If, instead, a shift toward riskier borrowers with weaker labor market prospects is driving rising default rates, then it may be less surprising that student loan borrowers are less likely to be homeowners or to be constrained in their occupational choices. In fact, rising default rates among such borrowers could be overshadowing relatively beneficial investments in higher education, which may be less worrisome or even desirable (Akers and Chingos (2014), Avery and Turner (2012), Dynarksi and Kreisman (2013), Sun and Yannelis (2014).) Indeed, for most borrowers (and the majority of the student loan portfolio) the education investments financed with their loans are associated with favorable economic outcomes, and borrowers are able to repay their debt even during recessionary periods.…”

Introduction to the Macroeconomic Dynamics Special Issue On: Growth in the Aftermath of the Financial Crisis: Theories, Policies, and Sources of Sustainable Development

“…It is therefore plausible [Jerzmanowski (2017) and Bucci and Marsiglio (2019)] that financial development may indirectly affect economic growth and income inequality via the human capital channel. 1 Recent evidence, indeed, already points to the fact that the demand for higher education increased in financially deregulated states as private student loans from banks became cheaper and more readily available [Sun and Yannelis (2016)].…”