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Liberty for More: Finance and Educational Opportunities

Issue/Topic: Postsecondary Affordability--Tuition/Fees; Postsecondary Participation--Access/Outreach
Author(s): Rubinstein, Yona; Levine, Ross
Organization(s): National Bureau of Economic Research
Publication: National Bureau of Economic Research Working Paper
Published On: 2/19/2014

Background:
Previous research has investigated how U.S. financial systems-- banking reforms in particular-- influence economic opportunities and students' decisions to enroll in college. However, previous studies did not examine the impact of state-specific banking reforms and did not account for the difference between them.

Purpose:
To assess whether state-specific banking reforms that reduced interest rates increased the probability that students from those states would attend college and to understand which particular segments of society were most influenced by those reforms, if at all.

Findings/Results:
Credit conditions, the ability of an individual to benefit from college, and a family's financial and educational circumstances combine to shape college decisions. Thus, the functioning of the financial system plays a powerful role in shaping the degree to which a child's educational choices--and hence economic opportunities--are defined by parental income.

Interstate bank deregulation that lowered interest rates boosted the probability that individuals with particular abilities and family traits attend college. Deregulation:
  • Had a positive impact on students who are considered "able" by achievement test cut scores and are from middle class and upper-middle class families. Five years after a state deregulated, the probability that those students attended college was 13% greater than before deregulation.

  • Had the biggest impact on able students whose parents had a relatively low level of education

  • Had no effect on able students from families in which both parents had more than 12 years of education

  • Had no effect on people with relatively low learning ability as measured by achievement tests

  • Reduced the returns to an education by lowering the cost of college, pushing up enrollment rates and increasing the supply of skilled workers.

Policy Implications/Recommendations:
By lowering the costs of a college education, bank deregulation boosted college enrollment rates among able students from middle and upper-middle class families. Improvements in the functioning of the financial system have a powerful influence on shaping economic opportunities and help make education affordable to more students.

Research Design:
Longitudinal Surveys

Population/Participants/Subjects:
National Longitudinal Survey of Youths, 1979 (NLSY79) and the Current Population Survey (CPS)

Year data is from:
1979 NLSY cohort and banking data from 1960-1991

Setting:
Multi-State

Data Collection and Analysis:
To measure individual level data: National Longitudinal Survey of Youths, 1979 (NLSY79) and the Current Population Survey (CPS) To measure the cost of credit: data on mortgage rates at the state-year level. Data is based on a monthly survey of major lenders

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