Discussion Paper

Do College Tuition Subsidies Boost Spending and Reduce Debt? Impacts by Income and Race

Abstract: In an October post, we showed the effect of college tuition subsidies in the form of merit-based financial aid on educational and student debt outcomes, documenting a large decline in student debt for those eligible for merit aid. Additionally, we reported striking differences in these outcomes by demographics, as proxied by neighborhood race and income. In this follow-up post, we examine whether and how this effect passes through to other debt and consumption outcomes, namely those related to autos, homes, and credit cards. We find that access to merit aid leads to an immediate but temporary increase in eligible individuals’ consumption in these categories. The increase is followed by a decline in consumption and a reduction in total debt of these types in the longer term. Importantly, there are marked differences in these consumption and debt patterns across income and race groups.

Keywords: tuition; subsidy; merit aid; debt; diversity;

JEL Classification: D14; Q12;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2020-07-08

Number: 20200708d

Note: Heterogeneity Series III: Credit Market Outcomes