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Student Loans Under the Risk of Youth Unemployment
While most college graduates eventually find jobs that match their qualifications, the possibility of long spells of unemployment and/or underemployment?combined with ensuing difficulties in repaying student loans?may limit and even dissuade productive investments in human capital. The author explores the optimal design of student loans when young college graduates can be unemployed and reaches three main conclusions. First, the optimal student loan program must incorporate an unemployment compensation mechanism as a key element, even if unemployment probabilities are endogenous and subject to moral hazard. Second, despite the presence of moral hazard, a well-designed student loan program can deliver efficient levels of investments. Dispersion in consumption should be introduced so the labor market potential of any individual, regardless of the family?s financial background, is not impaired as long as the individual is willing to put forth the effort, both during school and afterward, when seeking a job. Third, the amounts of unemployment benefits and the debt repayment schedule should be adjusted with the length of the unemployment spell. As unemployment persists, benefits should decline and repayments should increase to provide the right incentives for young college graduates to seek employment.
AUTHORS: Monge-Naranjo, Alexander
Test Questions, Economic Outcomes, and Inequality
Standard achievement scales aggregate test questions without considering their relationship to economic outcomes. This paper uses question-level data to improve the measurement of achievement in two ways. First, the paper constructs alternative achievement scales by relating individual questions directly to school completion and labor market outcomes. Second, the paper leverages the question data to construct multiple such scales in order to correct for biases stemming from measurement error. These new achievement scales rank students differently than standard scales and typically yield achievement gaps by race, gender, and household income that are larger by 0.1 to 0.5 standard deviations. Differential performance on test questions can fully explain black-white differences in both wages and lifetime earnings and can explain roughly half of the difference in these outcomes between youth from high- versus low-income households. By contrast, test questions do not explain gender differences in labor market outcomes.
AUTHORS: Nielsen, Eric
Why Are Life-Cycle Earnings Profiles Getting Flatter?
The authors present a simple, two-period model of human capital accumulation on the job and through college attainment. They use a calibrated version of the model to explain the observed flattening of the life-cycle earnings profiles of two cohorts of workers. The model accounts for more than 55 percent of the observed flattening for high school-educated and for college-educated workers. Two channels generate the flattening in the model: selection (or higher college attainment) and a higher skill price for the more recent cohort. Absent selection, the model would have accounted for no flattening for high school-educated workers and about 23 percent of the observed flattening for college-educated workers.
AUTHORS: Ravikumar, B.; Vandenbroucke, Guillaume
Is College Still Worth It? The New Calculus of Falling Returns
The college income premium is the extra income earned by a family whose head has a college degree over the income earned by an otherwise similar family whose head does not have a college degree. This premium remains positive but has declined for recent graduates. The college wealth premium (extra net worth) has declined more noticeably among all cohorts born after 1940. Among families whose head is White and born in the 1980s, the college wealth premium of a terminal four-year bachelor?s degree is at a historic low; among families whose head is any other race and ethnicity born in that decade, the premium is statistically indistinguishable from zero. Among families whose head is of any race or ethnicity born in the 1980s and holding a postgraduate degree, the wealth premium is also indistinguishable from zero. Our results suggest that college and postgraduate education may be failing some recent graduates as a financial investment.
AUTHORS: Emmons, William R.; Ricketts, Lowell R.; Kent, Ana Hernández
Explaining Cross-Cohort Differences in Life Cycle Earnings
College-educated workers entering the labor market in 1940 experienced a 4-fold increase in their labor earnings between the ages of 25 and 55; in contrast, the increase was 2.6-fold for those entering the market in 1980. For workers without a college education these figures are 3.6-fold and 1.5-fold, respectively. Why are earnings profiles flatter for recent cohorts? We build a parsimonious model of schooling and human capital accumulation on the job and calibrate it to earnings statistics of workers from the 1940 cohort. The model accounts for 99 percent of the flattening of earnings profiles for workers with a college education between the 1940 and the 1980 cohorts (52 percent for workers without a college education). The flattening in our model results from a single exogenous factor: the increasing price of skills. The higher skill price induces (i) higher college enrollment for recent cohorts and thus a change in the educational composition of workers and (ii) higher human capital at the start of work life for college-educated workers in the recent cohorts, which implies lower earnings growth over the life cycle.
AUTHORS: Kong, Yu-Chien; Ravikumar, B.; Vandenbroucke, Guillaume
Financial aid, debt management, and socioeconomic outcomes: post-college effects of merit-based aid
Prior research has demonstrated that financial aid can influence both college enrollments and completions, but less is known about its post-college consequences. Even for students whose attainment is unaffected, financial aid may affect post-college outcomes via reductions in both time to degree and debt at graduation. We utilize two complementary quasi-experimental strategies to identify causal effects of the WV PROMISE scholarship, a broad-based state merit aid program, up to ten years post-college-entry. This study is the first to link college transcripts and financial aid information to credit bureau data later in life, enabling us to examine important outcomes that have not previously been examined, including homeownership, neighborhood characteristics, and financial management (credit risk scores, defaults, and delinquencies). We find that even as graduation impacts fade out over time, impacts on other outcomes emerge: scholarship recipients are more likely to earn a graduate degree, more likely to own a home and live in higher-income neighborhoods, less likely to have adverse credit outcomes, and more likely to be in better financial health than similar students who did not receive scholarships.
AUTHORS: Scott-Clayton, Judith; Zafar, Basit
Modern Income-Share Agreements in Postsecondary Education: Features, Theory, Applications
An income-share agreement (ISA) in postsecondary education is a contract in which students pledge to pay a certain percentage of their future incomes over a set period of time in exchange for funding educational program expenses in the present. Typically, participants begin to make payments once their incomes rise above a minimum threshold set by the terms of the ISA and will never pay more than a set cap (usually, a multiple of the original amount). Funding for ISAs can range from university sources to philanthropic funding and private investor capital. In this study, we describe the many varied and often complex incarnations of ISA contracts, as well as their many use cases in traditional college programs, nondegree/certificate programs, and workforce development settings. First, we discuss the current state of the nascent ISA marketplace, including how ISAs are structured and funded, how educational programs come to consider offering ISAs to students, and what factors they might weigh during the ISA design and implementation stages. Second, we discuss the benefits and disadvantages of each major aspect of an ISA (e.g., funding model, payment terms) to students, institutions, and ? if applicable ? investors. Finally, we discuss the theoretical underpinnings of ISAs and the main practical challenges that institutions offering ISAs, students choosing these contracts, and regulators face in both the short and the long term as ISAs promulgate.
AUTHORS: Webber, Douglas; Ritter, Dubravka
Institution, Major, and Firm-Specific Premia: Evidence from Administrative Data
We examine how a student?s major and the institution attended contribute to the labor market outcomes of young graduates. Administrative panel data that combine student transcripts with matched employer-employee records allow us to provide the first decomposition of premia into individual and firm-specific components. We find that both major and institutional premia are more strongly related to the firm-specific component of wages than the individual-specific component of wages. On average, a student?s major is a more important predictor of future wages than the selectivity of the institution attended, but major premia (and their relative ranking) can differ substantially across institutions, suggesting the importance of program-level data for prospective students and their parents.
AUTHORS: Ost, Ben; Pan, Weixiang; Webber, Douglas