Wednesday, September 23, 2009

Grants or Loans?

Grants or Loans? Theoretical Issues Regarding Access and Persistence in Postsecondary Education

Lorne Carmichael, Ross Finnie; 2007


Most economic investigations of access to education treat an investment in college or university as if it were a financial investment offering a particular expected rate of return. Since the average measured rates of return are quite favourable, other factors such as lack of information, contrary parental influence, or "debt aversion" must be invoked to explain the unwillingness of some qualified students from poorer backgrounds to borrow money and attend. However, a model that recognizes the hardship associated with low levels of expenditure suggests that, ceteris paribus, poorer students will actually need a higher measured rate of return before they will decide to attend. The result holds even when there is an efficient student loan system. This approach can provide some normative guidance for decisions about the choice of grants or loans as vehicles for student aid, and has positive implications about the effects of grants and loans on access and persistence.

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