Behavioural Economics and Higher Education Participation

Liam posted recently about a recent Kennedy School Working paper (Dynarski and Clayton, 2007: College Grants on a Postcard) which proposes a simplification of the student financial aid system. Liam suggested that this is something we should look at in Ireland, and to examine whether students are being dettered by not getting clear signals as to whether they are eligible or not.

So it seems timely that I just discovered the website of the US Commission on the Future of Higher Education. Dynarski and Clayton have their paper on simplification of student financial aid up here - its an earlier version and is called "The Cost of Complexity in Federal Student Aid: Lessons from Optimal Tax Theory and Behavioral Economics" (Dynarski and Clayton, 2006). This is a real inspiration for thinking about how behavioural economics applies to higher education participation, which is something that I have been doing for some time and which I will discuss further below.

Other interesting papers from the Commission's website are Burgdorf & Kostka (Eliminating Complexity and Inconsistency in Federal Financial Aid Programs For Higher Education Students), Kirst and Venezia (Improving College Readiness and Success for All Students) and Daniel Hammermesh (FOUR QUESTIONS ON THE LABOR ECONOMICS OF HIGHER EDUCATION).

The conclusions in my MPhil thesis have been informed by the recent infusion of behavioural economic theory to higher education economics. One of my recommendations is to unify, simplify and create awareness about the higher education grants system. This is based on findings from the NOEAHE (2005), that both students and parents emphasise the difficulties of navigating through the range of available funding and the impression that some people have an ‘inside track’ when it comes to information on the various programmes. Students believe that this creates inequalities, and this view is shared by several administrators.

The Union of Students in Ireland (USI) (2007) recommends a single, unified grants system, which would feature a single application form, single assessment criteria and single payment date. They also recommend that grant application documents should be simplified and the instructions improved. A single and unified system would allow for economies of scale and enhance efficiency. It would also reduce confusion for students by giving them a sole institution to deal with in relation to higher education grants.

Awareness about the higher education grants system (and what entitlements are available) is another key issue. According to the NOEAHE (2005), “a number of students reported that they only became aware of the Student Assistance Fund when they were on the verge of dropping out due to financial hardship. It is possible that others who did drop out had not heard of the fund at all”. Since 2000, the Department of Education and Science has produced information in leaflet and booklet form on the range of funding available to students in further and higher education. However, according to the Department (2005) ensuring that this information reaches a wide body of people is a challenge.

The Department issues an information leaflet to each student applying to the Central Applications Office (CAO) for a higher education course and sends copies of the booklet to schools. However, according to NOEAHE (2005) students were unaware of the information, and access personnel had doubts as to whether students in general are aware of its existence. It was also reported that the booklet is difficult to follow, in part due to the range of funding programmes on offer and their associated criteria. Second-level representatives report that certain school-leaver groups are particularly at risk of being under-informed, in particular students on Leaving Certificate Applied programmes who do not normally use the CAO but are interested in accessing a further education course. The NOEAHE (2005) has stated that departmental information sources are in urgent need of development into a range of formats to reach the widest possible number of students.

A new information service (a website called www.mygrant.ie) has been set up with “the purpose to inform students and prospective students about the Maintenance Grant Scheme for 2006/7, and to ensure that students will find it easier to obtain grants”. This website is quite comprehensive; it includes a message board for discussion about the maintenance grant scheme as well as links to the other grant schemes that students can apply to. A user-friendly website with interactive features would be a useful step for creating awareness about the higher education grants system. A unified body in charge of the grants system should also advertise the website and the upper income limit for grant eligibility in multi-media advertising campaigns. Sensible places for placing these advertisements would be on the website of the Central Applications Office, and the websites of social networking sites which are popular the age-cohort of school-leavers. The financial resources for these advertising campaigns should be benchmarked at a similar level to those used in campaigns for consumer products aimed at the same age-group.

Other thoughts that I have about behavioural economics and higher education arise from the possibility that some school-leavers in the Republic of Ireland may:

(i) finish their secondary schooling with relatively less investment in the cultural and/or human capital of their household

(ii) and/or finish their secondary schooling with relatively less confidence in their academic ability

(iii) and/or finish their secondary schooling without a familiar reference point for academic achievement[1]

It should be considered that the first situation mentioned above may lead to the subsequent development of the second and/or third situations. Furthermore, increased investment in early childhood development could prevent any of the above situations from developing.[2] However, given that we know some households have less investment in their cultural and/or human capital, some consideration needs to be given to what can be done to help school-leavers who end up in the three situations outlined above.

Research that I am working on suggests that there should be an emphasis on Access programmes explicitly targeting students before they decide to enter higher education, and targeting students as early as possible in this period when there is lesser (or no) exposure to non-monetary household capital. Furthermore, Access programmes should compensate for deficits in non-monetary household capital by ensuring that students have confidence in their academic ability and high expectations for attaining a higher education qualification, including high expectations for the level of support they will receive from an Access programme at a higher education institution. With these behavioural interventions in place, non-financial barriers to participation are much more likely to be successfully tackled.

I have discussed with Liam to a great extent on the relevance of behavioural finance interventions to behavioural social interventions, and one of the relevant applications is illustrated by the idea that potential higher education (HE) participants may need to increase the length of their planning horizon. Higher levels of confidence and higher expectations will be less effective if potential HE participants do not appreciate the benefits of studying hard in secondary school (and subsequently investing in a higher education). With this is mind, the Access programmes in second-level schools should try to help students increase the length of their planning horizon.

There is a parallel to this issue in the behavioural finance literature, where a paper on retirement savings by Munnell et al (2000) shows that those with planning periods of less than two years are much less likely to provide for retirement. Munnell et al show that employee education can create a more long-term perspective and can have a major impact on retirement saving.

Another behavioural issue is the complexity of the unfamiliar choices that potential HE participants face when they come from households with lower levels of non-monetary capital. Iyengar et al (2003) and Iyengar and Lepper (2000) show that although extensive choice seems appealing, it may actually hinder the motivation to purchase, and that a more limited array of choices increases the likelihood to purchase (or make an economic decision). The 2003 paper by Iyengar et al discusses the complexity in the options available to individuals when they are deciding whether or not to begin a retirement plan.

Again, the field of behavioural finance provides inspiration and indeed some of this literature is producing much of the insights on how to apply behavioural interventions. Experiments with 401(k) retirement packages in the US suggest that changes in the manner in which financial instruments are delivered and framed can change behaviour toward saving for an equivalent discounted value. For example, a recent Pension Research Council working paper (Choi et al, 2006) reported on a "Quick Enrolment" programme which is designed to reduce the complexity of retirement savings decision-making. Despite essentially being a simplification of the 401(k) scheme rather than a major change in its monetary value, participation in the "QuickEnrolment" programme tripled 401(k) participation rates among new employees at one company (Choi et al, 2006).

The work by Choi et al is relevant to the decisions that potential HE participants make when they are choosing between higher education options and deciding whether to stay in education or enter the labour market. The array of subjects and courses is wider than ever at third level in Ireland and the risk is that too much choice can sometimes be a bad thing, especially when potential HE participants are concerned about making what they perceive to be the right choice. A lot of their concern could stem from the fear of choosing a third level course that will not provide high returns in the labour market once they are finished studying. One solution may be to reduce the number of higher education choices that potential HE participants face by devising some kind of "Quick Choice" initiative.

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[1] Oxoby (2007), in “Skill Uncertainty and Social Inference” (IZA WP-2567), suggests that individuals without familiar reference points for academic achievement may under-invest in their human capital due to uncertain expectations about their academic ability. The importance of “reference-dependency” in the formation of expectations about human capital investment is an interesting area for future research.

[2] According to Currie (2001), the benefits of early childhood education programs are often greater for more disadvantaged children, with notable results in terms of improved educational attainment.