Student Heterogeneity and Financial Incentives in Graduate Education: Evidence from a Student Aid Reform

In this paper, I study heterogeneity in graduate students’ responses to financial incentives. The incentive was given by a student aid reform in Norway that was intended to increase the proportion of students who graduate on time by offering a reduction of their student loan. Using a difference-in-difference strategy and detailed Norwegian register data, I find considerable variation in the treatment effect by student characteristics. Male students, students from low-income families, students in the middle of the ability distribution, and students with dependent children responded more strongly to the reform than others. Both employment rates and earnings of treated students were significantly reduced in the reform period, but the take-up of loans was not largely affected. In summary, male students mainly responded by reducing working hours, whereas female students largely exited employment. Students from lower socioeconomic backgrounds must have adapted through other channels than employment, earnings, or take-up of loans. Students with dependent children responded by increasing their take-up of loans. There is an understudied relationship between student characteristics and student behavior. By learning more about this relationship, it might be possible to design policies that affect student behavior more efficiently than the ones that are in place today.