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Over-optimism About Graduation and College Financial Aid

Author

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  • Emily G. Moschini
  • Gajendran Raveendranathan
  • Ming Xu

Abstract

In the United States, one in three students enrolled in a bachelor’s degree program eventually drops out, and the stock of student loans held by these dropouts is sizable. We establish empirically that college students and their parents are overly optimistic about the probability of college graduation when making college enrollment decisions. We incorporate such over-optimism into an overlapping generations model, which also includes family transfers, federal student loans, and a private student loan market. We discipline these model attributes using panel data from the U.S. Bureau of Labor Statistics and the U.S. Department of Education, and then examine the impact of over-optimism and of expanding federal student loan limits in the presence of over-optimism. We find that over-optimism, despite reflecting mistaken beliefs, increases welfare for 18-year-olds as a result of equilibrium adjustments in income taxes, family transfers, and skill. Expanding federal student loan limits reduces welfare for low-skill 18-year-olds from poor families, a result driven by the presence of over-optimism.

Suggested Citation

  • Emily G. Moschini & Gajendran Raveendranathan & Ming Xu, 2022. "Over-optimism About Graduation and College Financial Aid," Department of Economics Working Papers 2022-09, McMaster University.
    • Handle: RePEc:mcm:deptwp:2022-09
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    References listed on IDEAS

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    More about this item

    Keywords

    Post-secondary education; Over-optimism; Student loans;
    All these keywords.

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G5 - Financial Economics - - Household Finance

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