Understanding the Income Gradient in College Attendance in Mexico: The Role of Heterogeneity in Expected Returns to College

This paper studies the determinants of college attendance in Mexico. I use subjective quantitative expectations of future earnings to analyze both causes and implications of the steep income gradient in higher-education enrollment. I find that poor individuals require significantly higher expected returns to be induced to attend college. I then test predictions of a simple model of college attendance choice in the presence of credit constraints, using parental income and wealth as a proxy for the household's (unobserved) interest rate. I find that poor individuals with high expected returns are particularly responsive to changes in direct costs such as tuition, which is consistent with credit constraints playing an important role. To evaluate potential welfare implications of introducing a means-tested student loan program, I apply the Local Instrumental Variables approach of Heckman and Vytlacil to my model. I find that a sizeable fraction of poor individuals would change their decision in response to a reduction in interest rate, and that individuals at the margin have higher expected returns than the individuals already attending college. This suggests that policies such as government student loan programs could lead to large welfare gains.