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An overlook on liquidity constraints in higher education

There has been a long debate concerning the role that initial financial resources play on the choice of going to higher education. Ideologies aside, and looking at education through an overlapping generations model developed by Galor and Zeira, we can try to get some answers. (Galor and Zeira, 1993, Review of Economic Studies).

Taking into account the role of budget constraints and considering that financial markets are imperfect, only two options remain for those with financial constraints: finding a job or getting a loan to pay for school.  Regarding the latter option, getting a loan is hard and the return for us and future generations of our family may not be the one expected.  In those cases where budget constraints exist, the high interest rates assume an important role, as the parents’ income does not allow paying college tuitions or other school costs. In most of those cases, in the long run, a student loan may not be profitable, as the high costs will determine that the best choice is to work instead of going to school, which in turn will create a persistent pattern on educational choices, and contribute to a correlation between low income and low educational attainment.

Empirically speaking, the impact of liquidity constraints seems to be relevant only on secondary school.  Moreover, factors like secondary final grade seem to have a higher influence on university enrollment. However, more recent studies in UK and US, where on the last decades tuitions increased significantly, showed that credit constraints seem to impose a significant influence on the choice concerning higher education, therefore making more and more important to study liquidity constraints on education.

Lastly, and looking at possible policies to avoid persistent gaps in educational attainment,  increasing public expenditure  and free universal higher education seem to be the most popular ones. Nonetheless, redistributive policies have been stated as more efficient, since it could relax families’ financial constraints and allow more students to opt for higher education. An interesting remark on universal higher education is the possibility that this policy measure lead to a switch on redistributive policies – as most of the students in university come from high income families, and so they would be the ones who would benefit the most from lowering tuitions. Moreover, examples in Northern Europe, show it may not be an efficient way of increasing enrollment rates. If we look at the case of Denmark, where there are financial aid for all students who go to college and zero tuition fees, notwithstanding its high enrollment rates in tertiary education (80% in 2012 according to the WorldBank), we still observe a gap where students from high income families tend to go more to university than those from low income backgrounds. In conclusion, some more effective educational policies regarding higher education may be subsidizing low income students who wish to attend higher education or investing public resources on low levels of education to increase its quality and with that allow everyone to have an unconstrained choice on education.


Ana Catarina Neves




Author: studentnovasbe

Master student in Nova Sbe

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