Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/23451
Authors: 
Hendel, Igal
Shapiro, Joel
Willen, Paul
Year of Publication: 
2004
Series/Report no.: 
Public policy discussion papers / Federal Reserve Bank of Boston 04,5
Abstract: 
Affordable higher education is, and has been, a key element of social policy in the United States with broad bipartisan support. Financial aid has substantially increased the number of people who complete university?generally thought to be a good thing. We show, however, that making education more affordable can increase income inequality. The mechanism that drives our results is a combination of credit constraints and the ?signaling? role of education first explored by Spence (1973). When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or of high ability but with low financial resources. When government programs make borrowing easier or tuition more affordable, high-ability persons become educated and leave the uneducated pool, driving down the wage for unskilled workers and raising the skill premium.
Subjects: 
Education signaling
college premium
college loans
JEL: 
D82
J31
I28
I22
Document Type: 
Working Paper

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