Published: March 28, 2024 By

Background

A college degree provides substantial benefits, including lower unemployment, higher wages, and increased social mobility. However, as the price of a degree has risen, families increasingly use debt to finance a college education, with parents shouldering a larger share of the burden. For example, originations of federal “Parent PLUS” loans rose from $2.2 billion in 1991-1992 to $15.2 billion in 2017-2018 (Ma and Pender 2023). Parent PLUS loans are just one of many ways in which a child’s college decisions affect parents, leading to articles that declare parents as the “Hidden Causalities of the Student Debt Crisis” (Granville 2022). 

Motivated by these trends, Dr. Gurantz has begun to engage in a number of projects that look at how attending college affects family finances. Surprisingly there is very little research on this topic, in large part as there is rarely the ability to observe parent-student linked data at any reasonable scale. As a result, prior studies typically focus on how attending college impacts just the finances of the individual student (e.g., Scott-Clayton & Zafar, 2019), which paints an incomplete picture of how the costs of higher education are affecting society. 

With funding from the Spencer Foundation and Arnold Ventures, we have begun to answer these questions, with a research team that includes Palaash Bhargava and Dr. Sandra Black from Columbia University, Dr. Jeffrey Denning from Notre Dame, and Dr. Robert Fairlie from UCLA. These results rely on a newly-available, confidential, restricted-access administrative dataset that captures the universe of Free Application for Federal Student Aid (FAFSA) filers in California, which is then linked at the individual-level to detailed credit data records from a large credit bureau. These FAFSA data have an innovative feature: for students who are still dependents – which is most 18 and 19 year olds but can continue as long as students are not yet 26 – we can link applicants to their parents and consider how the child’s college experience affects their parent’s financial health. Although credit data do not capture many important outcomes, we can observe debt balances and default rates on a variety of loan types, such as educational loans, credit cards, and other forms of credit. 
Impacts of state grant aid on financial health

The first project using these data focuses on how families react to changes in the price of college as a result of receiving state aid; we anticipate releasing this working paper in 2024. In our data we can observe families who just met the criteria to become eligible for state aid receipt and compare to them to essentially identical families who are just ineligible for state aid. As a result, these luckier families receive about $17,500 in additional aid over the following six years, which induces their children to be slightly more likely to enroll in a broad access, four-year California State University instead of a two-year community college. Even though state grant aid induces a small increase in more expensive, four-year college enrollment, we find that parents reduce the educational loan balances they take out on behalf of their students by about 10%. We also find reductions in HELOC balances (Home Equity Lines of Credit). These reductions vary by household wealth, with families that have mortgages showing larger reductions in HELOCs, whereas families who do not own a home having larger reductions in educational loan balances. Grant aid also reduces the chance that parents are delinquent on their debt but only for parents with a prior history of delinquency, with no effect on parents without prior delinquencies.

Interestingly, we do not find any evidence that receiving grant aid reduces student borrowing. This project demonstrates that, at least in this case, focusing just on student outcomes would have missed all of the positive financial effects of aid receipt on families.

Future Work

The paper described above is just the first in a sequence of topics that we hope to investigate over the coming years. A second paper, just underway, will examine the complex role of federal Parent PLUS loans. These loans are only available to parents if their child has exhausted their own available federal credit and have become an increasingly important source of financial support. There has been considerable controversy over the benefits of Parent PLUS loans and who should have access to them. As with other educational loans, the primary benefit is that they could enable students to attend college who otherwise could not. However, parents may become overextended by these sizeable loans, which could create adverse financial consequences if it causes them to miss mortgage, credit card, or other necessary payments.  

For most of recent history, PLUS loans could be originated through the Department of Education’s Direct Loan (DL) program or the Federal Family Education Loan (FFEL) program, which were bank-issued loans backed by the federal government. However, after the federal government became the sole provider of federal loans via the Direct Loan Program, they chose to synthesize policies and tighten loan standards, which had the effect of denying PLUS access to some families with adverse credit histories. This change led to significant public outcry, particularly from HBCUs and other colleges that enrolled more Black students who were negatively impacted by these adverse credit history standards (Stratford 2014). As a result, the federal government changed the eligibility criteria yet again in 2014, thus increasing access for a subset of parents. 

Using the same data listed above – FAFSA applicants linked to their credit histories – we will examine whether changes in access to Parent PLUS loans impacted whether students attended college. More importantly, we can examine whether access to Parent PLUS loans changed how parents finance their child’s education, potentially forcing them into riskier types of credit with higher interest payments, such as credit cards. Thus we will determine whether losing or gaining access to this program had financial implications for these families with worse credit histories. 

Conclusion

We hope the two papers described above are just the beginning of an avenue for producing policy relevant research that touches on some of the most important factors facing higher education today.