Paper #560

Title:

Educational opportunity and the college premium

Authors:

Igal Hendel, Joel Shapiro and Paul Willen

Date:

May 2001

Abstract:

Since World War II, the United States government has made improved access to higher education a priority. This e¤ort has substantially increased the number of people who complete college. We show that by reducing the effective interest rate on borrowing for education, such policies can actually increase the gap in wages between those with a college education and those without. The mechanism that drives our results is the ‘signaling’ role of education first explored by Spence (1973). We argue that financial constraints on education reduce the value of education as a signal. We solve for the reduced form relationship between the interest rate and the wage premium in the steady state of a dynamic asymmetric information model. In addition, we discuss evidence of decreases in borrowing costs for education financing in the U.S.

Keywords:

College loans, education signalling, college wage premium

JEL codes:

I22, I28, J31, D82

Area of Research:

Microeconomics

Published in:

Journal of Public Economics, Volume 89, Issues 5-6, pp. 841-870, June 2005

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