Credit Constraints in the Demand for Education: Evidence from Survey Data

What can subjective reports of financial difficulties add to our understanding about the role of liquidity constraints in the demand for college education? Liquidity constraints in education may lead to inefficient skill allocations and perpetuate imbalances in the distribution of economic well-being. Unfortunately, empirical evidence regarding their pervasiveness in the U.S. has not been consistent in part because constraints tend to be inferred indirectly. To evaluate how a potentially more direct measure can be used to enhance our understanding of the issue, I focus on self-reports of financial difficulties available in the National Longitudinal Survey of Youth. I find that about 12 percent of college-age individuals expect to underinvest in education because of financial limitations, which is an upper-bound estimate of the fraction of liquidity-constrained students. While this paper shows that subjective indicators of credit constraints are potentially noisy, they appear to reveal important aspects of heterogeneity in the demand for education not captured by the standard measures such as, e.g. parental income.