Need-based assistance appears to improve academic and longer-term labour market outcomes for college students in Jamaica

Several studies have highlighted the benefits of higher education to low-income families. In the US for instance, Chetty et al. (2017) found that while access to colleges varies by parental income, students from low- and high-income families attain similar earnings if they attend the same college. Similarly, through a simulation exercise, Hershbein et al. (2020) showed that increased rates of degree attainment would meaningfully increase economic security for lower-income individuals and reduce the gap between individuals at the top and bottom of the earnings distribution. 

As such, it is not surprising that a growing number of low-income students are seeking to capitalise on the potential benefits that a college education affords. Among college-aged students in low- and middle-income developing countries, tertiary enrolment has expanded more than threefold from 1990 to 2019. Although the cost of acquiring a college education has consistently increased, many scholars have projected that tertiary enrolment in developing countries will continue to increase for several decades to come (Calderon 2018, Pandey and Indrakanti 2017, World Bank 2020). 

However, this surge in demand has caused many developing countries to reform the framework they utilise to finance higher education. This is because higher demand places a larger financial burden on public resources and many developing countries are already faced with  binding budget constraints. As such, several countries have adopted a cost-sharing model that divides the responsibility of higher education financing between the government and several non-governmental entities (for example,  students, colleges, non-profit, and the private sector). Because this financing model may further disenfranchise low-income and disadvantaged students, several countries have created subsidised student loans and grant funding programmes to incentivise these students to pursue higher education opportunities. 

Despite the increased demand for higher education and the corresponding changes in college financing in developing countries, there is limited research on the impact of college funding programmes on students’ academic and labour market outcomes.

College financing programmes in Jamaica

In my study (Wright 2021), I evaluate a national student loan and grant assistance programme that targets low-income college students in Jamaica.

Jamaica is an upper-middle-income developing country where a large share of families rely on publicly-financed tuition loans and grant subsidies to pursue higher education. Among the entering students at the two most selective universities, two in five received a student loan and one in 10 was awarded a need-based grant. The student loan programme is means-tested, offers an interest rate far below the market rate, and the loan is paid directly to colleges to cover the full cost of tuition (about US$ 1350). Similarly, the grant programme provides a non-refundable grant of US$ 500 to the neediest tuition loan recipients to offset the cost of books, living expenses, and other education-related expenses. The students who are eligible for the tuition loan have a per capita family income of about US$ 2700 and the grant recipients typically possess a per capita family income of about US$ 1000. 

As such, both programmes provide a sizable financial benefit to treated students and my study examines how the receipt of these benefits impact college students' academic performance, graduation prospects, and their employment, earnings, and tax contributions during and immediately after college. 

Findings

Using various quasi-experimental estimation techniques, this study presents several interesting findings:

  1. The results suggest that the tuition loan and grant funding improved college students’ academic performance and graduation prospects. In particular, the students who benefited from these programmes maintained a higher GPA, were less likely to drop out in their second year, and graduated at a higher rate.  
  2. The results further indicated that treated students are less likely to engage with the labour market during their college years. Economic theory suggests that this is one of the primary mechanisms that potentially explains the improvements in academic outcomes. 
  3. The grant funding improved the earnings of treated students in the early years after college. This longer-term benefit is likely a positive labour market premium for the better academic performance obtained by grant recipients during college. 
  4. The loan recipients had lower earnings in the early years after college. Consistent with theory, I find that one plausible mechanism to explain this finding is that the loan programme causes students to accept job offers that pay below their productive characteristics. This is likely because students are required to begin repayment within six months after graduation, making them more willing to accept lower-paying offers than hold out for more lucrative opportunities.

Consequently, the results indicate that both programmes achieved their primary policy objective of improving college outcomes and the prospects of economic mobility for needy students.  

Implication for education policy

The findings in this study provides three main insights for education policy in developing countries. First, both loan and grant need-based assistance can be effective tools to improve the academic and labour market outcomes of students from low-income households. A few related studies have arrived at a similar conclusion in the developing country context. For instance, Card and Solis (2020) showed that a loan programme in Chile increased the likelihood of college completion and similar positive effects have also been found for comparable loan programmes in Colombia, Mexico, and South Africa (Canton and Blom 2010, Gurgand et al. 2011, Londoño-Vélez et al. 2020, Melguizo et al. 2016). 

Second, need-based grant funding may yield a large positive long-term return for the government. While a longer time horizon is needed to evaluate the long-term benefits of each programme,  a cost-benefit analysis suggests that the programme paid for itself through higher tax contributions within a decade, providing a benefit of US$ 1.96 in discounted tax revenue for every US$ 1 of grant funding awarded. As such, this programme may be a cost-effective approach to improve the outcomes of low-income families in developing countries. 

Lastly, imposing strict repayment conditions on student loan borrowers may significantly penalise them as new college graduates entering the labour market. For example, the results indicate that one unintended consequence of imposing a short moratorium on loan repayment is that it induced students to accept lower paying jobs when they leave college. As such, while loan funding improves students’ outcomes during college, these students enter the labour market at a disadvantage. 

These insights are very important for policymakers who endeavour to improve the short- and long-term outcomes of low-income college students by designing cost-effective funding programmes. Future researchers should continue to explore how similar programmes impact students’ outcomes in other developing countries. 

References

Calderon A (2018), "Massification of Higher Education Revisited", RMIT University, Melbourne.

Canton E and A Blom (2010), "Student support and academic performance: experiences at private universities in Mexico", Education Economics 18(1): 49-65.

Card D and A Solis (2020), "Measuring the Effect of Student Loans on College Persistence", NBER Working Paper No. W27269.

Chetty R, J N Friedman, E Saez, N Turner, and D Yagan (2017), "Mobility Report Cards: the Role of Colleges in Intergenerational Mobility", NBER Working Paper No. 23618.

Gurgand M, A J Lorenceau, T Mélonio (2011), "Student Loans: Liquidity Constraint and Higher Education in South Africa", Agence Française de Développement Working Paper 117.

Hershbein B., M S Kearney, L W Pardue, (2020), "College attainment, income inequality, and economic security: a simulation exercise", AEA Papers and Proceedings 110: 352–355.

Londoño-Vélez J, C Rodríguez, and F Sánchez (2020), "Upstream and downstream impacts of college merit-based financial aid for low-income students: Ser Pilo Paga in Colombia", American Economic Journal: Economic Policy 12(2): 193-227.

Melguizo T, F Sanchez, and T Velasco (2016), "Credit for low-income students and access to and academic performance in higher education in Colombia: A regression discontinuity approach", World Development 80: 61-77.

Pandey U C and V Indrakanti (2017), Open and Distance Learning Initiatives for Sustainable Development, IGI Global.

World Bank (2020), School Enrollment, Tertiary (% Gross) (data file).

Wright N A (2021), "Need-based financing policies, college decision-making, and labor market behavior: Evidence from Jamaica", Journal of Development Economics 150: 102617.

Education Student loans Higher education Jamaica Labour market