From the Field

The Effects of State Investment in Higher Education

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With state budget cuts likely in the wake of the pandemic, it’s important to consider what the possible impact of reductions in funding for public colleges and universities. In a new working paper, Rajashri Chakrabarti of the Federal Reserve Bank of New York, Nicole Gorton of University of California and Michael F. Lovenheim of the Department of Cornell University analyze the long-run educational and financial outcomes of a reduction in state investment in higher education.

The researchers compared higher education state appropriations to two datasets: consumer credit records from the New York Fed’s Consumer Credit Panel (CCP) and administrative college enrollment and attainment data from the National Student Clearinghouse.

For students at four-year colleges, increases in state appropriations led to a shorter time earning degrees and substantially lower student debt, both in terms of the number of loans and the amount of money borrowed. In the two-year sector, state appropriation increases led to an increased likelihood that students will transfer to four-year colleges, earn a bachelor’s degree and go on to graduate school. Students also had more debt consistent with increased attainment, but a lower likelihood of delinquency and default. State support for higher education is also linked to more car and home ownership with lower adverse debt outcomes. The students experience substantial increases in their credit score and in the affluence of the neighborhood in which they live.

The findings demonstrate the large effect that state appropriations have on the return on education investment for so many young people.

By Robert Nishimwe