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  5. Optimism about Graduation and College Financial Aid

òòò½Íø Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Optimism about Graduation and College Financial Aid

  • Emily G. Moschini
  • Gajendran Raveendranathan
  • Ming Xu
òòò½Íø Journal: Macroeconomics (Forthcoming)

Abstract

In the United States, college dropout risk is sizable. We provide new empirical evidence that beliefs about the likelihood of earning a bachelor’s degree predict college enrollment, and that the distribution of these beliefs exhibits widespread optimism. We incorporate this distribution of beliefs into an overlapping generations model with college as a risky investment that can be financed via federal loans, grants, family transfers, or earnings. We then examine the welfare impact of access to federal student loans. We find that access can reduce welfare for young adults who are low-skilled, poor, and optimistic, due to their mistaken beliefs.

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