June 2002

IZA DP No. 518: The Evidence on Credit Constraints in Post-Secondary Schooling

published in: Economic Journal, 2002, 112 (482), 705-734

This paper examines the family income—college enrollment relationship and the evidence on credit constraints in post-secondary schooling. We distinguish short-run liquidity constraints from the long-term factors that promote cognitive and noncognitive ability. Long-run factors crystallized in ability are the major determinants of the family income—schooling relationship, although there is some evidence that up to 8% of the U.S. population is credit constrained in a short-run sense. Evidence that IV estimates of the returns to schooling exceed OLS estimates is sometimes claimed to support the existence of substantial credit constraints. This argument is critically examined.