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Are students credit-constrained or culture-constrained?

4 January, 2016 - 16:48

The foregoing analysis assumes that students and potential students make rational decisions on the costs and benefits of further education and act accordingly. It also assumes implicitly that individuals can borrow the funds necessary to build their human capital: if the additional returns to further education are worthwhile, individuals should borrow the money to make the investment, just as entrepreneurs do with physical capital.

However, there is a key difference in the credit markets. If an entrepreneur fails in her business venture the lender will have a claim on the physical capital. But a bank cannot repossess a human being who drops out of school without having accumulated the intended human capital. Accordingly, the traditional lending institutions are frequently reluctant to lend the amount that students might like to borrow - students are credit constrained. The sons and daughters of affluent families therefore find it easier to attend university, because they are more likely to have a supply of funds domestically. Governments customarily step into the breach and supply loans and bursaries to students who have limited resources. While funding frequently presents an obstacle to attending a third-level institution, a stronger determinant of attendance is the education of the parents, as detailed in Application Box.

Application Box: Parental education and university attendance in Canada

The biggest single determinant of university attendance in the modern era is parental education. A recent study* of who goes to university examined the level of parental education of young people ‘in transition’ – at the end of their high school – for the years 1991 and 2000. For the year 2000 they found that, if a parent had not completed high school, there was just a 12% chance that their son would attend university and an 18% chance that a daughter would attend. In contrast, for parents who themselves had completed a university degree, the probability that a son would also attend university was 53% and for a daughter 62%. Hence, the probability of a child attending university was roughly four times higher if the parent came from the top educational category rather the bottom category! Furthermore the authors found that this probability gap opened wider between 1991 and 2000.

*Finnie, R., C. Laporte and E. Lascelles. “Family Background and Access to Post-Secondary Education: What Happened in the Nineties?” Statistics Canada Research Paper, Catalogue number 11F0019MIE-226, 2004