Distributed April 19, 2002
News Service Contact: Kristen Cole
Parental contributions to education costs boost students’ ability to spend
Every dollar parents contributed toward law school expenses increased their offspring’s lifetime consumption by $1.76, says an economist at Brown University.
PROVIDENCE, R.I. — Law school students who received money from their parents toward tuition and expenses consumed more throughout their lifetime than classmates who did not, according to an economist at Brown University.
Students used parental contributions to subsidize their lifestyle in school or to offset debt. Either action resulted in greater consumption, which is the difference between earnings and educational expenses – or spending money.
“It was a bit surprising. You’d think parental support would induce students to stop working,” said Robert Sauer, visiting professor of economics, who conducted the study. “But it acted like an earning subsidy and induced some to start working.”
The study looked at 658 alumni of the University of Michigan Law School. The population was made up of white males, reflecting the majority of those enrolled in law school during the late 1970s and early 1980s. Sauer’s findings do not apply to women, whose career decisions are heavily influenced by childbearing factors and are thus more difficult to model.
Parental cash transfers significantly increased lifetime consumption for two main reasons. Individuals who are induced to work rather than borrow and individuals who use the money to offset loans graduate with lower debt burdens and therefore are able to consume more. Working while in school and borrowing less also increases in-school consumption levels over the consumption levels attainable through increased borrowing.
Every dollar from a parent increased a student’s lifetime consumption by $1.76. Most of that figure was the savings from avoiding the need to borrow and the interest that would incur. One dollar from a parent is one dollar less borrowed, and 62 cents less paid in interest on the dollar at 9 percent interest over 15 years. The remaining 14 cents was the increase in consumption in school.
Sauer will present his findings April 27 at a conference – The Econometrics of Education: Modeling Selectivity and Outcomes – in Montreal.
The notion that students with low levels of parental financial support would have to borrow heavily and amass a lot of debt, which would effect their career choices, is incorrect, said Sauer. Educational debt had only a modest influence on post-graduation career choices. Further, parental support did not affect the student’s lifetime earnings.
Parents and loans were the most important sources of financing the law school education. Sixty-one percent of the sample reported receiving money from parents. The mean amount of parental support was slightly more than half the three-year costs for out-of-state students. Sixty-one percent of students had educational debt when they graduated from law school.
Factors related to financing tuition are central to recent changes in education policy, said Sauer. Newly available tuition tax credits will likely lead to an increase in cash transfers from parents to children.
Educational loan-forgiveness programs developed to influence post-graduation career choices are also expanding. Sauer began his research to test the presumption of many educational loan-forgiveness programs that law school graduates were shying away from public service jobs because of initially low salaries and high educational debt service payments. Law school graduates enter the nonprofit sector with or without loan-forgiveness programs, he said.
Those who chose to work while in school had different characteristics from those who chose to borrow heavily for their education, said Sauer. He found that those who worked were academically stronger, had a higher earning capacity, and their parents had higher education levels, than those who borrowed.
One of the limitations of Sauer’s economic model is the assumption that parents do not react to their offspring’s decisions about work, and alter their contributions. Additionally, the findings do not apply to undergraduates, a population that Sauer is currently researching.