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Finance

Dillon Fuchsman, Josh B. McGee, Gema Zamarro.

Many states have recently made or are considering changes to their teacher retirement systems. However, little is known about how teachers value various elements of their retirement benefits versus other aspects of their jobs and compensation. To help alleviate this gap, we use a discrete choice stated preferences experiment embedded in a nationally representative survey of teachers to estimate their willingness-to-pay for various retirement plan characteristics and other non-salary job components. We find that teachers would be indifferent between a traditional pension and alternative retirement plan designs if the alternatives were paired with 2 to 3 percent salary increases. Our results indicate that experience is a significant mediator of retirement plan preferences. While more experienced teachers are willing to pay more to keep their traditional pension plans, inexperienced teachers do not have strong preferences around retirement plan type. However, teachers’ willingness-to-pay for traditional pension plans is less than their willingness-to-pay for many other elements of their compensation, including the value of retirement benefits, retirement age, salary growth, healthcare coverage, and Social Security enrollment.

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Rajashri Chakrabarti, Nicole Gorton, Michael F. Lovenheim.

Most public colleges and universities rely heavily on state financial support. As state budgets have tightened in recent decades, appropriations for higher education have declined substantially. Despite concerns expressed by policymakers and scholars that the declines in state support have reduced the return to education investment for public sector students, little evidence exists that can identify the causal effect of these funds on long-run outcomes. We present the first such analysis in the literature using new data that leverages the merger of two rich datasets: consumer credit records from the New York Fed's Consumer Credit Panel (CCP), sourced from Equifax, and administrative college enrollment and attainment data from the National Student Clearinghouse. We overcome identification concerns related to the endogeneity of state appropriation variation using an instrument that interacts the baseline share of total revenue that comes from state appropriations at each public institution with yearly variation in state-level appropriations. Our analysis is conducted separately for two-year and four-year students, and we analyze individuals into their mid-30s. For four-year students, we find that state appropriation increases lead to substantially lower student debt originations. They also react to appropriation increases by shortening their time to degree, but we find little effect on other outcomes. In the two-year sector, state appropriation increases lead to more collegiate and post-collegiate educational attainment, more educational debt consistent with the increased educational attainment, but lower likelihood of delinquency and default. State support also leads to more car and home ownership with lower adverse debt outcomes, and these students experience substantial increases in their credit score and in the affluence of the neighborhood in which they live. Examining mechanisms, we find state appropriations are passed on to students in the form of lower tuition in the four-year sector with no institutional spending response. For community colleges, we find evidence of both price and quality mechanisms, the latter captured in higher educational resources in key spending categories. These results are consistent with the different pattern of effects we document in the four-year and two-year sectors. Our results underscore the importance of state support for higher education in driving student debt outcomes and the long-run returns to postsecondary investments that students experience.

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Oded Gurantz, Taylor Odle.

We replicate and extend prior work on Florida’s Bright Futures merit aid scholarship to consider its effect on college enrollment and degree completion. We estimate causal impacts using a regression discontinuity design to exploit SAT thresholds that strongly determine eligibility. We find no positive impacts on attendance or attainment, and instrumental variable results generally reject estimates as small as 1-2 percentage points. Across subgroups, we do find that eligibility slightly reduces six-year associate degree attainment for lower-SES students and may induce small enrollment shifts among Hispanic and White students. Our findings of these minimal-at-best impacts contrast those of prior works, attributable in part to methodological improvements and more robust data, and further underscore the importance of study replication. (JEL: H75, I21, I22, I23, I28)

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Robert M. Costrell.

The ongoing crisis in teacher pension funding has led states to consider various reforms in plan design, to replace the traditional benefit formulas, based on years of service and final average salary (FAS).  One such design is a cash balance (CB) plan, long deployed in the private sector, and increasingly considered, but rarely yet adopted for teachers.  Such plans are structured with individual 401(k)-type retirement accounts, but with guaranteed returns.  In this paper I examine how the nation’s first CB plan for teachers, in Kansas, has played out for system costs, and the level and distribution of individual benefits, compared to the FAS plan it replaced.  My key findings are:  (1) employer-funded benefits were modestly reduced, despite the surface appearance of more generous employer contribution matches; (2) more importantly, the cost of the pension guarantee, which is off-the-books under standard actuarial accounting, was reduced quite substantially.  In addition, benefits are more equitably distributed between short termers and career teachers than under the back-loaded structure of benefits characteristic of FAS plans.   The key to the plan’s cost reduction is that the guaranteed return approximates a low-risk market return, considerably lower than the assumed return on risky assets.   

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Benjamin L. Castleman, Francis X. Murphy, Richard W. Patterson, William L. Skimmyhorn.

The Post-9/11 GI Bill allows service members to transfer generous education benefits to a dependent. We run a large scale experiment that encourages service members to consider the transfer option among a population that includes individuals for whom the transfer benefits are clear and individuals for whom the net-benefits are significantly more ambiguous. We find no impact of a one-time email about benefits transfer among service members for whom we predict considerable ambiguity in the action, but sizeable impacts among service members for whom education benefits transfer is far less ambiguous. Our work contributes to the nascent literature investigating conditions when low-touch nudges at scale may be effective. JEL Classification: D15, D91, H52, I24

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Mark J. Chin, Lena Shi.

Given states’ balanced budget requirements, investment decisions often involve trade-offs between policymakers’ budget priorities. Does political party control affect investment decisions and outcomes? Using a regression discontinuity design based on close state elections between 1984-2013, we find that marginally Democratic legislatures spend more on higher education but less on K-12 education. Rather than trading off within the education budget, policymakers trade education and welfare, particularly in liberal and high-poverty states. Increases in local revenue offset party differences in K-12 spending, suggesting that policymakers make trade-offs by considering the availability of external budget sources and how investments respond to constituents’ needs. (JEL I22, I28, H72, H75)

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Alberto Guzman-Alvarez, Lindsay C. Page.

Verification is a federally mandated process that requires selected students to further attest that the information reported on their FAFSA is accurate and complete. In this brief, we estimate institutional costs of administrating the FAFSA verification mandate and consider variation in costs by institution type and sector. Using data from 2014, we estimate that compliance costs to institutions in that year totaled nearly $500 million with the burden falling disproportionately on public institutions and community colleges, in particular. Specifically, we estimate that 22% of an average community college’s financial aid office operating budget is devoted to verification procedures, compared to 15% at public four-year institutions. Our analysis is timely, given that rates of FAFSA verification have increased in recent years.

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Christian Buerger, Seung Hyeong Lee, John D. Singleton.

A recent literature provides new evidence that school resources are important for student outcomes. In this paper, we show that school finance reform-induced increases in student performance are driven by those states that had test-based accountability policies in place at the time. By incentivizing school improvement, accountability systems (such as the federal No Child Left Behind act) may raise the efficiency with which additional school funding gets spent. Our empirical approach leverages the timing of school finance reforms to compare funding impacts on student test scores between states that had accountability in place at the time of the reform with states that did not. The results indicate that finance reforms are three times more productive in low-income school districts when also accompanied by test-based accountability. These findings shed new light on the role of accountability incentives in education production and the mechanisms supporting the effectiveness of school resources.

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Robert M. Costrell, Josh B. McGee.

Our goal in this paper, presented at the 2020 Brookings Municipal Finance Conference, is to better understand teacher pension funding dynamics with a focus on sustainability and intergenerational equity.  The origin of this paper is our analysis of the funding policy recommended in a highly publicized paper first presented at the 2019 Brookings Municipal Finance Conference (Lenney, Lutz, and Sheiner, 2019a; 2019b).  That proposed policy aims to alleviate rising pension payments that crowd-out classroom expenditures and teacher salaries by abandoning the attempt to pay down pension debt.  While the problem of crowd-out is real, we show that, with uncertain investment returns, the recommended policy would carry significant risk of pension fund insolvency and a jump in contributions to the pay-go rate, which is much higher than current rates. We close by proposing a policy evaluation framework that better incorporates risk and the intertemporal tradeoffs between current contributions and likely future outcomes.  We illustrate throughout with data from the California Teachers Retirement System (CalSTRS).

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Sandra E. Black, Jeffrey T. Denning, Lisa J. Dettling, Sarena Goodman, Lesley J. Turner.

Growing reliance on student loans and repayment difficulties have raised concerns of a student debt crisis in the United States. However, little is known about the effects of student borrowing on human capital and long-run financial well-being. We use variation induced by recent expansions in federal loan limits, together with administrative schooling, earnings, and credit records, to identify the effects of increased student borrowing on credit-constrained students’ educational attainment, earnings, debt, and loan repayment. Increased student loan availability raises student debt and improves degree completion, later-life earnings, and student loan repayment while having no effect on homeownership or other types of debt.

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