Graduates, Dropouts and Slow Finishers: The Effects of Credit Constraints on University Outcomes
| Published date | 01 June 2016 |
| DOI | http://doi.org/10.1111/obes.12119 |
| Date | 01 June 2016 |
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©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 78, 3 (2016) 0305–9049
doi: 10.1111/obes.12119
Graduates, Dropouts and Slow Finishers: The Effects
of Credit Constraints on University Outcomes*
Buly A. Cardak† and Joe Vecci‡
†Department of Economics and Finance, La Trobe Business School, La Trobe University,
Bundoora, VIC, 3086, Australia (e-mail: b.cardak@latrobe.edu.au)
‡Department of Economics, Monash University, Clayton, VIC, 3800, Australia (e-mail:
joseph.vecci@monash.edu.au)
Abstract
The effect of credit constraints on university outcomes is studied. Credit constraints have
a negative relationship with dropout, especially on lower achieving high school graduates.
Credit constrained students with strong high school achievement are 13–15% more (less)
likely to graduate (be slow finishers) relative to otherwise similar students who are po-
tentially or unlikely constrained. Using competing risk analysis, we find dropout is most
likely in the first year of study and falls over time for all students.After 3 years of study,
the risk of dropout increases for students who are constrained suggesting constraints may
eventually bind on these students.
I. Introduction
Why do students who enrol in university drop out? While the number varies across coun-
tries, large numbers of students start a degree programme which they fail to complete.
The average university dropout rate across Organisation for Economic Cooperation and
Development (OECD) countries is around 30%. In the US, 35% of students commencing a
4-year degree dropout.1The comparable dropout rate is 18% inAustralia, 25% in Ger many
and 30% in the UK (OECD, 2013). More troubling is evidence that many of those that
dropout tend to come from low socioeconomic status (SES) backgrounds, Stinebrickner
and Stinebrickner (2012), thus exacerbating the SES gradient in university participation
for graduates, further increasing inequality. The costs to students and society can be large.
Students typically forgo income and take on debt while studying, dropping out leaves
JEL Classification numbers: I23, I22, J24, H52
*Wethank the editor and referees for helpful comments and suggestions. We are indebted to Chris Ryan for many
helpful comments and suggestions and James Maloney for excellent research assistance. We are also grateful for
comments from David Prentice and seminar participants at Deakin, La Trobe and Monash Universities,University
of Wollongong,an Economic Society of Australia VictorianProfessional Development Seminar and the ESAM/ACE
2014. Cardak acknowledgessuppor t from a research grant providedby the Australian Research Council (DP0662909)
and is grateful for the hospitality extended by the Melbourne Institute where part of this work was undertaken.
1The figure is 47% when 2-year programmes are included.
324 Bulletin
students facing costs without the anticipated benefits of graduation. For those that drop
out, loans are less likely to be repaid and subsidies and scholarships provided by govern-
ments and universities fail to achieve the intended objectives (seeAvery and Turner, 2012
for some recent US evidence).
There is an ongoing debate about student loan reform in the US (see e.g. Avery and
Turner, 2012; Stiglitz, 2013). They highlight concerns about growing debt that does not
match the earnings prospects of students, leading to high repayment burdens and default
rates. Stiglitz (2013) argues that even with the current loan institutions in the US, the rapid
growth in tuition charges seen in recent years makes it difficult for students to manage
repayments after graduation.2He points to the Australian income contingent loan scheme
(Higher Education Contribution Scheme, hereafter HECS) as a possible alternative. The
appealing features are the income contingency and the fixed repayment burden. Unlike
many other student loan arrangements where repayment dollar amounts are fixed, the
repayment amount rises and falls with income. The implication is that students do not
experience high repayment burdens that can drive them to default.
This paper investigates the dropout, graduation and slow finishing decisions of univer-
sity students under the world’s first income contingent loan scheme, in place in Australia
since 1989. We focus on human capital investment where students decide to dropout or
continue to study on the basis of the costs and benefits of their decision. The central issues
in our analysis include credit constraints and financial support from a range of sources
including family and government. Students face a tuition charge for which they have ac-
cess to a universal government-operatedincome contingent loan scheme, HECS, which we
describe in more detail below (see Chapman, 1997) for a comprehensive discussion. The
federal government also provides income support for students in need based on a parental
means test. Even with this support in place, we observe relatively large numbers of stu-
dents ‘changing their mind’ part way through a degree programme by either dropping out
(21% of our sample) or delaying progress (19%). Students may not appreciate the financial
commitments associated with university study when they applyfor and enrol in university.
Conversely, given the tuition and time costs of study, dropping out may be an efficient
decision if a student discovers they lack the interest or aptitude for the study chosen. Our
objective is to test for differences in graduation and dropout behaviour between students
that are likely and unlikely to face credit constraints.
The data used in this study are taken from the Longitudinal Study of AustralianYouth
2003 (LSAY03) cohort. Unlike many previous studies that focus on parental income as
a reflection of credit constraints, we classify students into likely to be, potentially and
unlikely to be credit constrained categories based on whetherthey attended private schools,
the average SES of their school and their own SES; more detail is provided below.3The
dropout, incomplete and graduate outcomes are modelled using both a multinomial logit,
while a competing risks approach is used to model the evolution of student decisions over
time. These approaches capture different aspects of student decisions in higher education
2See Lochner and Monge-Naranjo (2011) for a study of the growing importance of private credit providers in
student loans resulting from strong tuition growth and unchanging student loan limits in the US.
3Emphasis on parental willingness to pay for education is consistent with findings in Brown, Scholz and Seshadri
(2012) who show that parental income is not the best indicator of credit constraints if parents are unwilling or unable
to contribute student college costs.
©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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