Many of those students are attending open-access community colleges, where tuition is relatively low, helped by substantial support from federal and state grant aid. Still, the remaining costs associated with college attendance—such as books and supplies and living expenses—may be important determinants of students’ success. For these students, the resources provided by student loans could mean the difference between working longer hours and having additional time to spend in class or on coursework.
Although the federal student-loan program exists to provide such resources, the growth in student loan debt is often described as a “crisis,” and many colleges and universities have implemented policies designed to reduce student borrowing. However, there is little rigorous evidence on the causal effect of loans on educational outcomes. As a result, it is not clear whether efforts to reduce borrowing will benefit or harm students.
We address this question through a randomized experiment at a large community college. Colleges that participate in the federal student-loan program must make loans available to all of their students, and the amount that each student can borrow is determined by his or her class standing and dependence on parental support. However, colleges have discretion over how much loan aid, if any, to list on students’ annual financial-aid award letters. Depending on the school’s approach, a letter might provide a loan “offer” equal to the maximum dollar amount a student could borrow, zero, or anything in between.