TUITION SUBSIDIES and OVEREDUCATION
FEBRUARY 12, 2020
Abstract: Rising tuition subsidies and student loans have boosted college completion in the U.S., but have they also increased the overeducation rate? I find that some of the largest college subsidy efforts of the U.S. government, the WWII, Vietnam War, and Post-9/11 G.I. Bills, led to persistent increases in the overeducation rate among bachelor's degree holders. Motivated by these empirical patterns, I employ a dynamic structural model of occupational choice to address selection issues and conduct counterfactual analyses. The model is estimated using NLSY97 data, and accounts for parental background, academic performance, university selectivity and college major choice. The model achieves a good fit of empirical patterns in the college graduation and overeducation rates. Counterfactual analyses indicate that increases in tuition subsidies lead to higher rates of overeducation, and lower predicted earnings among college graduates. Notwithstanding the pre-college human capital of subsidy beneficiaries, reducing overeducation stands out as a policy-actionable way to improve the public monetary efficiency of tuition subsidies.