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Finance

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 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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Monnica Chan, Zachary Mabel, Preeya Pandya Mbekeani.

Performance-based funding models for higher education, which tie state support for institutions to performance on student outcomes, have proliferated in recent decades. Some states have designed these policies to also address educational attainment gaps by including bonus payments for traditionally low-performing groups. Using a Synthetic Control Method research design, we examine the impact of these funding regimes on race-based completion gaps in Tennessee and Ohio. We find no evidence that performance-based funding narrowed race-based completion gaps. In fact, contrary to their intended purpose, we find that performance-based funding widened existing gaps in certificate completion in Tennessee. Across both states, the estimated impacts on associate degree outcomes are also directionally consistent with performance-based funding exacerbating racial inequities in associate degree attainment.

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Carlos X. Lastra-Anadón, Paul E. Peterson.
The efficiency-equity trade-offs in public service delivery may be influenced by the dependency of local governments on their own resources rather than inter-governmental grants. School districts in the United States are expected both to produce human capital efficiently and to provide educational opportunity equally. To ascertain school district trade-offs, we estimate effects of revenue source on student performances in math and reading. Achievement is estimated from 225,000 observations weighted to be district representative. Estimates are made with OLS, geographic discontinuity models exploiting differences at state borders, and 2SLS models that use changes in housing prices as an instrument. For every 10 percent increase in local revenue share, achievement increases by a sizeable 0.02 to 0.06 standard deviations. Gains for students from low socio-economic backgrounds are about half those from higher ones. Both voice and exit channels moderate the efficiency-equity trade-off. Implications for federalism and state policy are discussed.

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Jing Liu, Julie Cohen.

Valid and reliable measurements of teaching quality facilitate school-level decision-making and policies pertaining to teachers, but conventional classroom observations are costly, prone to rater bias, and hard to implement at scale. Using nearly 1,000 word-to-word transcriptions of 4th- and 5th-grade English language arts classes, we apply novel text-as-data methods to develop automated, objective measures of teaching to complement classroom observations. This approach is free of rater bias and enables the detection of three instructional factors that are well aligned with commonly used observation protocols: classroom management, interactive instruction, and teacher-centered instruction. The teacher-centered instruction factor is a consistent negative predictor of value-added scores, even after controlling for teachers’ average classroom observation scores. The interactive instruction factor predicts positive value-added scores.

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Kenneth A. Shores, Christopher A. Candelaria, Sarah E. Kabourek.

Sixty-seven school finance reforms (SFRs) in 27 states have taken place since 1990; however, there is little empirical evidence on the heterogeneity of SFR effects. We provide a comprehensive description of how individual reforms affected resource allocation to low- and high-income districts within states. We then examine whether characteristics of the SFR, such as the funding formula that was adopted, predict effect size heterogeneity. Taken together, this research aims to provide a rich description of variation in states' responses to SFRs, as well as explanation of this heterogeneity as it relates to contextual factors.

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