The Effect of Rising Higher Education Costs on Business Formation

The Effect of Rising Higher Education Costs on Business Formation

Authors: Lea Rendell

Abstract: Between 2000 and 2014, yearly real average college tuition increased by 31% while the average student loan balance increased by 21%. I use administrative data to examine how an increase in the cost of higher education affects the likelihood of forming a business after graduation. I instrument for realized tuition by exploiting the variation in total four-year tuition due to differences in the length of exposure to increased tuition between students in different enrollment years at universities that experienced a large “sticker price” tuition shock. I find that for every $10,000 increase in tuition there is a 3.0 percentage point (41 percent) decrease in the likelihood of being an owner or early joiner of a business. This decline is 7.8 percentage points larger for individuals at universities that have larger student loan balances and 4.1 percentage points higher for individuals with parents who did not complete college. The negative effect on business formation does not exist for students attending universities with more generous financial aid. These results suggest that increasing higher education costs are deterring recent graduates from engaging in entrepreneurial activity.

Seminar Notes

Venue

CES Brownbag 2024

Objective

To understand if rising education costs decrease entrepreneurship

Importance

Two reasons higher education costs might decrease entrepreneurship -

Funding constraints - may reduce financial resources needed to start a business or student loans may reduce likelihood of getting funding.

Risk aversion - new businesses are risky. May be less willing to take on risk if in debt (student loans)

Background

Between 2000 and 2014 - 31% increase in average published tuition rates and 21% increase in average student loan balance.

Literature has documented negative long-term effects of student loans on marriage rates, homeownership, job market.

Declining share of young entrepreneurs.

Data & Key Variables

National Survey of College Graduates (NSCG) - institution and background info. 90,000 individuals per survey year 2013, 2015, 2017, 2019, 2021. 1/3-1/2 of respondents are newly sampled each year. 2004-2011 graduates

Tuition data - IPEDS - calculate 4 year tuition bill

Business Formation data - BR & LBD, ILBD, LEHD

Choi et al (2023) method to identify “Founding team”; owner. Employer & non-employer firms.

Measured within 8 years of graduation

Methodology

Use variation in tuition and the timing of tuition shock relative to stage of college education.

Shock = year-over-year change of over $1000

Students further from graduation when shock occurs will have a larger tuition balance

Results

Decrease in entrepreneurship, measured as being part of a founding team, of ~3 percentage points for every $10,000 of tuition. A 40% decrease relative to the mean.

Larger effects at schools with high loan rates, and for students with lower educational background parents

Key Table/Figure