Grants vs. Loans: the Role of Financial Aid in College Major Choice

Abstract We analyse whether financing higher education through student loans or grants affects the college major choices of students in Chile where either type of financing is allocated based on a standardised test. Students who are marginally eligible for grants are more likely to enrol in high-paying fields such as STEM. Complementing the reduced form results, we estimate a discrete choice model on data for narrowly defined higher education programmes. The results indicate that, holding other programme characteristics constant, grant recipients place higher value on fields with high earnings growth potential, while being less concerned about a lower graduation probability.