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GERMAN STUDENTS REJECT FREE MONEY IN EDUCATIONAL
SYSTEM.
DJUMAYEVA GULNORA AMIRKULOVNA
Prepare: teacher of the “Special sciences” department of special school № 2 of
Chilonzor district of Tashkent city.
Annotation: Tuition fees at German federal institutions of higher education are virtually
non-existent, and only small administration fees have to be paid by students. What remains to
be covered are expenses for basic needs and accommodation. Among several options to
finance living expenses, students can receive financial help from their parents, work to earn
their own income, or apply for scholarships and student federal aid, also known as BAföG,
which
is
provided
by
the
Federal
Training
Assistance
Act
(Bundesausbildungsförderungsgesetz).
Depending on various socioeconomic factors, students can receive monthly BAföG
payments for the nominal length of their studies. Half of the total BAföG aid is a grant that
does not have to be paid back and the other half is an interest-free loan with the repayment
being capped at 10,000 (Bundesministerium für Bildung und Forschung). According to the
latest student survey ‘21. Sozialerhebung’ published by the Federal Ministry of Education and
Research, approximately 79% of students who receive BAföG state that without federal aid
they would have not been able to study (Middendorff et al).
In 2012, approximately 67% of students were formally eligible to receive BAföG, i.e.
they met the prerequisite to be still under 30 years old when starting their first full-time study
program (Herber and Kalinowski). Out of these formally eligible students, only 28% received
BAföG (Deutscher Bundestag ). There are two potential explanations behind the low share of
recipients: Either the students fail the means test for student aid, or they choose to not apply
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for aid even though they are eligible for a positive aid amount. While the former explanation
is in line with the purpose of the BAföG system, the latter would mean that it fails to support
students that are targeted by the system.
The previously mentioned student survey Sozialerhebung provides some insights why
some of the students did not file a BAföG application form in the first place. As the top runner,
76% of students state that according to their own expectations, either their parents’ or partner's
income was too high, followed by 30% of students saying that their own income was too high.
Remarkably, 25% of all students state that they did not apply due to the fact that they did not
want to accumulate debt. When only students from lower educational backgrounds are
considered, the share of students who state that making debt was the main reason for non-
application increases to 37% (Middendorff et al.).
This paper shows how the combination of information frictions, attitude towards risk,
student income and debt aversion can rationalize this behavior. A student who is eligible for
aid but does not apply forgoes financial resources, considering that in the German student aid
system, half of the payment is a free subsidy to the student and the other half is a zero-interest
loan. Essentially, not applying for BAföG directly translates into rejecting free money. This is
particularly controversial for students in Germany, since upward mobility for German students
to tertiary education is still low compared to other OECD countries (OECD ; Herber and
Kalinowski ). Germany has a low participation rate in higher education and also the lowest
growth rate in tertiary education in Europe, which Powell and Solga call ‘German
exceptionalism’. Student aid is supposed to increase enrollment rates to higher education
institutions (Cornwell, Mustard, and Sridhar; John and Noell ) and encourage potential
students to enroll earlier to universities (Steiner and Wrohlich ). Moreover, financial aid can
also raise the probability that a student finishes her studies successfully instead of dropping
out early (Glocker ).
We first build a theoretical model that illustrates the tradeoff of a rational student. In the
presence of imperfect information about the entitled amount of aid, risk aversion, debt
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aversion, and a costly application process, a student might find it optimal to refrain from
applying for aid. The model shows that stronger information frictions give rise to a higher
likelihood for non-application. While in general, poorer students are more likely to apply for
aid, they are also more affected by these information frictions. Moreover, the more risk-averse
a student is, the higher is the likelihood to turn down the application. A student with higher
risk aversion reacts also more severely to any changes in the information level as well as
changes in student income. Lastly, a high degree of debt aversion deters students from applying
for BAföG, irrespective of all other factors.
These hypotheses are tested using panel data provided by the GSOEP (German Socio-
Economic Panel, Goebel et al, in which students during the years 2001–2013 are observed.
Since the GSOEP does not include information on students’ eligibility for BAföG, we simulate
for each student potential BAföG amounts. We only keep eligible students in the sample, which
then reduces the number to
𝑁
-988 observations or
𝑛
=412students over 13 years. We first use
a pooled probit model to predict the probability to not receive BAföG conditional on being
eligible. We then control for unobserved heterogeneity with a correlated random effects (CRE)
probit model and find evidence for unobserved heterogeneity. The CRE probit shows that an
increase of the monthly parental gross labor income by 1% is associated with a remarkable
34.4% increase of the probability to not apply for BAföG despite eligibility (significant at
0.1%-level). This suggests that the misconceptions about eligibility increase with parental
income. If the age of a student increases by 1 year, the probability to reject BAföG is 3.3%
higher, significant at a 0.1% level in the pooled probit. Accordingly, older students assume to
not be eligible even though they are still within the actual age limit. A three-way interaction
testing for the relationship between risk aversion, income and information level is highly
significant at a 0.1% significance level.
Students with high risk aversion and strong information frictions (no siblings receiving
BAföG or being an only child) are particularly likely to not apply for aid. Additional
information via a sibling receiving BAföG is associated with a lower non-take-up rate, whereas
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there is a stronger relationship for poorer students. Students with low risk aversion are more
likely to apply for student aid in general, while the level of information has a very moderate
effect on that probability. Moreover, we find that if a student is more accustomed to debt
because her family is paying back monthly credit rates, the probability to reject BAföG
decreases by 6.9% at a 10% significance level in the pooled probit. This suggests that debt-
averse students are more likely to refrain from an application for aid.
The remainder of the paper is structured as follows: Chapter 2 provides some background
information about the BAföG system and reviews the most relevant literature. In chapter 3, we
build a simple theoretical model to illustrate the student's application decision and derive
several testable hypotheses. Chapter 4 tests these hypotheses using GSOEP data and discusses
the empirical results. The 5th chapter concludes.
References
1.
Andreß, H.-J., K. Golsch, and A. W. Schmidt. 2013. Applied Panel Data
Analysis for Economic and Social Surveys. Vol. 1. Berlin: Springer-Verlag, 203–247.
2.
Bettinger, E. P., B. T. Long, P. Oreopoulos, and L. Sanbonmatsu. 2012.
“The Role of Application Assistance and Information in College Decisions: Results
from the H&R Block FAFSA Experiment.” The Quarterly Journal of Economics 127
(3): 1205–1242. DoI
3.
Cadena, B. C., and B. J. Keys. 2013. “Can Self-Control Explain Avoiding
Free Money? Evidence from Interest-Free Student Loans.” Review of Economics and
Statistics 95
