Life-cycle higher education expenditures and the role of altruism

This paper constructs an empirical life-cycle profile for higher education expenditures. By life-cycle profile we mean how much an individual spends on average with respect to age. The purpose of constructing an empirical life-cycle profile is to compare the theoretical life-cycle profile predicted by the models (denoted BPH model) of human capital accumulation of Ben-Porath (1967) and Heckman (1976a, 1976b) to the data associated with higher education expenditures. The comparison of the theoretical and empirical profiles allows one to determine if (at all) and how (direction) theory should be modified. A main result of this paper is the existence of statistically significant turning points in the empirical life-cycle higher education expenditure profile. The first turning point occurs at age 43, followed by another at age 60, and another at age 78. These turning points are robust to perturbations in the regression model and how the cohorts are defined. A second finding of this paper is that the theory of parental altruism significantly improves the performance of the BPH model. Relative to the baseline BPH model, altruistic transfers to the younger generations cause the very young (ages 18-23) to over-consume on higher education. From ages 24-45, agents economize on higher education expenditures as they work and save for the impending altruistic transfers which they must make. The economization causes the profile to rapidly decrease during this age period. However, because the life-cycle cannot cross zero, the first turning point occurs at age 45, followed by another turn downward at an age just before 60. Only in the later part of the life-cycle, which represents a very small fraction of expenditures, does the theory of altruism not improve the performance of the standard baseline theory; the Bayes factor is inconclusive for altruism at ages above 55.