Saving for Children’s College Education: An Empirical Analysis of the Trade-off Between the Quality and Quantity of Children

Abstract

This paper examines the effect of children’s college expenses on household savings. The theoretical model introduces life-cycle savings into the quality–quantity model of fertility and derives predictions for the impact of expected expenses on parents’ savings. Using the actual amount of parents’ financial support reported in the Survey of Consumer Finances, the empirical model estimates the expected expenditures on children’s college education and investigates the effect of expected expenditures on parents’ savings. The results show that parents’ support for each of their children’s college expenses decreases with the number of children. The results are consistent with the predictions of the life-cycle theory of saving and consumption that households save in advance for expected expenses to smooth their consumption.

Appendices

Appendix A

Definition of variables

Name	Description
Number of children	Number of children of either the respondent or spouse
Completed fertility	Predicted number of children when the household head is 55 years old
College expenditures	Amount of parental support for college expenses of each child
Expected college expenditures	Predicted amount of parents’ support for children’s college expenses
Has a child in college	=1 if the household has a child attending college between 1983 and 86; =0 otherwise
Savings_1	(Net worth in 1986 minus net worth in 1983)/3
Savings_2	(Net worth in 1986 excluding the capital gains on primary residence minus net worth in 1983)/3
Net worth	Household net worth in 1983
Permanent income	Exponential of predicted log of 1985 household income
Transitory income	Difference between total household income in 1985 and permanent income
Age	Age of the household head in 1983
Age2	Age-squared of the household head in 1983
High school	=1 if the household head has a high school degree; =0 otherwise
College	=1 if the household head has a college degree; =0 otherwise
Black	=1 if the household head is African-American; =0 otherwise
Couple	=1 if the household head has a partner; =0 otherwise
Female	=1 if the household head is a single female; =0 otherwise
All right to borrow for education	=1 if the household head thinks it is all right to borrow for education; =0 otherwise
Windfall	=1 if the household received a windfall greater than $3,000 between 1983 and 86; =0 otherwise
Risky	=1 if the household head is willing to undertake risky investments; =0 otherwise
Non-SMSA	=1 if the place of residence is not in a SMSA; =0 otherwise
# of children in college	The number of children attending college between 1983 and 86
High school_spouse	=1 if the female partner has a high school degree; =0 otherwise
College_spouse	= 1 if the female partner has a college degree; =0 otherwise
Work_spouse	= 1 if the female partner has a full-time job in 1983; =0 otherwise
Retirement	=1 if retirement is the most important reason for saving; =0 otherwise
Emergencies	=1 if emergencies is the most important reason for saving; =0 otherwise
Children’s education	=1 if children’s education is the most important reason for saving; =0 otherwise
Home purchase	=1 if saving to buy a home is the most important reason for saving; =0 otherwise
Other saving motives	=1 if the household cited another reason as the most important reason to save; =0 otherwise
Net worth_25	=1 if the household is in the bottom 25 percentile of the wealth distribution in 1983; =0 otherwise
Net worth_75	=1 if the household is in the top 25 percentile of the wealth distribution in 1983; =0 otherwise
Never married	=1 if the household head has never been married; =0 otherwise
Widow	=1 if the household head is a widow or widower; =0 otherwise
Divorced	=1 if the household head is divorced; =0 otherwise
Education (years)	The number of years the household head attended school

Appendix B

Estimates of OLS regression for the log of 1985 household income

	Coeff	Std. Error
Constant	7.899	0.227**
Age	0.044	0.008**
Age2	0.000	0.000**
Black	−0.787	0.952
Black × Age	0.019	0.043
Black × Age2	−0.0002	0.000
Never married	−0.191	0.134
Widow	−0.101	0.149
Divorced	−0.090	0.129
Female	−0.190	0.093**
High school	0.111	0.070
College	0.150	0.125
Education (years)	0.086	0.015**
High school_spouse	0.280	0.079**
College_spouse	0.327	0.084**
Work_spouse	0.186	0.041**
N	1,699
Mean of log of income	10.132
R 2	0.352

1. Note: The data source is the 1983–86 Survey of Consumer Finances Variables are defined in Appendix A
2. * p < .1; ** p < .05