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Previously published in International Journal of Financial Studies.

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Although one of the primary objectives of microfinance has been the reduction of poverty through the provision of credit for income-generating purposes, evidence of its impact on poverty has been mixed. Even if there is no direct impact of microfinance, there may be an indirect positive impact through the effect of microcredit availability on families’ decisions to invest in their children’s education. In this paper, I describe a study undertaken to gauge the impact of microcredit availability on education expenditures for children of clients of a South Indian microfinance institution. I first look at some determinants of the demand for education and then go on to consider what we know about how microcredit affects this demand. I find that microcredit has an impact on the demand for education as mediated by wealth effects and status effects, i.e., microloans increase spending on education the greater the wealth and the greater the social status of the family. Focus group interviews suggest that the impact of microcredit on the demand for education comes mainly from the greater access to financial resources and, to a lesser degree, from an accompanying appreciation of the value of education.