Student Loans and Repayment: Theory, Evidence and Policy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Rising costs of and returns to college have led to sizeable increases in the demand for student loans in many countries. In the U.S., student loan default rates have also risen for recent cohorts as labor market uncertainty and debt levels have increased. We discuss these trends as well as recent evidence on the extent to which students are able to obtain enough credit for college and the extent to which they are able to repay their student debts after. We then discuss optimal student credit arrangements that balance three important objectives: (i) providing credit for students to access college and finance consumption while in school, (ii) providing insurance against uncertain adverse schooling or post-school labor market outcomes in the form of income-contingent repayments, and (iii) providing incentives for student borrowers to honor their loan obligations (in expectation) when information and commitment frictions are present. Specifically, we develop a two-period educational investment model with uncertainty and show how student loan contracts can be designed to optimally address incentive problems related to moral hazard, costly income verification, and limited commitment by the borrower. We also survey other research related to the optimal design of student loan contracts in imperfect markets. Finally, we provide practical policy guidance for re-designing student loan programs to more efficiently provide insurance while addressing information and commitment frictions in the market. Terms of use: Documents in

Does Salient Financial Information Affect Academic Performance and Borrowing Behavior among College Students?

“…Private student loans are generally more costly than federal student loans and have repayment terms that are much less flexible than those of federal loans (Lochner and Monge-Naranjo 2015). Moreover, private student loans are underwritten and therefore require a cosigner for approval unless the student has established a positive credit record.…”

“…The federally required entry counseling for those looking to take on student loans is provided online, and as a 2015 study by Fernandez et al notes, "most students begin counseling eager to learn more about how to finance their education and control their borrowing, but they tend to shift from reading material slowly and carefully to skimming and skipping as they progress." The lack of patience for online education paired with the lack of experience with credit can potentially lead young borrowers to make suboptimal decisions about the type and amount of student loans they use to finance their education (Avery and Turner 2012;Lochner and Monge-Naranjo 2015). Other existing financial counseling for student loans is directed toward students close to graduation, and this information tends to focus on loan repayment options.…”

Explaining Individuals’ Behavior towards Their Acquisition of Students’ Loan in the US

“…There is evidence that most debtors have been defaulting on their loans, at an increasing rate over the last decade (Lochner and Monge-Naranjo, 2015). Moreover, the demand for student loans has been increasing over the last decade (Lochner andMonge-Naranjo, 2015 andAvery andTurner, 2012).…”

“…The success of the Harvard student loan program led to similar programs in the other Ivy League and state colleges in the mid-to late-1800s (Cohen & Kisker, 2009). Currently, student loans are provided mainly by the US federal government through the US Department of Education (Lochner and Monge-Naranjo, 2015). The US Department of Education currently manages about $713 billion in Federal Student Aid, which accounts for about 90 percent of the student loan market (Li, 2013).…”

“…To this end, many studies have contributed to the understanding of students' behavior concerning student loans, in particular, the repayment of student loans and defaults (Lochner and Monge-Naranjo, 2015;Hillman et al 2014;Li, 2013;Gross et al 2009;Greiner, 1996;and others). However, there is still very scanty information regarding the factors that influence how much money a student might borrow in the first place.…”