Insuring student loans against the risk of college failure

Satyajit Chatterjee () and Felicia Ionescu
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Felicia Ionescu: https://www.federalreserve.gov/econres/felicia-f-ionescu.htm

No 10-31, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Participants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). The authors examine whether insurance against college-failure risk can be offered, taking into account moral hazard and adverse selection. To do so, they develop a model that accounts for college enrollment, dropout, and completion rates among new high school graduates in the US and use that model to study the feasibility and optimality of offering insurance against college failure risk. The authors find that optimal insurance raises the enrollment rate by 3.5 percent, the fraction acquiring a degree by 3.8 percent and welfare by 2.7 percent. These effects are more pronounced for students with low scholastic ability (the ones with high failure probability).

Keywords: Student loans; Risk management; Education, Higher - Economic aspects; Insurance (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-edu, nep-ias, nep-lab and nep-rmg
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Citations: View citations in EconPapers (6)

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