A Theory of Inefficient College Entry and Excessive Student Debt

Fedaseyeu Viktar () and Strohush Vitaliy ()
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Fedaseyeu Viktar: Department of Finance, Bocconi University, and IGIER, Via Roentgen 1, Milan, 20136, Italy
Strohush Vitaliy: Department of Economics, Elon University, 2075 Campus Box, Elon, NC 27244, USA

The B.E. Journal of Economic Analysis & Policy, 2018, vol. 18, issue 1, 21

Abstract: When workers are myopic and the amount of financing provided by the government is sufficiently large, some workers acquire education even if they are better off without it. We show that government-provided loans generate a propagation mechanism that exacerbates inefficient college entry. Further, the extent of this inefficiency depends on the speed at which loans are provided, and not just on their amount. The extent of inefficient college entry also depends on the distribution of myopic workers in the population, and inefficiencies can arise even if not all workers are myopic. We extend the model to study the impact of the dropout rate and heterogeneous expectations as well the dynamic implications of inefficient college entry.

Keywords: student loans; inefficient college entry; excessive student debt; education (search for similar items in EconPapers)
JEL-codes: I22 I26 I28 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/bejeap-2016-0304

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