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The student loan consolidation option

Deborah Lucas and Damien Moore

Journal of Public Economics, 2019, vol. 174, issue C, 1-12

Abstract: The federal government makes credit for higher education widely available at subsidized prices through its student loan programs. A loan provision that at times has significantly increased the size and volatility of the subsidies is the consolidation option, which allows borrowers to convert floating rate loans to fixed rate loans, often on very favorable terms. The option provides a novel setting in which to study how unsophisticated borrowers respond to financial incentives. We develop a model to evaluate the option's cost to the government, and find that the ex-ante cost of the option ranged from 0.8% to 6.4% of loan principal between 1998 and 2005. Using a sample of 700,000 student loan records, we find that borrowers responded to the time-varying incentives to consolidate although some left sizeable amounts of money on the table; that more indebted borrowers were more likely to optimize; and that there is some evidence of learning over time.

Keywords: Education financing; Education policy; Student loans; Options pricing in public policy applications (search for similar items in EconPapers)
Date: 2019
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Working Paper: The Student Loan Consolidation Option (2008) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:174:y:2019:i:c:p:1-12

DOI: 10.1016/j.jpubeco.2019.01.011

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