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A Day Late and a Dollar Short: Liquidity and Household Formation among Student Borrowers

Sarena Goodman, Adam Isen and Constantine Yannelis

No 2018-025, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: The federal government encourages human capital investment through lending and grant programs, but resources from these programs may also finance non-education activities for students whose liquidity is otherwise restricted. This paper explores this possibility, using administrative data for the universe of federal student loan borrowers linked to tax records. We examine the effects of a sharp discontinuity in program limits?generated by the timing of a student borrower?s 24th birthday?on household formation early in the lifecycle. After demonstrating that this discontinuity induces a jump in federal support, we estimate an immediate and persistent increase in homeownership, with larger effects among those most financially constrained. In the first year, borrowers with higher limits also earn less but are more likely to save; however, there are no differences in subsequent years. Finally, effects on marriage and fertility lag homeownership. Altogether, the results appear to be driven by liquidity rather than human capital or wealth effects.

Keywords: Credit limits; Homeownership; Household formation; Human capital; Liquidity; Saving; Student loans (search for similar items in EconPapers)
JEL-codes: D14 G18 H52 H8 J24 I22 D15 (search for similar items in EconPapers)
Date: 2018-04-13
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DOI: 10.17016/FEDS.2018.025

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