The Consequences of Student Loan Credit Expansions: Evidence from Three Decades of Default Cycles

W. Looney and Constantine Yannelis

No 19-32, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper studies the link between credit availability and student loan repayment using administrative federal student loan data. We demonstrate that expansions and contractions in federal student loan credit to institutions with high default rates explain most of the time series variation in student loan defaults between 1980 and 2010. Expansions in loan eligibility between 1976 and 1988 led to the entry of new, high-risk institutions, and default rates exceeding 30 percent in the late 1980s. Credit access was subsequently tightened through strict institutional and student accountability measures. This contracted credit availability at the highest default rate institutions, which in turn caused an exodus of institutions with high default rates, resulting in lower default rates on student loans. After 1992, the cycle was repeated, with credit access gradually loosened by unwinding many of the pre-1992 reforms. We confirm this time series narrative by examining discrete policy changes governing access to credit to show that tightening credit supply led to the closure of high-default schools and the relaxation of accountability rules resulted in their expansion. Our estimates imply that 85 percent of the increase in default between 1980 and 1990, and 95 percent of the decrease in default between 1990 and 2000 is driven by schools entering and exiting loan programs. One-third of the recent increase in default is associated with the entry of online programs following the relaxation of rules for lending to online schools, and another third is associated with the abolition of rules limiting the share of revenue coming from federal programs

Keywords: student loans; credit expansion; human capital; loan default (search for similar items in EconPapers)
JEL-codes: D14 G28 H52 H81 (search for similar items in EconPapers)
Pages: 90 pages
Date: 2019-07-29
New Economics Papers: this item is included in nep-ban and nep-his
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2019/wp19-32.pdf (application/pdf)

Related works:
Journal Article: The consequences of student loan credit expansions: Evidence from three decades of default cycles (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:19-32

Ordering information: This working paper can be ordered from

DOI: 10.21799/frbp.wp.2019.32

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().