Student Loans and Repayment: Theory, Evidence and Policy

Lance Lochner and Alexander Monge-Naranjo

No 20145, University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers from University of Western Ontario, Centre for Human Capital and Productivity (CHCP)

Abstract: Rising costs of and returns to college have led to sizeable increases in the demand for student loans in many countries. In the U.S., student loan default rates have also risen for recent cohorts as labor market uncertainty and debt levels have increased. We discuss these trends as well as recent evidence on the extent to which students are able to obtain enough credit for college and the extent to which they are able to repay their student debts after. We then discuss optimal student credit arrangements that balance three important objectives: (i) providing credit for students to access college and finance consumption while in school, (ii) providing insurance against uncertain adverse schooling or post-school labor market outcomes in the form of income-contingent repayments, and (iii) providing incentives for student borrowers to honor their loan obligations (in expectation) when information and commitment frictions are present. Specifically, we develop a two-period educational investment model with uncertainty and show how student loan contracts can be designed to optimally address incentive problems related to moral hazard, costly income verification, and limited commitment by the borrower. We also survey other research related to the optimal design of student loan contracts in imperfect markets. Finally, we provide practical policy guidance for re-designing student loan programs to more efficiently provide insurance while addressing information and commitment frictions in the market.

Keywords: Human Capital; Borrowing; Student Loans; Default; Repayment; Income-Contingent; Credit Constraint (search for similar items in EconPapers)
JEL-codes: D14 D82 H21 H52 I22 I24 J24 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-hrm and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Student Loans and Repayment: Theory, Evidence and Policy (2015)
Working Paper: Student Loans and Repayment: Theory, Evidence and Policy (2015)
Working Paper: Student Loans and Repayment: Theory, Evidence and Policy (2015)
Working Paper: Student Loans and Repayment: Theory, Evidence and Policy (2015)
Working Paper: Student Loans and Repayment: Theory, Evidence and Policy (2014)
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