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Parental Support, Savings and Student Loan Repayment

Lance Lochner (), Todd Stinebrickner () and Utku Suleymanoglu
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Utku Suleymanoglu: University of Western Ontario, https://economics.uwo.ca

No 20182, 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: Using unique survey and administrative data from the Canada Student Loans Program, we document that parental support and personal savings substantially lower student loan repayment problems. We develop a theoretical model for studying student borrowing and repayment in the presence of risky labor market outcomes, moral hazard, and costly earnings verification. This framework demonstrates that non-monetary costs of applying for income-based repayment assistance are critical to understanding why resources other than earnings lead to greater repayment. We further show that eliminating these non-monetary costs may be inefficient and lead to undesirable redistribution. Empirically, we demonstrate that expanding Canada’s income-based Repayment Assistance Plan to automatically cover all borrowers would likely reduce program revenue by nearly one-half over early years of repayment. Finally, we show how student loan programs can be more efficiently designed to address heterogeneity in parental transfers in the presence of non-monetary earnings verification costs and moral hazard.

Date: 2018
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Working Paper: Parental Support, Savings and Student Loan Repayment (2018) Downloads
Working Paper: Parental Support, Savings and Student Loan Repayment (2018) Downloads
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