A Theory of Student Overborrowing

Viktar Fedaseyeu

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Vitaliy Strohush

Elon University

January 10, 2014

We analyze households' decision to borrow for education in a setting where some of them are myopic and student loans are provided by the government. First, we show that when the amount of loans that the government is willing to provide is too large, some workers will borrow from the government and acquire education even if they would have been better off without it. These situations, which we call overborrowing, can occur even if the average college wage premium is positive. Second, we show that government-provided loans generate a propagation mechanism that exacerbates the problem of overborrowing. Third, we show that the extent of overborrowing depends on the speed at which loans are provided, and not just on their amount. As a result, overborrowing can be minimized if loans are provided gradually rather than all at once, even when workers are myopic. Fourth, we demonstrate that overborrowing can occur as long as a sufficient number of workers are myopic, even if the remaining workers are not myopic.

Number of Pages in PDF File: 37

Keywords: Student loans; overborrowing; education

Open PDF in Browser Download This Paper

Date posted: March 24, 2012 ; Last revised: January 17, 2014

Suggested Citation

Fedaseyeu, Viktar and Strohush, Vitaliy, A Theory of Student Overborrowing (January 10, 2014). Available at SSRN: http://ssrn.com/abstract=2026990 or http://dx.doi.org/10.2139/ssrn.2026990

Contact Information

Viktar Fedaseyeu (Contact Author)
Bocconi University - Department of Finance ( email )
Via Roentgen 1
Milano, MI 20136
+390258365283 (Phone)
+390258365283 (Fax)
Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )
Via Roentgen 1
Milan, 20136
Vitaliy Strohush
Elon University ( email )
Elon, NC 27244
United States
Feedback to SSRN

Paper statistics
Abstract Views: 456
Downloads: 79
Download Rank: 229,191

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.219 seconds