Abstract

http://ssrn.com/abstract=2332284
 


 



Private Student Loans and Bankruptcy: Did Four-Year Undergraduates Benefit from the Increased Collectability of Student Loans


Xiaoling Ang


Consumer Financial Protection Bureau

Dalié Jiménez


University of Connecticut School of Law

April 2, 2014


Abstract:     
Since 1976, Congress has progressively amended the bankruptcy laws to treat some types of student loans differently from other unsecured debt. In 2005, student loans originated by private companies — loans granted only to credit-worthy individuals and risk-priced at origination — were added to the list of educational loans that are presumptively nondischargeable in bankruptcy. Proponents of this change argued that it was necessary to prevent strategic borrower behavior and reduce the cost of consumer credit. Focusing on consumers’ decision-making biases, opponents predicted that there would be no discernible change in the cost of consumer credit or loan volumes. We develop and test theoretical models predicting the effects of the law change on private student loans granted to students at four-year undergraduate institutions. Using a unique dataset of private student loan originations, we test those predictions using OLS regression, Blinder-Oaxaca, matching, and difference-in-difference methods. Contrary to our hypotheses, we find that the overall cost of private student loans at four-year undergraduate institutions increased by an average of 335 basis points as a result of the law change. We also find that the law change caused an expansion of credit for less credit worthy borrowers, although the average borrower credit score only decreased slightly in practical terms. Finally, the volume of loans originated also increased by approximately 60 percent in the post period, the majority of which is attributable to the law change.

We develop and test a theoretical model for the plausible effects of the law change on private student loans granted to students at four-year undergraduate institutions. Using a unique dataset of private student loan originations before and after the 2005 bankruptcy law change, we test that model and its resulting hypotheses using OLS, Oaxaca-Blinder, matching, and difference-in-difference methods. We find that the overall cost of private student loans at four year undergraduate institutions increased an average of 3.5 basis points as a result of the law change. We also find that the credit score composition of borrowers post-law change skewed towards the lower end of the credit score spectrum but the average borrower credit score only decreased slightly in practical terms. Finally, the volume of loans originated also increased approximately 60 percent in the post period, the majority of which is attributable to the law change.

Number of Pages in PDF File: 47

Keywords: bankruptcy, student loans, matching, law change, education, consumer finance, BAPCPA

JEL Classification: D1, D78, K35, D18, D12, C9, I22, I28, K00

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Date posted: September 29, 2013 ; Last revised: April 3, 2014

Suggested Citation

Ang, Xiaoling and Jiménez, Dalié, Private Student Loans and Bankruptcy: Did Four-Year Undergraduates Benefit from the Increased Collectability of Student Loans (April 2, 2014). Private Student Loans and Bankruptcy: Did Four-Year Undergraduates Benefit from the Increased Collectability of Student Loans, UpJohn Press (Forthcoming). Available at SSRN: http://ssrn.com/abstract=2332284 or http://dx.doi.org/10.2139/ssrn.2332284

Contact Information

Xiaoling Ang
Consumer Financial Protection Bureau ( email )
1275 1st St NE
827-C
Washington, DC 20002
United States
Dalié Jiménez (Contact Author)
University of Connecticut School of Law ( email )
65 Elizabeth Street
Hartford, CT 06105
United States
860-570-5114 (Phone)
HOME PAGE: http://www.dalie.org
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