The incidence of student loan subsidies: Evidence from the PLUS program

Abstract

How much do students benefit from student loan subsidies? We investigate this question,
exploiting a natural experiment: a demand shock due to the tightening of credit
standards in the PLUS program in 2011. We first establish that the Bennett Hypothesis
is best explained by colleges charging large markups over their marginal costs, rather
than by advantageous selection. Then we use our results to estimate that students plausibly
capture less than 60 cents of each dollar of resources expended on loan subsidies.
We discuss alternative approaches that would more directly benefit students.

Keywords: Student loans, PLUS loans, Bennett Hypothesis, Credit histories, Higher education, Subsidy incidence

JEL Classification: I22, I23, H22, G5, G28.