Insuring Student Loans Against the Risk of College Failure

Posted: 7 Oct 2010 Last revised: 11 Feb 2013

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Felicia Anamaria Ionescu

Colgate University

Date Written: October 4, 2010

Abstract

Participants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). The authors examine whether insurance against college-failure risk can be offered, taking into account moral hazard and adverse selection. To do so, they develop a model that accounts for college enrollment, dropout, and completion rates among new high school graduates in the US and use that model to study the feasibility and optimality of offering insurance against college failure risk. The authors find that optimal insurance raises the enrollment rate by 3.5 percent, the fraction acquiring a degree by 3.8 percent and welfare by 2.7 percent. These effects are more pronounced for students with low scholastic ability (the ones with high failure probability).

Superseded by Working Paper 12-15

Keywords: College Risk, Government Student Loans, Optimal Insurance

JEL Classification: D82, D86, I22

Suggested Citation

Chatterjee, Satyajit and Ionescu, Felicia Anamaria, Insuring Student Loans Against the Risk of College Failure (October 4, 2010). FRB of Philadelphia Working Paper No. 10-31. Available at SSRN: https://ssrn.com/abstract=1687999 or http://dx.doi.org/10.2139/ssrn.1687999

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Felicia Anamaria Ionescu

Colgate University ( email )

13 Oak Drive
Hamilton NY 13346, NY 13346
United States

HOME PAGE: http://people.colgate.edu/fionescu/

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