Private Student Loans and Bankruptcy: Did Four-Year Undergraduates Benefit from the Increased Collectability of Student Loans
University of Connecticut School of Law; Harvard Law School - Center on the Legal Profession
August 2, 2014
Forthcoming UpJohn Press Volume
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 ordinary least squares regression, Blinder-Oaxaca, matching, and difference-in-difference methods. We find that both opponents and proponents of bankruptcy reform were wrong about the effect of that reform. The overall cost of private student loans at four-year undergraduate institutions increased by an average of 35 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. We attribute a 200% increase in loan volumes to the law change.
Number of Pages in PDF File: 48
Keywords: bankruptcy, student loans, matching, law change, education, consumer finance, BAPCPA
JEL Classification: D1, D78, K35, D18, D12, C9, I22, I28, K00
Date posted: September 29, 2013 ; Last revised: August 3, 2014