More Credit, More Problems? Federal Student Loan Limits and Education Outcomes

55 Pages Posted: 3 Feb 2015 Last revised: 18 Nov 2015

See all articles by Cullen F. Goenner

Cullen F. Goenner

University of North Dakota - Department of Economics and Finance

Chih Ming Tan

University of North Dakota - College of Business & Public Administration - Department of Economics

Date Written: November 14, 2015

Abstract

The Federal Stafford loan program is the largest source of financial aid to students who attend college in the United States. Here we utilize the increase in Stafford loan limits that occurred between 2006 and 2008 to identify how a pooled cross-section of first-time freshmen at the University of North Dakota (UND) responded to an increase in the availability of credit. Using a difference-in-differences approach, we examine how borrowing, the composition of credit, and student outcomes were impacted by the policy changes. The student body at UND provides a unique opportunity to examine the treatment effects of these policies, as we are able to isolate the impact of macroeconomic fluctuations on borrowing due to the strength and stability of North Dakota’s economy during the period. Freshmen are shown here to substitute an increase in their borrowing through Stafford loans with a partial reduction in borrowing via private loans. Substitution is particularly strong among more credit constrained students. Interestingly, despite having access to more credit, student academic outcomes did not improve as a result of the changes, and in some cases worsened.

Keywords: Borrowing constraints, government student loans, education outcomes

JEL Classification: H52, I18

Suggested Citation

Goenner, Cullen F. and Tan, Chih Ming, More Credit, More Problems? Federal Student Loan Limits and Education Outcomes (November 14, 2015). Available at SSRN: https://ssrn.com/abstract=2559276 or http://dx.doi.org/10.2139/ssrn.2559276

Cullen F. Goenner (Contact Author)

University of North Dakota - Department of Economics and Finance ( email )

293 Centennial Drive Stop 8369
Grand Forks, ND 58202
United States

HOME PAGE: http://www.ndeconomist.com

Chih Ming Tan

University of North Dakota - College of Business & Public Administration - Department of Economics ( email )

293 Centennial Drive Stop 8369
Grand Forks, ND 58202-8369
United States

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

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