Student Debt and Default: The Role of For-Profit Colleges

86 Pages Posted: 25 Apr 2017

See all articles by Luis Armona

Luis Armona

Stanford University

Rajashri Chakrabarti

Federal Reserve Bank of New York

Michael Lovenheim

Cornell University - Department of Policy Analysis and Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2020

Abstract

For-profit providers have become an important fixture of U.S. higher education markets. Students who attend for-profit institutions take on more educational debt and are more likely to default on their student loans than those attending similarly selective public schools. Because for-profits tend to serve students from more disadvantaged backgrounds, it is important to isolate the causal effect of for-profit enrollment on student debt and repayment outcomes as well as the educational and labor market mechanisms that drive any such effects. We approach this problem using a novel instrument combined with comprehensive institution-level data on student debt, default, educational attainment, and labor market outcomes. Our instrument leverages the interaction between changes in the demand for college due to labor demand shocks and the baseline supply of for-profit schools. We compare how enrollment and subsequent outcomes change across areas that experience similar labor demand shocks but that have different latent supply of for-profit institutions. The first-stage estimates show that students are much more likely to enroll in a for-profit institution for a given labor demand change when there is a higher supply of such schools in the base period. Among four-year students, for-profit enrollment leads to more loans, higher loan amounts, an increased likelihood of borrowing, and an increased risk of default. Two-year for-profit students also take out more loans, originate more student debt, and have higher default rates. We present evidence that these debt and default outcomes are driven by higher for-profit tuition and a negative effect of for-profit enrollment on labor market outcomes. Our results point to high costs and low returns to for-profit enrollment that generate worse student debt and repayment outcomes. These findings have important implications for public investments in higher education as well as how students make postsecondary choices.

Keywords: postsecondary education, for-profit schools, student loans, default, returns to education

JEL Classification: H4, I2, J1

Suggested Citation

Armona, Luis and Chakrabarti, Rajashri and Lovenheim, Michael, Student Debt and Default: The Role of For-Profit Colleges (February 2020). Available at SSRN: https://ssrn.com/abstract=2958120

Luis Armona (Contact Author)

Stanford University ( email )

Rajashri Chakrabarti

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/chakrabarti

Michael Lovenheim

Cornell University - Department of Policy Analysis and Management ( email )

Ithaca, NY
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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