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A Harming Hand: The Predatory Implications of Government Backed Student Loans

80 Pages Posted: 27 Oct 2017 Last revised: 21 Nov 2017

Andrew Schwartz

University of California, Berkeley - Haas School of Business

Date Written: November 20, 2017

Abstract

Using the Department of Education's College Scorecard, I provide evidence that over 30 of undergraduates should expect to realize a negative financial return on their investment in higher education. To explain these findings, I construct a model of informed lending in which student loan providers know more about students' expected wage distributions than the students themselves. Reversing traditional lending information asymmetries has no adverse impacts in a laissez-faire environment as students are able to perfectly infer their type from lenders' loan offers. With all student loans required to be issued at the same interest rate (as is the case today) students are no longer able to learn their true type. In this environment, students may be induced to accept a predatory admissions offer. In spite of the possibility for predatory behavior, the socially optimal student loan program, may still mandate that all loans be issued at the same interest rate. In effect, the socially optimal lending program can encourage predatory behavior.

Keywords: Government Subsidies, Informed Lending, Interest Rate Pooling, Optimal Government Policy, Returns to Education, Student Loans

JEL Classification: G28, G29, H81, I26

Suggested Citation

Schwartz, Andrew, A Harming Hand: The Predatory Implications of Government Backed Student Loans (November 20, 2017). Available at SSRN: https://ssrn.com/abstract=3060059

Andrew Schwartz (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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