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

56 Pages Posted: 27 Oct 2017 Last revised: 8 Jun 2018

Andrew Schwartz

University of California, Berkeley - Haas School of Business

Date Written: May 30, 2018

Abstract

Although economic research is near unanimous finding that college is a good investment, there is growing concern about the impact that student debt and defaults have on student borrowers. Using the Department of Education's College Scorecard, I document a new stylized fact about cross-sectional return heterogeneity across schools. Motivated by this fact, I then construct a basic informed lending model to study the optimal way to encourage greater college attendance via loan policies. I show that under a socially optimal guarantee scheme, a social planner will want to pool all students at a single, uniform rate. This optimal policy, however, will result in weak students accepting predatory offers.

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 (May 30, 2018). Available at SSRN: https://ssrn.com/abstract=3060059 or http://dx.doi.org/10.2139/ssrn.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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