A Harming Hand: The Predatory Implications of Government Backed Student Loans
80 Pages Posted: 27 Oct 2017 Last revised: 21 Nov 2017
Date Written: November 20, 2017
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: Suggested Citation