A Harming Hand: The Predatory Implications of Government Backed Student Loans
56 Pages Posted: 27 Oct 2017 Last revised: 8 Jun 2018
Date Written: May 30, 2018
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: Suggested Citation