College student behavior and student loan default

Abstract

This paper shows that perseverant behavior during college predicts default risk later in life. Using college transcripts, we find that students who voluntarily repeat courses after performing poorly are 10% less likely to default than peers who give up after comparably poor performance in the same courses at the same institutions. Conversely, students who quit courses mid-semester are more likely to default than their perseverant peers. Utilizing post-college financial distress, second differences, and proof by contradiction, we show that factors potentially confounding the observed behavior, such as students’ private information about human capital value, are unlikely to explain our results.

Keywords: Student loans, Default risk, Transcripts, Perseverance, Household finance

JEL Classification: D14, H52, H81, I22, I28