Second Chance: Life without Student Debt
45 Pages Posted: 26 Apr 2019 Last revised: 7 May 2019
Date Written: April 30, 2019
Rising student debt is considered one of the creeping threats of our time. This paper examines the effect of student debt relief on individual credit and labor market outcomes. We exploit the plausibly-random debt discharge due to the inability of National Collegiate, the largest owner of private student loan debt, to prove chain of title for thousands of loans across the US. Using hand-collected lawsuits filings matched with individual credit bureau information, we find that borrowers experiencing the debt relief shock reduce their indebtedness by 26%, by both reducing their demand for credit and limiting the use of existing credit accounts, and are 12% less likely to default on other accounts. After the discharge, the borrowers' geographical mobility increases, as well as, their probability to change jobs and ultimately their income increases by more than $4000 over a three year period, which is equivalent to about two months' salary. These findings speak to the benefits of intervening in the student loan market to reduce the consequences of debt overhang problems by forgiving student debts.
Keywords: Student Debt, Private Student Loans, Legal Settlement, Mobility, Debt Collection
JEL Classification: D14, H52, H81, J24, I23
Suggested Citation: Suggested Citation