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The strategic overuse of student loans

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  • Manger, Christian

Abstract

This theoretical model shows that students strategically overuse student loans. In imperfect labour and credit markets, firms compensate graduates for a share of their loans via higher wages. This shifts some costs to firms and low-skilled workers who suffer from higher unemployment and lower wages. While any student loan increases unemployment, the effects on welfare and inequality depend on the purpose of the loan: A loan for tuition fees reduces human capital and credit accessibility, the college premium increases significantly, and welfare declines. A loan spent on consumption increases education and credit accessibility, while wage inequality and welfare change marginally.

Suggested Citation

  • Manger, Christian, 2020. "The strategic overuse of student loans," Labour Economics, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:labeco:v:66:y:2020:i:c:s0927537120301093
    DOI: 10.1016/j.labeco.2020.101905
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    References listed on IDEAS

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    More about this item

    Keywords

    Search frictions; Imperfect credit markets; Student loans; College premium; Contingent loans;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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