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Credit Scores and College Investment

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Abstract

The private market of student loans has become an important source of college financing in the U.S. Unlike government student loans, the terms on private student loans (i.e., credit limits and interest rates) are based on credit scores We quantify the effects of credit scores on college investment in a heterogeneous life-cycle economy that exhibits a government and private market for student loans. We find that students with higher credit scores invest in more college education. Furthermore, we find that the relationship between credit scores and college investment has important policy implications. For example, when government borrowing limits are relaxed, college investment increases but so does the riskiness of the pool of borrowers, leading to higher default rates in the private market. If private creditors react to the government policy (by adjusting loan terms to minimize default risk), college investment is offset, with poor students experiencing the largest reductions. The effects of credit scores on college investment are more pronounced when taking into account the recent drop in financial wealth for U.S. households.

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File URL: http://commons.colgate.edu/cgi/viewcontent.cgi?article=1013&context=econ_facschol
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Bibliographic Info

Paper provided by Department of Economics, Colgate University in its series Working Papers with number 2010-07.

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Date of creation: Aug 2010
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Handle: RePEc:cgt:wpaper:2010-07

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Keywords: college investment; credit scores; student loans;

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Cited by:
  1. Felicia Ionescu & Marius Ionescu, 2012. "The Interplay Between Student Loans and Credit Cards: Implications for Default," Working Papers 2012-014, Human Capital and Economic Opportunity Working Group.
  2. Brant Abbott & Giovanni Gallipoli & Costas Meghir & Giovanni L. Violante, 2013. "Education Policy and Intergenerational Transfers in Equilibrium," Cowles Foundation Discussion Papers 1887, Cowles Foundation for Research in Economics, Yale University.
  3. Gicheva, Dora, 2011. "Does the Student-Loan Burden Weigh into the Decision to Start a Family?," Working Papers 11-14, University of North Carolina at Greensboro, Department of Economics.
  4. Felicia Ionescu, 2011. "The Interplay Between Different Types of Unsecured Credit and Amplification of Consumer Default," 2011 Meeting Papers 912, Society for Economic Dynamics.

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