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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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References

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  1. Lance Lochner & Alexander Monge-Naranjo, 2010. "The Nature of Credit Constraints and Human Capital," Working Papers 2011-024, Human Capital and Economic Opportunity Working Group.
  2. Philippe Belley & Lance Lochner, 2008. "The Changing Role of Family Income and Ability in Determining Educational Achievement," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20081, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
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Cited by:
  1. Krueger, Dirk & Ludwig, Alexander, 2013. "Optimal Progressive Taxation and Education Subsidies in a Model of Endogenous Human Capital Formation," MEA discussion paper series 13267, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  2. Felicia Ionescu, 2011. "The Interplay Between Different Types of Unsecured Credit and Amplification of Consumer Default," 2011 Meeting Papers 912, Society for Economic Dynamics.
  3. Giovanni L. Violante & Costas Meghir & Giovanni Gallipoli, 2008. "Equilibrium Effects of Education Policies: a Quantitative Evaluation," 2008 Meeting Papers 868, Society for Economic Dynamics.
  4. Brant Abbott & Giovanni Gallipoli & Costas Meghir & Giovanni L. Violante, 2013. "Education Policy and Intergenerational Transfers in Equilibrium," Working Paper Series 15_13, The Rimini Centre for Economic Analysis.
  5. Darolia, Rajeev, 2014. "Working (and studying) day and night: Heterogeneous effects of working on the academic performance of full-time and part-time students," Economics of Education Review, Elsevier, vol. 38(C), pages 38-50.
  6. 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.
  7. 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.

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