Insuring student loans against the risk of college failure
AbstractParticipants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). The authors examine whether insurance against college-failure risk can be offered, taking into account moral hazard and adverse selection. To do so, they develop a model that accounts for college enrollment, dropout, and completion rates among new high school graduates in the US and use that model to study the feasibility and optimality of offering insurance against college failure risk. The authors find that optimal insurance raises the enrollment rate by 3.5 percent, the fraction acquiring a degree by 3.8 percent and welfare by 2.7 percent. These effects are more pronounced for students with low scholastic ability (the ones with high failure probability).
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 10-31.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-16 (All new papers)
- NEP-EDU-2010-10-16 (Education)
- NEP-IAS-2010-10-16 (Insurance Economics)
- NEP-LAB-2010-10-16 (Labour Economics)
- NEP-RMG-2010-10-16 (Risk Management)
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- Robert J. Gary-Bobo & Alain Trannoy, 2013.
"Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection,"
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- Lance Lochner & Alexander Monge-Naranjo, 2012.
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- Lance Lochner & Alexander Monge-Naranjo, 2012. "Credit Constraints in Education," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20121, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
- Lance Lochner & Alexander Monge-Naranjo, 2011. "Credit Constraints in Education," Working Papers 2011-036, Human Capital and Economic Opportunity Working Group.
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