Insuring student loans against the financial risk of failing to complete college
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). We examine whether insurance, in the form of loan forgiveness in the event of failure to complete college, can be offered, taking into account moral hazard and adverse selection. To do so, we develop a model that accounts for college enrollment and graduation rates among recent US high school graduates. In our model students may fail to earn a degree because they either fail college or choose to leave voluntarily. We find that if loan forgiveness is offered only when a student fails college, average welfare increases by 2.40 percent (in consumption equivalent units) without much effect on either enrollment or graduation rates. If loan forgiveness is offered against both failure and voluntarily departure, welfare increases by 2.15 percent and both enrollment and graduation are higher.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-15.
Date of creation: 2012
Date of revision:
Other versions of this item:
- Satyajit Chatterjee & Felicia Ionescu, 2012. "Insuring student loans against the financial risk of failing to complete college," Quantitative Economics, Econometric Society, vol. 3(3), pages 393-420, November.
- NEP-ALL-2012-06-25 (All new papers)
- NEP-EDU-2012-06-25 (Education)
- NEP-IAS-2012-06-25 (Insurance Economics)
- NEP-LAB-2012-06-25 (Labour Economics)
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