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Abstract

Under current law, participants in (college) student loan program must repay their loan in full regardless of whether they complete college. Dropout rate among college students from low-income background is anywhere between 33 to 50 percent. The combination of lack of family resources, unconstrained access to student loans and high dropout rates means that for a substantial fraction of low-income students the attempt to acquire a college degree ends in low earnings and high indebtedness. In this paper we examine whether the student loan program can gainfully offer insurance against college failure risk. We argue that such an insurance scheme is administratively feasible and provide conditions under which such insurance can be gainfully offered taking into account the constraints imposed by moral hazard. We show that the provision of such insurance will raise enrollment rates, dropout rates, and average welfare. The model is calibrated to US data on college costs, enrollment rates, college premium, and average indebtedness of program participants. Insurance against college failure risk raises enrollment rates by 4 percent, decreases college completion rate from 61 percent to 40 percent and increases welfare by about 0.24 percent.

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File URL: http://www.economicdynamics.org/meetpapers/2008/paper_813.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 813.

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Date of creation: 2008
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Handle: RePEc:red:sed008:813

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1. Akyol, Ahmet & Athreya, Kartik, 2005. "Risky higher education and subsidies," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 979-1023, June.
   
   • Ahmet Akyol & Kartik Artheya, 2003. "Risky higher education and subsidies," Working Paper 03-02, Federal Reserve Bank of Richmond.
2. Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," Working Papers 0209, Centro de Investigacion Economica, ITAM.
   
   • Diego Restuccia & Carlos Urrutia, 2004. "Intergenerational Persistence of Earnings: The Role of Early and College Education," American Economic Review, American Economic Association, vol. 94(5), pages 1354-1378, December.
   • Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," Working Papers diegor-02-03, University of Toronto, Department of Economics.
   • Diego Restuccia & Carlos Urrutia, 2002. "Intergenerational Persistence of Earnings: The Role of Early and College Education," University of Western Ontario, Economic Policy Research Institute Working Papers 20024, University of Western Ontario, Economic Policy Research Institute.

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Cited by:

1. Lance J. Lochner & Alexander Monge-Naranjo, 2008. "The Nature of Credit Constraints and Human Capital," NBER Working Papers 13912, National Bureau of Economic Research, Inc.
   
   • Lance J. Lochner & Alexander Monge-Naranjo, 2011. "The Nature of Credit Constraints and Human Capital," American Economic Review, American Economic Association, vol. 101(6), pages 2487-2529, October.
   • Lance J. Lochner, 2009. "The Nature of Credit Constraints and Human Capital," 2009 Meeting Papers 745, Society for Economic Dynamics.
   • 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.
   • Lance J. Lochner & Alexander Monge-Naranjo, 2010. "The Nature of Credit Constraints and Human Capital," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20101, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
2. Nicole Simpson & Felicia Ionescu, 2010. "Credit Scores and College Investment," 2010 Meeting Papers 666, Society for Economic Dynamics.
   
   • Ionescu, Felicia & Simpson, Nicole, 2010. "Credit Scores and College Investment," Working Papers 2010-07, Department of Economics, Colgate University.
3. Ionescu, Felicia, 2009. "Risky College Investment under Alternative Bankruptcy Regimes for Student Loans," Working Papers 2009-01, Department of Economics, Colgate University.
4. Ionescu, Anamaria, 2008. "The Federal Student Loan Program: Quantitative Implications for College Enrollment and Default Rates," Working Papers 2007-04, Department of Economics, Colgate University.
   
   • Felicia Ionescu, 2009. "The Federal Student Loan Program: Quantitative Implications for College Enrollment and Default Rates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 205-231, January.

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