IDEAS home Printed from https://ideas.repec.org/a/bpj/bejeap/v18y2018i1p21n2.html
   My bibliography  Save this article

A Theory of Inefficient College Entry and Excessive Student Debt

Author

Listed:
  • Fedaseyeu Viktar

    (Department of Finance, Bocconi University, and IGIER, Via Roentgen 1, Milan, 20136, Italy)

  • Strohush Vitaliy

    (Department of Economics, Elon University, 2075 Campus Box, Elon, NC 27244, USA)

Abstract

When workers are myopic and the amount of financing provided by the government is sufficiently large, some workers acquire education even if they are better off without it. We show that government-provided loans generate a propagation mechanism that exacerbates inefficient college entry. Further, the extent of this inefficiency depends on the speed at which loans are provided, and not just on their amount. The extent of inefficient college entry also depends on the distribution of myopic workers in the population, and inefficiencies can arise even if not all workers are myopic. We extend the model to study the impact of the dropout rate and heterogeneous expectations as well the dynamic implications of inefficient college entry.

Suggested Citation

  • Fedaseyeu Viktar & Strohush Vitaliy, 2018. "A Theory of Inefficient College Entry and Excessive Student Debt," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(1), pages 1-21, January.
    • Handle: RePEc:bpj:bejeap:v:18:y:2018:i:1:p:21:n:2
    DOI: 10.1515/bejeap-2016-0304
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/bejeap-2016-0304
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/bejeap-2016-0304?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    2. Darolia, Rajeev, 2013. "Integrity versus access? The effect of federal financial aid availability on postsecondary enrollment," Journal of Public Economics, Elsevier, vol. 106(C), pages 101-114.
    3. Adam Looney & Constantine Yannelis, 2015. "A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 1-89.
    4. repec:iza:izawol:journl:y:2014:p:92 is not listed on IDEAS
    5. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    6. Douglas Webber, 2014. "Is the return to education the same for everybody?," IZA World of Labor, Institute of Labor Economics (IZA), pages 1-92, October.
    7. Ralph Stinebrickner & Todd Stinebrickner, 2008. "The Effect of Credit Constraints on the College Drop-Out Decision: A Direct Approach Using a New Panel Study," American Economic Review, American Economic Association, vol. 98(5), pages 2163-2184, December.
    8. Rothstein, Jesse & Rouse, Cecilia Elena, 2011. "Constrained after college: Student loans and early-career occupational choices," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 149-163, February.
    9. Susan Dynarski, 2002. "The Behavioral and Distributional Implications of Aid for College," American Economic Review, American Economic Association, vol. 92(2), pages 279-285, May.
    10. David J. Deming & Claudia Goldin & Lawrence F. Katz, 2012. "The For-Profit Postsecondary School Sector: Nimble Critters or Agile Predators?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 139-164, Winter.
    11. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2006. "Costly Information Acquisition: Experimental Analysis of a Boundedly Rational Model," American Economic Review, American Economic Association, vol. 96(4), pages 1043-1068, September.
    12. Jesse Bricker & Jeffrey Thompson, 2016. "Does Education Loan Debt Influence Household Financial Distress? An Assessment Using The 2007–2009 Survey Of Consumer Finances Panel," Contemporary Economic Policy, Western Economic Association International, vol. 34(4), pages 660-677, October.
    13. Gicheva, Dora & Thompson, Jeffrey, 2014. "The Effects of Student Loans on Long-Term Household Financial Stability," UNCG Economics Working Papers 14-2, University of North Carolina at Greensboro, Department of Economics.
    14. Dynarski, Susan M. & Scott–Clayton, Judith E., 2006. "The Cost of Complexity in Federal Student Aid: Lessons From Optimal Tax Theory and Behavioral Economics," National Tax Journal, National Tax Association;National Tax Journal, vol. 59(2), pages 319-356, June.
    15. Charles F. Manski, 1993. "Adolescent Econometricians: How Do Youth Infer the Returns to Schooling?," NBER Chapters, in: Studies of Supply and Demand in Higher Education, pages 43-60, National Bureau of Economic Research, Inc.
    16. Christopher Avery & Sarah Turner, 2012. "Student Loans: Do College Students Borrow Too Much--Or Not Enough?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 165-192, Winter.
    17. Christine Schwartz, 2010. "Pathways to educational homogamy in marital and cohabiting unions," Demography, Springer;Population Association of America (PAA), vol. 47(3), pages 735-753, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rajeev Darolia, 2013. "Student Loan Repayment and College Accountability," Consumer Finance Institute discussion papers 13-5, Federal Reserve Bank of Philadelphia.
    2. Rajeev Darolia, 2016. "An Experiment on Information Use in College Student Loan Decisions," Working Papers 16-18, Federal Reserve Bank of Philadelphia.
    3. Goodman, Sarena & Isen, Adam & Yannelis, Constantine, 2021. "A day late and a dollar short: Liquidity and household formation among student borrowers," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1301-1323.
    4. Rajeev Darolia, 2015. "Messengers of Bad News or Bad Apples? Student Debt and College Accountability," Education Finance and Policy, MIT Press, vol. 10(2), pages 277-299, March.
    5. José Alberto Fuinhas & Victor Moutinho & Estefano Silva, 2019. "Delinquency and Default in USA Student Debt as a Proportional Response to Unemployment and Average Debt per Borrower," Economies, MDPI, vol. 7(4), pages 1-16, October.
    6. Berrak Bahadir & Dora Gicheva, 2022. "Macroeconomic Implications of Student Debt: A State‐Level Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2273-2300, December.
    7. Lance Lochner & Alexander Monge-Naranjo, 2014. "Student Loans and Repayment: Theory, Evidence and Policy," Working Papers 2014-40, Federal Reserve Bank of St. Louis.
    8. Matthew S. Rutledge & Geoffrey T. Sanzenbacher & Francis M. Vitagliano, 2016. "How Does Student Debt Affect Early-Career Retirement Saving?," Working Papers, Center for Retirement Research at Boston College wp2016-9, Center for Retirement Research.
    9. Jeffrey T. Denning & Todd R. Jones, 2021. "Maxed Out?: The Effect of Larger Student Loan Limits on Borrowing and Education Outcomes," Journal of Human Resources, University of Wisconsin Press, vol. 56(4), pages 1113-1140.
    10. Looney, Adam & Yannelis, Constantine, 2022. "The consequences of student loan credit expansions: Evidence from three decades of default cycles," Journal of Financial Economics, Elsevier, vol. 143(2), pages 771-793.
    11. Sandra E. Black & Jeffrey T. Denning & Lisa J. Dettling & Sarena Goodman & Lesley J. Turner, 2023. "Taking It to the Limit: Effects of Increased Student Loan Availability on Attainment, Earnings, and Financial Well-Being," American Economic Review, American Economic Association, vol. 113(12), pages 3357-3400, December.
    12. Stephanie Riegg Cellini & Rajeev Darolia, 2017. "High Costs, Low Resources, and Missing Information: Explaining Student Borrowing in the For-Profit Sector," The ANNALS of the American Academy of Political and Social Science, , vol. 671(1), pages 92-112, May.
    13. Lau, Christopher V., 2020. "Are federal student loan accountability regulations effective?," Economics of Education Review, Elsevier, vol. 75(C).
    14. Darolia, Rajeev, 2013. "Integrity versus access? The effect of federal financial aid availability on postsecondary enrollment," Journal of Public Economics, Elsevier, vol. 106(C), pages 101-114.
    15. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    16. Catherine, Sylvain & Yannelis, Constantine, 2023. "The distributional effects of student loan forgiveness," Journal of Financial Economics, Elsevier, vol. 147(2), pages 297-316.
    17. Jinhee Kim & Swarn Chatterjee, 2019. "Student Loans, Health, and Life Satisfaction of US Households: Evidence from a Panel Study," Journal of Family and Economic Issues, Springer, vol. 40(1), pages 36-50, March.
    18. Stephanie Riegg Cellini & Nicholas Turner, 2019. "Gainfully Employed?: Assessing the Employment and Earnings of For-Profit College Students Using Administrative Data," Journal of Human Resources, University of Wisconsin Press, vol. 54(2), pages 342-370.
    19. Mueller, Holger & Yannelis, Constantine, 2017. "Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs," CEPR Discussion Papers 11938, C.E.P.R. Discussion Papers.
    20. Alvaro Mezza & Daniel R. Ringo & Shane M. Sherlund & Kamila Sommer, 2016. "Student Loans and Homeownership," Finance and Economics Discussion Series 2016-10, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    student loans; inefficient college entry; excessive student debt; education;
    All these keywords.

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejeap:v:18:y:2018:i:1:p:21:n:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.