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Consolidation of Student Loan Repayments and Default Incentives

Listed author(s):
  • Ionescu Felicia A

    ()

    (Colgate University)

I study repayment behavior for college graduates who borrow under the U.S. Federal Student Loan Program to finance higher education. I develop a dynamic model with uninsurable shocks to earnings and student loan rates that explains the repayment pattern in U.S. data: college graduates with lower debt will lock-in interest rates, while those with higher debt will switch to an income-contingent plan. Default does not occur among the most financially constrained group of college graduates. I use the model to quantify the effects of a reform introduced in 2006 that eliminates the possibility to lock-in interest rates for student loans. The reform induces a significant increase in default rates, which is largely accounted for by low-income borrowers.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 8 (2008)
Issue (Month): 1 (August)
Pages: 1-37

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Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:22
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  1. 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.
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  4. Deborah Lucas & Damien Moore, 2007. "The Student Loan Consolidation Option: An Analysis of an Exotic Financial Derivative: Working Paper 2007-05," Working Papers 18540, Congressional Budget Office.
  5. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
  6. 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.
  7. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
  8. Felicia Ionescu & Satyajit Chatterjee, 2008. "Insuring College Failure Risk," 2008 Meeting Papers 813, Society for Economic Dynamics.
  9. Susan M. Dynarski, 2003. "Does Aid Matter? Measuring the Effect of Student Aid on College Attendance and Completion," American Economic Review, American Economic Association, vol. 93(1), pages 279-288, March.
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  12. Caroline Minter Hoxby, 2004. "Introduction to "College Choices: The Economics of Where to Go, When to Go, and How to Pay For It"," NBER Chapters,in: College Choices: The Economics of Where to Go, When to Go, and How to Pay For It, pages 1-12 National Bureau of Economic Research, Inc.
  13. Caroline M. Hoxby, 2004. "College Choices: The Economics of Where to Go, When to Go, and How to Pay For It," NBER Books, National Bureau of Economic Research, Inc, number hoxb04-1, November.
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