Sources of Rising Student Debt in the U.S.: College Costs, Wage Inequality, and Delinquency

This paper examines the quantitative implications of rising college costs, wage inequality, and delinquency for the growth of student debt in the U.S. Rising college costs and wage inequality are introduced as exogenous inputs into an incomplete-markets overlapping-generations model with choices of college attendance, student loans, and delinquency. In the benchmark economy, aggregate student debt rises by $314 billion between 1985 and 2014, accounting for approximately 64% of the observed rise in undergraduate student loans in the U.S. The rise in college costs is the primary driver of the increased borrowing, while the rise in income risk and the decline in student ability lead to higher delinquency rates. Increasing delinquency significantly amplifies debt accumulation: in a counterfactual economy without the option of becoming delinquent, debt increases by only $178 billion. Finally, we show that income-driven repayment (IDR) plans can substantially moderate debt growth, leading to an increase of only $169 billion. This effect arises because IDR reduces delinquency rates by offering greater repayment flexibility. (Copyright: Elsevier)