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Risky College Investment under Alternative Bankruptcy Regimes for Student Loans

I consider the implications of alternative bankruptcy regimes for student loans ina heterogeneous model of life-cycle earnings and risky human capital accumulation. Findings suggest that the ability level of high-school graduates drives the decision to enroll in college, while the initial human capital level is crucial for completing college. Also, the correlation between parental wealth and ability and human capital stock is key in delivering enrollment and completion rates across income groups consistent with empirical findings. The model delivers higher college enrollment, dropout, and default rates when loans can be discharged. Under liquidation, financially constrained borrowers choose to default, whereas under reorganization borrowers default for other reasons rather than financial constraints. Dischargeability benefits college dropouts and students with low assets. It induces more human capital accumulation over the life-cycle relative to the reorganization regime.

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File URL: http://commons.colgate.edu/cgi/viewcontent.cgi?article=1006&context=econ_facschol
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Paper provided by Department of Economics, Colgate University in its series Working Papers with number 2009-01.

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Date of creation: Aug 2009
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Handle: RePEc:cgt:wpaper:2009-01
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Web page: http://www.colgate.edu/academics/departments-and-programs/economics

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  1. Igor Livshits & James MacGee & Michele Tertilt, 2005. "Consumer Bankruptcy: A Fresh Start," Discussion Papers 04-011, Stanford Institute for Economic Policy Research.
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  13. Elizabeth M. Caucutt & Krishna B. Kumar, 2000. "Higher Education Subsidies and Heterogeneity, A Dynamic Analysis," RCER Working Papers 472, University of Rochester - Center for Economic Research (RCER).
  14. 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 2163-84, December.
  15. Elizabeth M. Caucutt & Lance Lochner, 2005. "Borrowing constraints on families with young children," Proceedings, Federal Reserve Bank of Cleveland, pages 39-48.
  16. Athreya, Kartik & Tam, Xuan S. & Young, Eric R., 2009. "Unsecured credit markets are not insurance markets," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 83-103, January.
  17. Satyajit Chatterjee & Felicia Ionescu, 2010. "Insuring college failure risk," Working Papers 10-1, Federal Reserve Bank of Philadelphia.
  18. Deborah Lucas & Damien Moore, 1975. "Guaranteed versus Direct Lending: The Case of Student Loans," NBER Chapters, in: Measuring and Managing Federal Financial Risk, pages 163-205 National Bureau of Economic Research, Inc.
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