Insuring student loans against the financial risk of failing to complete college
Participants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). We examine whether insurance, in the form of loan forgiveness in the event of failure to complete college, can be offered, taking into account moral hazard and adverse selection. To do so, we develop a model that accounts for college enrollment and graduation rates among recent US high school graduates. In our model students may fail to earn a degree because they either fail college or choose to leave voluntarily. We find that if loan forgiveness is offered only when a student fails college, average welfare increases by 2.40 percent (in consumption equivalent units) without much effect on either enrollment or graduation rates. If loan forgiveness is offered against both failure and voluntarily departure, welfare increases by 2.15 percent and both enrollment and graduation are higher.
|Date of creation:||2012|
|Contact details of provider:|| Postal: 10 Independence Mall, Philadelphia, PA 19106-1574|
Web page: http://www.philadelphiafed.org/
More information through EDIRC
|Order Information:|| Web: http://www.phil.frb.org/econ/wps/index.html Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Bound & Michael Lovenheim & Sarah Turner, 2009.
"Why Have College Completion Rates Declined? An Analysis of Changing Student Preparation and Collegiate Resources,"
NBER Working Papers
15566, National Bureau of Economic Research, Inc.
- John Bound & Michael F. Lovenheim & Sarah Turner, 2010. "Why Have College Completion Rates Declined? An Analysis of Changing Student Preparation and Collegiate Resources," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 129-157, July.
- 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).
- Caucutt, Elizabeth M. & Kumar, Krishna B., 2003. "Higher education subsidies and heterogeneity: a dynamic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 27(8), pages 1459-1502, June.
- Akyol, Ahmet & Athreya, Kartik B., 2003.
"Risky higher education and subsidies,"
03-02, Federal Reserve Bank of Richmond.
- Diego Restuccia & Carlos Urrutia, 2002.
"Intergenerational Persistence of Earnings: The Role of Early and College Education,"
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," University of Western Ontario, Economic Policy Research Institute Working Papers 20024, University of Western Ontario, Economic Policy Research Institute.
- 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.
- Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2007.
"Insurance and Opportunities: A Welfare Analysis of Labor Market Risk,"
NBER Working Papers
13673, National Bureau of Economic Research, Inc.
- Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L., 2008. "Insurance and opportunities: A welfare analysis of labor market risk," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 501-525, April.
- Arcidiacono, Peter, 2002.
"Ability Sorting and the Returns to College Major,"
02-26, Duke University, Department of Economics.
- Kevin M. Stange, 2012. "An Empirical Investigation of the Option Value of College Enrollment," American Economic Journal: Applied Economics, American Economic Association, vol. 4(1), pages 49-84, January.
- David Andolfatto & Martin Gervais, 2004.
"Human Capital Investment and Debt Constraints,"
Labor and Demography
When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:12-15. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul)
If references are entirely missing, you can add them using this form.