IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/17-38.html
   My bibliography  Save this paper

Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform

Author

Listed:
  • Rajeev Darolia
  • Dubravka Ritter

Abstract

Bankruptcy reform in 2005 restricted debtors? ability to discharge private student loan debt. The reform was motivated by the perceived incentive of some borrowers to file bankruptcy under Chapter 7 even if they had, or expected to have, sufficient income to service their debt. Using a national sample of credit bureau files, we examine whether private student loan borrowers distinctly adjusted their Chapter 7 bankruptcy filing behavior in response to the reform. We do not find evidence to indicate that the moral hazard associated with dischargeability appreciably affected the behavior of private student loan debtors prior to the policy.

Suggested Citation

  • Rajeev Darolia & Dubravka Ritter, 2017. "Strategic Default Among Private Student Loan Debtors: Evidence from Bankruptcy Reform," Working Papers 17-38, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:17-38
    as

    Download full text from publisher

    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2017/wp17-38.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Will Dobbie & Jae Song, 2015. "Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection," American Economic Review, American Economic Association, vol. 105(3), pages 1272-1311, March.
    2. 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.
    3. Wenli Li & Michelle J. White & Ning S. Zhu, 2010. "Did bankruptcy reform cause mortgage default rates to rise?," Working Papers 10-16, Federal Reserve Bank of Philadelphia.
    4. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
    5. 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.
    6. 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.
    7. Albanesi, Stefania & Nosal, Jaromir, 2015. "Insolvency After the 2005 Bankruptcy Reform," CEPR Discussion Papers 10533, C.E.P.R. Discussion Papers.
    8. Satyajit Chatterjee & Felicia Ionescu, 2012. "Insuring student loans against the financial risk of failing to complete college," Quantitative Economics, Econometric Society, vol. 3(3), pages 393-420, November.
    9. 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.
    10. Wenli Li & Michelle J. White & Ning Zhu, 2011. "Did Bankruptcy Reform Cause Mortgage Defaults to Rise?," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 123-147, November.
    11. Knapp, Laura Greene & Seaks, Terry G, 1992. "An Analysis of the Probability of Default on Federally Guaranteed Student Loans," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 404-411, August.
    12. Julapa Jagtiani & Wenli Li, 2014. "Credit access after consumer bankruptcy filing: new evidence," Working Papers 14-25, Federal Reserve Bank of Philadelphia.
    13. Philip Oreopoulos & Kjell G. Salvanes, 2011. "Priceless: The Nonpecuniary Benefits of Schooling," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 159-184, Winter.
    14. Stephanie Riegg Cellini & Claudia Goldin, 2014. "Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges," American Economic Journal: Economic Policy, American Economic Association, vol. 6(4), pages 174-206, November.
    15. Song Han & Benjamin J. Keys & Geng Li, 2011. "Credit supply to personal bankruptcy filers: evidence from credit card mailings," Finance and Economics Discussion Series 2011-29, Board of Governors of the Federal Reserve System (U.S.).
    16. Dynarski, Mark, 1994. "Who defaults on student loans? Findings from the National Postsecondary Student Aid Study," Economics of Education Review, Elsevier, vol. 13(1), pages 55-68, March.
    17. Chintal Desai & Gregory Elliehausen & Jevgenijs Steinbuks, 2013. "Effects of Bankruptcy Exemptions and Foreclosure Laws on Mortgage Default and Foreclosure Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 391-415, October.
    18. Thomas A. Garrett, 2007. "The rise in personal bankruptcies: the Eighth Federal Reserve District and beyond," Review, Federal Reserve Bank of St. Louis, vol. 89(Jan), pages 15-38.
    19. Richard Hynes & Eric A. Posner, 2002. "The Law and Economics of Consumer Finance," American Law and Economics Review, American Law and Economics Association, vol. 4(1), pages 168-207, January.
    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 & Dubravka Ritter, 2015. "Do student loan borrowers opportunistically default? Evidence from bankruptcy reform," Working Papers 15-17, Federal Reserve Bank of Philadelphia.
    2. Jason Allen & Kiana Basiri, 2016. "The Impact of Bankruptcy Reform on Insolvency Choice and Consumer Credit," Staff Working Papers 16-26, Bank of Canada.
    3. Rajeev Darolia, 2013. "Student Loan Repayment and College Accountability," Consumer Finance Institute discussion papers 13-5, Federal Reserve Bank of Philadelphia.
    4. Joselynn Hawkins Fountain, 2019. "The Effect of the Gainful Employment Regulatory Uncertainty on Student Enrollment at For-Profit Institutions of Higher Education," Research in Higher Education, Springer;Association for Institutional Research, vol. 60(8), pages 1065-1089, December.
    5. Florian Exler & Michéle Tertilt, 2020. "Consumer Debt and default: A Macro Perspective," CRC TR 224 Discussion Paper Series crctr224_2020_153v2, University of Bonn and University of Mannheim, Germany.
    6. 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.
    7. 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.
    8. Nadia Karamcheva & Jeffrey Perry & Constantine Yannelis, 2020. "Income-Driven Repayment Plans for Student Loans: Working Paper 2020-02," Working Papers 56337, Congressional Budget Office.
    9. Lance Lochner & Alexander Monge-Naranjo, 2014. "Student Loans and Repayment: Theory, Evidence and Policy," Working Papers 2014-40, Federal Reserve Bank of St. Louis.
    10. Rajeev Darolia, 2016. "An Experiment on Information Use in College Student Loan Decisions," Working Papers 16-18, Federal Reserve Bank of Philadelphia.
    11. 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.
    12. Robert J. Gary-Bobo & Alain Trannoy, 2015. "Optimal student loans and graduate tax under moral hazard and adverse selection," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 546-576, September.
    13. Hyungsuk Byun & Barry Scholnick, 2017. "Spatial Commitment Devices and Addictive Goods: Evidence from the Removal of Slot Machines from Bars," Working Papers 17-34, Federal Reserve Bank of Philadelphia.
    14. Mueller, Holger M. & Yannelis, Constantine, 2019. "The rise in student loan defaults," Journal of Financial Economics, Elsevier, vol. 131(1), pages 1-19.
    15. Danisewicz, Piotr & Elard, Ilaf, 2023. "The real effects of financial technology: Marketplace lending and personal bankruptcy," Journal of Banking & Finance, Elsevier, vol. 155(C).
    16. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    17. Michelle White & Wenli Li, 2011. "Residential Mortgage Default and Consumer Bankruptcy: Theory and Empirical Evidence," 2011 Meeting Papers 1038, Society for Economic Dynamics.
    18. Gan, Li & Hernandez, Manuel A. & Zhang, Shuoxun, 2021. "Insurance or deliberate use of the bankruptcy law for financial gain? Testing for heterogeneous filing behaviors in the United States," Economic Modelling, Elsevier, vol. 105(C).
    19. 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.
    20. Holger M. Mueller & Constantine Yannelis, 2017. "Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs," NBER Working Papers 23284, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    student loans; bankruptcy; bankruptcy reform;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:fip:fedpwp:17-38. 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: Beth Paul (email available below). General contact details of provider: https://edirc.repec.org/data/frbphus.html .

    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.