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The Student Loan Consolidation Option

Author

Listed:
  • Deborah Lucas

    () (MIT Sloan School)

  • Damien Moore

    (Congressional Budget Office)

Abstract

The federal government makes subsidized federal financing for higher education widely available. The extent of the subsidy varies over time with interest rate and credit market conditions. A loan provision that has added considerably to the size and volatility of the subsidy is the consolidation option, which allows students to convert floating rate federal loans to a fixed rate equal to the average floating rate on their outstanding loans. We develop a model to estimate the option's cost and to evaluate its sensitivity to changes in program rules, economic conditions, and borrower behavior. We model borrower behavior using data from the National Student Loan Data System, which provides new insights on the responsiveness of consumers to financial incentives.

Suggested Citation

  • Deborah Lucas & Damien Moore, 2008. "The Student Loan Consolidation Option," Working Papers 2012-015, Human Capital and Economic Opportunity Working Group.
  • Handle: RePEc:hka:wpaper:2012-015
    Note: M
    as

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    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Lucas_Moore_2012_student-loan-consolidation.pdf
    File Function: First version, August, 2008
    Download Restriction: no

    References listed on IDEAS

    as
    1. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 707-747, October.
    2. Jagannathan, Ravi & Kaplin, Andrew & Sun, Steve, 2003. "An evaluation of multi-factor CIR models using LIBOR, swap rates, and cap and swaption prices," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 113-146.
    3. Lance Lochner & Alexander Monge-Naranjo, 2002. "Human Capital Formation with Endogenous Credit Constraints," NBER Working Papers 8815, National Bureau of Economic Research, Inc.
    4. Michael P. Keane, 2002. "Financial Aid, Borrowing Constraints, and College Attendance: Evidence from Structural Estimates," American Economic Review, American Economic Association, vol. 92(2), pages 293-297, May.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    student loans; federal credit; subsidies;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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