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Parental Support, Savings and Student Loan Repayment

Author

Listed:
  • Lance Lochner

    (University of Western Ontario)

  • Todd Stinebrickner

    (Western University)

  • Utku Suleymanoglu

    (University of Michigan)

Abstract

Using unique survey and administrative data from the Canada Student Loans Program, we document that parental support and personal savings substantially lower student loan repayment problems. We develop a theoretical model for studying student borrowing and repayment in the presence of risky labor market outcomes, moral hazard, and costly earnings verification. This framework demonstrates that non-monetary costs of applying for income-based repayment assistance are critical to understanding why resources other than earnings lead to greater repayment. We further show that eliminating these non-monetary costs may be inefficient and lead to undesirable redistribution. Empirically, we demonstrate that expanding Canada's income-based Repayment Assistance Plan to automatically cover all borrowers would likely reduce program revenue by nearly one-half over early years of repayment. Finally, we show how student loan programs can be more efficiently designed to address heterogeneity in parental transfers in the presence of non-monetary earnings verification costs and moral hazard.

Suggested Citation

  • Lance Lochner & Todd Stinebrickner & Utku Suleymanoglu, 2018. "Parental Support, Savings and Student Loan Repayment," Working Papers 2018-054, Human Capital and Economic Opportunity Working Group.
  • Handle: RePEc:hka:wpaper:2018-054
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    References listed on IDEAS

    as
    1. 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.
    2. Flávio Cunha & James Heckman, 2016. "Decomposing Trends in Inequality in Earnings into Forecastable and Uncertain Components," Journal of Labor Economics, University of Chicago Press, vol. 34(S2), pages 31-65.
    3. Schwartz, S. & Finnie, R., 2002. "Student loans in Canada: an analysis of borrowing and repayment," Economics of Education Review, Elsevier, vol. 21(5), pages 497-512, October.
    4. Greg Kaplan, 2012. "Moving Back Home: Insurance against Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 446-512.
    5. Brad Hershbein & Kevin M. Hollenbeck (ed.), 2015. "Student Loans and the Dynamics of Debt," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number sldd, December.
    6. Barsky R. & Bound J. & Charles K.K. & Lupton J.P., 2002. "Accounting for the Black-White Wealth Gap: A Nonparametric Approach," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 663-673, September.
    7. Lance Lochner & Todd Stinebrickner & Utky Suleymanoglu, 2013. "The Importance of Financial Resources for Student Loan Repayment," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20137, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    8. Lance Lochner & Alexander Monge-Naranjo, 2014. "Default and Repayment among Baccalaureate Degree Earners," Working Papers 2014-003, Human Capital and Economic Opportunity Working Group.
    9. Lance Lochner & Youngki Shin, 2014. "Understanding Earnings Dynamics: Identifying and Estimating the Changing Roles of Unobserved Ability, Permanent and Transitory Shocks," NBER Working Papers 20068, National Bureau of Economic Research, Inc.
    10. McGarry, Kathleen, 2016. "Dynamic aspects of family transfers," Journal of Public Economics, Elsevier, vol. 137(C), pages 1-13.
    11. Robert A. Moffitt & Peter Gottschalk, 2012. "Trends in the Transitory Variance of Male Earnings: Methods and Evidence," Journal of Human Resources, University of Wisconsin Press, vol. 47(1), pages 204-236.
    12. repec:hka:wpaper:2013-20 is not listed on IDEAS
    13. 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.
    14. 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.
    15. Nerlove, Marc L, 1975. "Some Problems in the Use of Income-contingent Loans for the Finance of Higher Education," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 157-183, February.
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    Cited by:

    1. Christian Belzil & Arnaud Maurel & Modibo Sidibé, 2021. "Estimating the Value of Higher Education Financial Aid: Evidence from a Field Experiment," Journal of Labor Economics, University of Chicago Press, vol. 39(2), pages 361-395.
    2. Mallick Hossain & Igor Livshits & Collin Wardius, 2023. "Not Cashing In on Cashing Out: An Analysis of Low Cash-Out Refinance Rates," Working Papers 23-04, Federal Reserve Bank of Philadelphia.
    3. Lance Lochner & Qian Liu & Martin Gervais, 2021. "Innis Lecture: Returns on student loans in Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(4), pages 1495-1524, November.
    4. Michael Boutros & Nuno Clara & Francisco Gomes, 2023. "Borrow Now, Pay Even Later: A Quantitative Analysis of Student Debt Payment Plans," Staff Working Papers 23-54, Bank of Canada.
    5. Christian Belzil & Jörgen Hansen & Xingfei Liu, 2022. "The evolution of inequality in education trajectories and graduation outcomes in the US," CIRANO Working Papers 2022s-14, CIRANO.
    6. Hotz, V. Joseph & Wiemers, Emily & Rasmussen, Joshua & Koegel, Kate Maxwell, 2018. "The Role of Parental Wealth and Income in Financing Children's College Attendance and Its Consequences," IZA Discussion Papers 11842, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    student loans; moral hazard; college; family investments;
    All these keywords.

    JEL classification:

    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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