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Insuring College Failure Risk


  • Felicia Ionescu

    (Colgate University)

  • Satyajit Chatterjee

    (Federal Reserve Bank of Philadelphia)


Under current law, participants in (college) student loan program must repay their loan in full regardless of whether they complete college. Dropout rate among college students from low-income background is anywhere between 33 to 50 percent. The combination of lack of family resources, unconstrained access to student loans and high dropout rates means that for a substantial fraction of low-income students the attempt to acquire a college degree ends in low earnings and high indebtedness. In this paper we examine whether the student loan program can gainfully offer insurance against college failure risk. We argue that such an insurance scheme is administratively feasible and provide conditions under which such insurance can be gainfully offered taking into account the constraints imposed by moral hazard. We show that the provision of such insurance will raise enrollment rates, dropout rates, and average welfare. The model is calibrated to US data on college costs, enrollment rates, college premium, and average indebtedness of program participants. Insurance against college failure risk raises enrollment rates by 4 percent, decreases college completion rate from 61 percent to 40 percent and increases welfare by about 0.24 percent.

Suggested Citation

  • Felicia Ionescu & Satyajit Chatterjee, 2008. "Insuring College Failure Risk," 2008 Meeting Papers 813, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:813

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    References listed on IDEAS

    1. Kevin M. Murphy & Finis Welch, 1992. "The Structure of Wages," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 285-326.
    2. Akyol, Ahmet & Athreya, Kartik, 2005. "Risky higher education and subsidies," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 979-1023, June.
    3. 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 2163-2184, December.
    4. 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.
    5. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-1160, September.
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    Cited by:

    1. 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.
    2. Felicia Ionescu, 2011. "Risky Human Capital and Alternative Bankruptcy Regimes for Student Loans," Journal of Human Capital, University of Chicago Press, vol. 5(2), pages 153-206.
    3. Ionescu Felicia A, 2008. "Consolidation of Student Loan Repayments and Default Incentives," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-37, August.
    4. Felicia Ionescu, 2009. "The Federal Student Loan Program: Quantitative Implications for College Enrollment and Default Rates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 205-231, January.
    5. Ionescu, Felicia & Simpson, Nicole, 2010. "Credit Scores and College Investment," Working Papers 2010-07, Department of Economics, Colgate University.

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