More Credit, More Problems? Government Student Loan Limits and Education Outcomes
The federal Stafford loan program is the largest source of financial aid to students who attend college in the United States. Here we utilize the increase in Stafford loan limits that occurred between 2006 and 2008 to identify how a pooled cross-section of first-time freshmen at the University of North Dakota (UND) responded to an increase in the availability of credit. Using a difference-in-differences approach, we examine how borrowing, the composition of credit, and student outcomes were impacted by the policy changes. The student body at UND provides a unique opportunity to examine the treatment effects of these policies, as we are able to isolate the impact of macroeconomic fluctuations on borrowing due to the strength and stability of the stateâ€™s economy during the period. Freshmen are shown here to substitute an increase in their borrowing through Stafford loans, with a partial reduction in borrowing via private loans. Substitution is particularly strong among more credit constrained students. Interestingly, despite having access to more credit, student outcomes did not improve as a result of the changes, and in some cases worsened.
|Date of creation:||Sep 2015|
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