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Risk-Sharing and Student Loan Policy: Consequences for Students and Institutions

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  • Webber, Douglas A.

    (Federal Reserve Board of Governors)

Abstract

This paper examines the potential costs and benefits associated with a risk-sharing policy imposed on all higher education institutions. Under such a program, institutions would be required to pay for a portion of the student loans among which their students defaulted. I examine the predicted institutional responses under a variety of possible penalties and institutional characteristics using a straightforward model of institutional behavior based on monopolistic competition. I also examine the impact of a risk-sharing program on overall economic efficiency by estimating the returns to scale for undergraduate enrollment (as well as other outputs) among each of ten educational sectors. I find that even a relatively small incentive effect of a risk-sharing would lead to a substantial decline in overall student debt. There is considerable heterogeneity across sectors, with 4-year for-profit institutions accounting for the majority of the savings. My estimates suggest that a risk-sharing program would induce a modest tuition increase, but that there is unlikely to be a substantial loss of economic efficiency in terms of costs due to a reallocation of students across sectors.

Suggested Citation

  • Webber, Douglas A., 2015. "Risk-Sharing and Student Loan Policy: Consequences for Students and Institutions," IZA Discussion Papers 8871, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp8871
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    Cited by:

    1. Didier, Nicolás, 2021. "Does the expansion of higher education reduce gender gaps in the labor market? Evidence from a natural experiment," International Journal of Educational Development, Elsevier, vol. 86(C).
    2. Jason Jabbari & Mathieu Despard & Olga Kondratjeva & Brinda Gupta & Michal Grinstein-Weiss, 2023. "Nothing to show for it: Financial Distress and Re-Enrollment Aspirations for those with non-degreed debt," Research in Higher Education, Springer;Association for Institutional Research, vol. 64(1), pages 1-32, February.
    3. Webber, Douglas A., 2018. "Risk-Sharing in Higher Education: A Policy Proposal," IZA Policy Papers 141, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    default rates; higher education; student loans;
    All these keywords.

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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