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Credit Status and College Investment: Implications for Student Loan Policies
Felicia Ionescu (au); Nicole Simpson (au)
The private market for student loans has become an important source of college financing in the U.S. Unlike government student loans, the terms on student loans in the private market are based on credit status. The authors quantify the importance of the private market for student loans and of credit status for college investment in a general equilibrium heterogeneous life-cycle economy. They find that students with good credit status invest in more college education and that this effect is more pronounced for low-income students. Furthermore, the relationship between credit status and college investment has important policy implications. Specifically, when borrowing limits in the government student loan program are relaxed (as implemented in 2008), college investment increases, but so does the riskiness of the pool of borrowers, leading to higher default rates in the private market for student loans. When general equilibrium effects are accounted for, the welfare gains experienced from a more generous government student loan program are negated. This compares to budget-neutral tuition subsidies that increase college investment and welfare. Tables. This is a print on demand report.
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