Working Paper: NBER ID: w24863
Authors: Lance Lochner; Todd Stinebrickner; Utku Suleymanoglu
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.
Keywords: student loans; parental support; repayment assistance; Canada
JEL Codes: D14; D82; H21; H52; I22; I24; I28; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Parental support (J13) | likelihood of experiencing repayment problems (F34) |
| Personal savings (D14) | likelihood of experiencing repayment problems (F34) |
| Parental support + Personal savings (D14) | likelihood of experiencing repayment problems (F34) |
| Parental support + Savings (D14) | repayment problems for low-earning borrowers (G51) |
| Nonmonetary verification costs (E42) | assistance take-up (I38) |
| Parental support (J13) | assistance take-up (I38) |