Working Paper: NBER ID: w30790
Authors: Martin Gervais; Qian Liu; Lance Lochner
Abstract: We use new administrative data that links detailed information on Canadian student loan recipients with their repayment and income histories from the Canada Student Loans Program (CSLP), income tax filings, and post-secondary schooling records to measure the extent to which student borrowers adjust loan repayments to insure against income variation. Several mechanisms are available for students to adjust loan repayments in response to income fluctuations: formal, like CSLP's Repayment Assistance Plan; and informal, such as delinquency or default. Borrowers can also make larger payments than required should they experience unexpectedly high income. Indeed, loan payments are shown to increase in income, more so in early years and for individuals with higher initial debt. More formally, we estimate that on average, an unexpected $1,000 change in year-over-year income is associated with a $30 change in loan payment: from a $50 change the year after graduation, declining to a $20 change 5 years after graduation. Loan repayments are also used to absorb income variation that is more permanent in nature: for borrowers whose income is consistently below or above expected income at graduation, the magnitude of average repayment adjustment is similar to the average yearly response.
Keywords: student loans; income insurance; repayment schemes; Canada
JEL Codes: E21; G51; H52; I22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected $1,000 increase in year-over-year income (D19) | 30% increase in loan payments in the year following graduation (G51) |
| unexpected $1,000 increase in year-over-year income (D19) | 20% increase in loan payments five years after graduation (G51) |
| consistent income levels below or above expected graduation income (D29) | similar repayment adjustments (E43) |