A BEJM Topics article.

Abstract

I study repayment behavior for college graduates who borrow under the U.S. Federal Student Loan Program to finance higher education. I develop a dynamic model with uninsurable shocks to earnings and student loan rates that explains the repayment pattern in U.S. data: college graduates with lower debt will lock-in interest rates, while those with higher debt will switch to an income-contingent plan. Default does not occur among the most financially constrained group of college graduates. I use the model to quantify the effects of a reform introduced in 2006 that eliminates the possibility to lock-in interest rates for student loans. The reform induces a significant increase in default rates, which is largely accounted for by low-income borrowers.

Submitted: December 12, 2007 · Accepted: July 7, 2008 · Published: August 14, 2008

Recommended Citation

Ionescu, Felicia A. (2008) "Consolidation of Student Loan Repayments and Default Incentives," The B.E. Journal of Macroeconomics: Vol. 8 : Iss. 1 (Topics), Article 22.
DOI: 10.2202/1935-1690.1682
Available at: http://www.bepress.com/bejm/vol8/iss1/art22