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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Schwartzman, Felipe / Wang, Pengfei

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Consolidation of Student Loan Repayments and Default Incentives

Felicia A Ionescu
Published Online: 2008-08-14 | DOI: https://doi.org/10.2202/1935-1690.1682

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.

Keywords: student loans; consolidation; default

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Published Online: 2008-08-14

Citation Information: The B.E. Journal of Macroeconomics, Volume 8, Issue 1, ISSN (Online) 1935-1690, DOI: https://doi.org/10.2202/1935-1690.1682.

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