The student loan consolidation option
Name
ConsolidationReviseFinalDecember2018.pdf
Description
Submitted version
Size
317.72 KB
Format
Adobe PDF
Checksum (MD5)
b025f5082a73b1cb619e81541cb74051
Author(s)
Lucas, Deborah J.
Moore, Damien
Date Issued
June 2019
Journal
Journal of Public Economics
Publisher
Elsevier BV
Citation
Lucas, Deborah and Damien Moore. "The student loan consolidation option." Journal of Public Economics 174 (June 2019): 1-12. © 2019 Elsevier B.V.
Version
Original manuscript
Abstract
The federal government makes credit for higher education widely available at subsidized prices through its student loan programs. A loan provision that at times has significantly increased the size and volatility of the subsidies is the consolidation option, which allows borrowers to convert floating rate loans to fixed rate loans, often on very favorable terms. The option provides a novel setting in which to study how unsophisticated borrowers respond to financial incentives. We develop a model to evaluate the option's cost to the government, and find that the ex-ante cost of the option ranged from 0.8% to 6.4% of loan principal between 1998 and 2005. Using a sample of 700,000 student loan records, we find that borrowers responded to the time-varying incentives to consolidate although some left sizeable amounts of money on the table; that more indebted borrowers were more likely to optimize; and that there is some evidence of learning over time.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-NonCommercial-NoDerivs License
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/j.jpubeco.2019.01.011
