A Harming Hand: The Predatory Implications of Government Backed Student Loans

Abstract

Although economic research is near unanimous finding that college is a good investment, there is growing concern about the impact that student debt and defaults have on student borrowers. Using the Department of Education's College Scorecard, I document a new stylized fact about cross-sectional return heterogeneity across schools. Motivated by this fact, I then construct a basic informed lending model to study the optimal way to encourage greater college attendance via loan policies. I show that under a socially optimal guarantee scheme, a social planner will want to pool all students at a single, uniform rate. This optimal policy, however, will result in weak students accepting predatory offers.