Do Lower Lender Subsidies Reduce Guaranteed Student Loan Supply?

Abstract

The article analyzes effects of borrower interest rates and student lender subsidies on federally guaranteed student loan volumes from 1988 to 1994 and from 1996 to 2006. Some have argued that lender subsidy cuts would reduce loan supply or cause lenders to exit the student loan market. If lenders get economic rents due to overly generous subsidies, a simple model of the student loan market suggests that small changes in subsidy levels should not affect loan supply. Empirical results based on a variety of generalized method of moments panel estimators suggest that evidence of links between higher special allowance payment margins and higher loan volumes is weak or inconclusive for both the 1988–94 and 1996–2006 periods. Subsidy reductions, according to this analysis, had no discernable effect on student loan volumes. Results also suggest that higher real borrower interest rates reduce student loan volumes for public colleges and universities. Changes in the federal student loan program in the wake of the credit crunch that began in August 2007 are briefly discussed, along with current proposals to shift all new loans to a direct lending program.