Publication Date

2-23-2015

Abstract

This paper examines the potential costs and benefits associated with a risk-sharing policy imposed on all higher education institutions. Under such a program, institutions would be required to pay for a portion of the student loans among which their students defaulted. I examine the predicted institutional responses under a variety of possible penalties and institutional characteristics using a straightforward model of institutional behavior based on monopolistic competition. I also examine the impact of a risk-sharing program on overall economic efficiency by estimating the returns to scale for undergraduate enrollment (as well as other outputs) among each of ten educational sectors.

I find that even a relatively small incentive effect of a risk-sharing would lead to a substantial decline in overall student debt. There is considerable heterogeneity across sectors, with 4-year for-profit institutions accounting for the majority of the savings. My estimates suggest that a risk-sharing program would induce a modest tuition increase, but that there is unlikely to be a substantial loss of economic efficiency in terms of costs due to a reallocation of students across sectors.

Comments

Suggested Citation
Webber, D. A. (2015). Risk-sharing and student loan policy: Consequences for students and institutions [Electronic version]. Retrieved [insert date], from Cornell University, School of Industrial and Labor Relations site: https://digitalcommons.ilr.cornell.edu/workingpapers/204/

Required Publisher Statement
Published by the Cornell Higher Education Research Institute, ILR School, Cornell University.

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