The Cost of Defaulting on Student Loans

Open Access
Author:
Hunt, Casey E
Area of Honors:
Economics
Degree:
Bachelor of Arts
Document Type:
Thesis
Thesis Supervisors:
  • Russell Wade Cooper, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
  • James R. Tybout, Faculty Reader
Keywords:
  • Student Loans
  • Human Capital Accumulation
  • Federal loans
  • default
Abstract:
This paper explores how the cost of defaulting on student loans affects which students choose to go to college. Through a two-period model, I will explain how these costs affect individuals when making the decision to go to college by discussing the returns to education, uncertainty in the job market after graduating college, the chance of defaulting on student loans, and the measurable costs of defaulting on student loans. This work will expand on the work done by many other economists in the realm of human capital accumulation – most notably, it will expand on the work of Lance Lochner and Alexander Monge-Naranjo. This work, however, considers developments from the Great Recession whereas many models similar to the one in this paper were developed before 2007 or use data from before the Great Recession. Additionally, this model addresses how the costs of default affect the economy as a whole, as it shows how accrued debt and wage garnishments change the indifference wage between repayment and default in the aggregate distribution of wages. With the results of my model, I recommend policies that should be adopted for repaying student loans or alleviating the burden of defaulting on loans in certain situations including income based repayment suggestions and school level policies. This will ultimately add to the growing literature of human capital accumulation and student loan markets.