The strategic overuse of student loans

Christian Manger

Labour Economics, 2020, vol. 66, issue C

Abstract: This theoretical model shows that students strategically overuse student loans. In imperfect labour and credit markets, firms compensate graduates for a share of their loans via higher wages. This shifts some costs to firms and low-skilled workers who suffer from higher unemployment and lower wages. While any student loan increases unemployment, the effects on welfare and inequality depend on the purpose of the loan: A loan for tuition fees reduces human capital and credit accessibility, the college premium increases significantly, and welfare declines. A loan spent on consumption increases education and credit accessibility, while wage inequality and welfare change marginally.

Keywords: Search frictions; Imperfect credit markets; Student loans; College premium; Contingent loans (search for similar items in EconPapers)
JEL-codes: J23 J24 J41 J64 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:66:y:2020:i:c:s0927537120301093

DOI: 10.1016/j.labeco.2020.101905

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