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Insuring Student Loans Against the Risk of College Failure ∗ (2010)
| Citations: | 4 - 0 self |
BibTeX
@MISC{Chatterjee10insuringstudent,
author = {Satyajit Chatterjee and Felicia Ionescu},
title = {Insuring Student Loans Against the Risk of College Failure ∗},
year = {2010}
}
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Abstract
Participants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). We examine whether insurance against college-failure risk can be offered, taking into account moral hazard and adverse selection. To do so, we develop a model that accounts for college enrollment, dropout, and completion rates among new high school graduates in the US and use that model to study the feasibility and optimality of offering insurance against college failure risk. We find that optimal insurance raises the enrollment rate by 3.5 percent, the fraction acquiring a degree by 3.8 percent and welfare by 2.7 percent. These effects are more pronounced for students with low scholastic ability (the ones with high failure probability).
Keyphrases
college failure student loan low scholastic ability college student college enrollment full regardless adverse selection new high school graduate college-failure risk dropout rate optimal insurance college failure risk completion rate enrollment rate high failure probability many student student loan program account moral hazard
