Document Type

Working Paper

Publication Date

Summer 8-1-2009

JEL Codes

D91; G33; I22

Working Paper Number

2009-01

Abstract

I consider the implications of alternative bankruptcy regimes for student loans ina heterogeneous model of life-cycle earnings and risky human capital accumulation. Findings suggest that the ability level of high-school graduates drives the decision to enroll in college, while the initial human capital level is crucial for completing college. Also, the correlation between parental wealth and ability and human capital stock is key in delivering enrollment and completion rates across income groups consistent with empirical findings. The model delivers higher college enrollment, dropout, and default rates when loans can be discharged. Under liquidation, financially constrained borrowers choose to default, whereas under reorganization borrowers default for other reasons rather than financial constraints. Dischargeability benefits college dropouts and students with low assets. It induces more human capital accumulation over the life-cycle relative to the reorganization regime.

Acknowledgements

Thanks to participants at Macro Midwest Meetings, Midwest Economics Meetings, seminar series at Colgate University, Fordham University, University of Connecticut, University of Delaware, University of Western Ontario, and Macro Workshop of Liberal Arts Colleges, especially to Kartik Athreya, S. Chattarjee, Dean Corbae, Janice Ebertly, Mark Hopkins, Lance Lochner, Igor Livshits, Deborah Lucas, B. Ravikumar, Nicole Simpson, Chris Sleet, Jorge Soares, Gustavo Ventura, Galina Vereschgagina, Steve Williamson, Eric Young, and Christian Zimmermann.

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Economics Commons

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