Jun 14, 2014

Student loans and time-to-degree

In this paper, I showed that student loans are effective in the reduction of time-to-degree when the student obtains the loan for several semesters (six or more). This effect was significant when it was calculated by a treatment effect model (which controls for observable and unobservable covariates). p. 24
The paper by Luis García presents evidence from a university in Peru. The author argues
Student loans are not common in Peruvian society; consequently, discovering the effectiveness of such a program can provide insight into what would happen if student loans were offered to higher education students outside the PUCP [the university in question] and what would be necessary to make them effective. p. 2 
Generally speaking, loans are repaid when there is a correct assessment of the investment project, and similar filters are in place, or should be, for student loans. The basic one is probably a good college-admission process.  

It is likely that student loans will not have the same effects in a developed country, like the US, and a less developed country, like Peru. The level of development of the education market is not the same, and the labor market conditions are different. The US economy has had a slow recovery, and Peru is a fast-growing-economy. So, taking some of those factors into consideration one will expect a higher return of student loans (seen as investment) in Peru than in the US. Another factor that affects the return on the loan is the type of degree, an arts degree will generate different returns than a finance one, for example. 

Student loans must not be seen in isolation, their level of effectiveness depends on general macroeconomic stability, like low unemployment or, at least, low inflation. A government that wants to promote education through student loans but has poor macroeconomic performance is not likely to get high repayment rates; and less so, high social returns from the loans. 

In addition, the repayment of loans differs substantially depending on the type of educational institution, rates are different in for-profit and public colleges, for example. In a specific sample of countries and schemes, the repayment rate was found to be around 40%, and it can be as low as 20%.

Students who have had loans usually behaved different in the job market. They get higher-paid jobs, in general, which makes economic sense. 

Other evidence indicates that getting a student loan affects negatively the future financial situation of the person, it even affects her home-ownership prospects (or the type of ownership). But people who get a student loan but do not finish school are definitely worse-off. Even though many people are worried about a higher-education bubble, some evidence shows that actually some undergrad students reject public-funded loans, which is related to behavioural reasons:

One sixth of traditional undergraduate students actively reject loans with an implied government subsidy of up to $1,500 over the student’s career. p. 23
Defaults on student loans are a related area, and there is some research on it. For example, minority groups and students from low income families default more (see here as well). Note that most of the research on default is from the US. 

Finally, the grey areas in this topic are large, one of them is the performance of student loans in private universities in developing countries. And the general topic of student loans in less developed countries has not been researched as much as I expected. 

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