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Borrow Now, Pay Even Later: A Quantitative Analysis of Student Debt Payment Plans

Journal

Journal of Financial Economics

Subject

Finance

Authors / Editors

Boutros M;Clara N;Gomes F

Biographies

Publication Year

2024

Abstract

In the U.S., student debt is currently the second largest component of consumer debt. Households are required to repay these loans early in their lifecycle, when marginal utility is particularly high. We study alternative contracts that offer partial or full payment deferral until later in life. We calibrate an economy with the current contracts, and then solve for counterfactual equilibria. The alternative contracts yield large welfare gains, which are robust to assumptions about the behavior of the lenders and borrower preferences. The gains are similar to those that could come from the debt relief program currently being considered in the U.S., but without its adverse fiscal implications.

Available on ECCH

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