Poster #22 - Public Credit, Private Exit: Borrower Selection in Parental Student Loans

• In Event: Friday Poster Reception

Abstract

Public and private lenders coexist in many credit markets, but the fiscal and distributional consequences of public lending depend on how borrowers sort between the two. When private lenders withdraw, relatively creditworthy households may shift into public programs, improving government repayment outcomes while potentially exposing those households to higher borrowing costs. We study this trade-off in the market for parental student loans, where the federal Parent PLUS program offers loans at a uniform interest rate regardless of borrower creditworthiness, while private lenders price and screen borrowers according to risk. Using administrative credit-bureau data, we distinguish public and private parental student loans and document substantial differences in borrower composition: federal borrowers have lower average credit scores (627 versus 716) and higher delinquency rates. We then exploit geographic variation in exposure to JPMorgan's 2013 exit from private student lending to examine how private credit supply affects borrowing decisions. Greater exposure to the exit reduces private parent borrowing, particularly among prime borrowers and homeowners, without a statistically detectable reduction in total parent borrowing. These findings are consistent with substitution toward public credit among borrowers with access to both markets. A simple model illustrates how this reallocation can improve the government's fiscal position while imposing costs on borrowers who lose access to competitively priced private loans. Our findings highlight the importance of borrower selection for evaluating the design and fiscal consequences of public lending programs.

Author

• Ruth Jacobson Cohen, University of Wisconsin-Madison
  Presenting Author