Borrow now, pay even later: A quantitative analysis of student debt payment plans

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.

Duke Scholars

Author Nuno Duarte Pacheco Clara Fuqua School of Business