Student Loan Limit Increases
Introduction
Each year, millions of college students in the United States complete the Free Application for Federal Student Aid (FAFSA) to apply for a Stafford loan to help finance their post-secondary education. Most undergraduate students who apply for federal assistance will choose to borrow through the Stafford Loan program. Although borrowing limits do not depend on income or family resources, students with unmet need qualify for subsidized loans that do not accrue interest while they are enrolled at least half-time.
In the mid-2000s, the U.S. government passed two pieces of legislation in response to significant increases in the cost of post-secondary education: the Higher Education Reconciliation Act of 2005, which raised loan limits for first- and second-year borrowers beginning in the 2007-2008 school year, and the Ensuring Continued Access to Student Loans Acts of 2008, which raised unsubsidized limits of all levels of undergraduates beginning in 2009.
Black et al. (2023) employs a difference-in-differences model to study the effects of these loan limit increases on borrowers’ outcomes. The paper defines the treatment group as those who were borrowing at the loan limit prior to the policy changes and were likely constrained in their borrowing, referred to as “constrained students” in the literature, and compares their outcomes to those borrowing below the loan limit, or “unconstrained students.” The results suggest that constrained students increase their borrowing when given access to additional loans, and that there are no significant increases in total grant aid received by constrained students who are exposed to higher loan limits. Constrained students enrolled at 4-year colleges decrease their labor supply while enrolled and stay in school longer after loan increases, but there was no distinguishable effect on whether community college students were more or less likely to remain enrolled. Constrained students were reduced reliance on credit cards and other forms of debt while enrolled, were more likely to graduate and have higher early career earnings, and were less likely to default on their student loans.
Black et al. (2023) uses these results to estimate the MVPF of increasing federal student loan limits.
Pays for Itself
Net Cost
Black et al. (2023) estimates the net cost to the government to issue an additional $1,000 in student loans due to higher undergraduate loan limits.
The net cost calculation includes three components that increased net costs and two components that decreased net costs. The three components that increased net costs are subsidy costs, costs associated with providing subsidies and aid directly to public institutions, and reduced tax revenue remitted while enrolled at school.
Black et al. (2023) uses the Congressional Budget Office’s March 2020 Baseline average subsidy rate for the first two pieces. The paper notes that for an additional $1,000 lent, it costs the government $27 for both students enrolled at either 4-year institutions or community college. The direct subsidies to public institutions are estimated to be $502 per $1,000 borrowed for 4-year entrants and $888 for community college entrants. Grant aid to community colleges are estimated to be $523 per $1,000 borrowed for community college students.
The paper finds that, as a result of the increased loans available to students, a significant portion of students enrolled at 4-year institutions meaningfully reduced their labor supply while enrolled. This reduction in student wages costs the government $158 in tax revenue per $1,000 borrowed for 4-year entrants.
The total cost per $1,000 borrowing increase for 4-year entrants is $27 + $502 + $158 = $687 and $27 + $888 + $523 = $1,438 for community college entrants. The paper uses the relative representation of 4-year (65%) and community college (35%) students in the sample to yield an weighted net cost of $950 per $1,000 in additional borrowing.
The paper also found that increasing loan limits reduced default rates on student loans. The government saved $24 per $1,000 borrowed for 4-year college entrants and $13 for community college entrants. Additionally, the government realizes higher tax revenues from borrower’s increased earnings. Entrants of 4-year colleges are estimated to increase tax revenues $1,170 per $1,000 borrowed during the six through ten years after college entry, cumulatively. Entrants of community college are estimated to increase revenues by $13, yielding a weighted estimate of $765 per $1,000 borrowed recouped in tax revenue.
The paper assumes that if the trend in increased earnings persist for at least one more year, estimated fiscal benefits will total $962 per $1,000, implying the benefits will outweigh the costs by 11 years after college entry.
Willingness to Pay
The paper assumes the willingness to pay is positive. The paper argues that this is a reasonable assumption as students reduced their labor supply and dependency on credit cards as a result of the increased loan limits.
MVPF Summary
The MVPF of increasing loan limits for student borrows is infinite given a positive willingness to pay and a negative estimated net cost.
References
Black, Sandra E., Jeffrey T. Denning, Lisa J. Dettling, Sarena Goodman, and Lesley J. Turner (2023). “Taking It To the Limit: Effects of Increased Student Loan Availability on Attainment, Earnings, and Financial Well-Being.” American Economic Review, 113(12): 3357-3400. DOI: https://doi.org/10.1257/aer.20210926
Policy Features
- Average Age
- 18
- Empirical Method
- Difference in Differences
- Research Type
- Primary
- Peer Reviewed
- Yes
- MVPF Publication Link
- doi.org/10.1257/aer.20210926