Working Paper

Student Loans, Access to Credit and Consumer Financial Behavior

Abstract: This paper provides novel evidence that increased student loan debts, caused by rising tuitions, increase borrowers’ demand for additional consumer debt, while simultaneously restricting their ability to access it. The net effect of student loan debt on consumer borrowing varies by market, depending on whether the supply or demand channel dominates. In loosely underwritten credit markets, increased student loan debt causes borrowing to increase, while in tightly underwritten markets, increased student loan debt reduces the use of credit. These findings match predictions of a standard lifecycle model of household consumption and borrowing, augmented with a realistic student loan repayment contract.

Keywords: Credit demand and supply; Rising tuition; Access to credit; Student loans; Consumption smoothing;

JEL Classification: D15; I22; D14; D10;

https://doi.org/10.17016/FEDS.2021.050

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2021-08-02

Number: 2021-050