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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
A Day Late and a Dollar Short : Liquidity and Household Formation among Student Borrowers
Sarena Goodman
Adam Isen
Constantine Yannelis
Abstract

The federal government encourages human capital investment through lending and grant programs, but resources from these programs may also finance non-education activities for students whose liquidity is otherwise restricted. This paper explores this possibility, using administrative data for the universe of federal student loan borrowers linked to tax records. We examine the effects of a sharp discontinuity in program limits—generated by the timing of a student borrower’s 24th birthday—on household formation early in the lifecycle. After demonstrating that this discontinuity induces a jump in federal support, we estimate an immediate and persistent increase in homeownership, with larger effects among those most financially constrained. In the first year, borrowers with higher limits also earn less but are more likely to save; however, there are no differences in subsequent years. Finally, effects on marriage and fertility lag homeownership. Altogether, the results appear to be driven by liquidity rather than human capital or wealth effects.


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Sarena Goodman & Adam Isen & Constantine Yannelis, A Day Late and a Dollar Short : Liquidity and Household Formation among Student Borrowers, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2018-025, 13 Apr 2018.
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Keywords: Credit limits ; Homeownership ; Household formation ; Human capital ; Liquidity ; Saving ; Student loans
DOI: 10.17016/FEDS.2018.025
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