Viewing Education Loans Through A Myopic Lens: A Revenue-Neutral Proposal For Accelerating Student Loan Subsidies
Gandhi, Sima J.
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Although the federal government dedicated nearly $40 billion to funding student loans in 2006, only 60 percent of potential students from low-income families attend college, compared with 90 percent from high-income families. This article argues that enrollment rates are lower than they could be because potential students undervalue loan subsidies, which are delivered after graduation instead of up front when a student enrolls and incurs costs. The behavioral economics concept of myopic loss aversion suggests that accelerating loan subsidies to the time of enrollment would increase their effectiveness as an incentive to enroll. Empirical studies also find a larger response to up-front subsidies such as grants than to delayed subsidies delivered after graduation such as loan forgiveness.