Guaranteed Student Loans and Subsidies: Who Captures the Rents?

The paper analyzes effects of borrower interest rates and student lender subsidies on federally guaranteed student loan volumes from 1988 to 1994 and from 1996 to 2006. In present and past policy debates, some have contended that lender subsidy cuts would cause some lenders to reduce loan supply or to leave the student loan market. A simple model of the student loan market suggests that if lenders receive economic rents due to overly generous subsidies, small changes in subsidy levels should not affect loan supply. The empirical results based on a variety of GMM panel estimators find evidence of a link between higher SAP margins and higher loan volumes is weak or inconclusive for both the 1988-1994 and 1996-2006 periods. This suggests that subsidy reductions had no discernable effect on student loan volumes. Results also suggest that higher real borrower interest rates reduce student loan volumes for public colleges and universities.