Student Loans—Extra Cash per Semester Doesn’t Translate to Better Results

Student loans balances exceed 1.6 trillion dollars, and the amount keeps growing. Why do students borrow, and when they borrow, does it help them?

Most student loans in the United States are administered by the federal government. The amount a student can borrow does not depend on much—the main factors include if a student is considered independent from their parents and their “class standing” (e.g., freshman, sophomore, junior).

Jeffrey Denning and Todd Jones use the rules about class standing to study how eligibility for additional loan dollars affects borrowing and educational outcomes. In essence, they compare students who have accumulated 29 credits to those with 30 credits (and students with 59 credits to students with 60 credits). These students look very similar but have an important difference: students with 30 credits can borrow up to $500 more in a semester.

Looking at data from public universities in Utah, the authors found that students who have access to more loans do in fact borrow more—at least 26 percent of borrowers increase their borrowing when they can borrow more. However, this additional borrowing does not seem to affect student GPA, the number of credits completed, or graduation. The increase in loan amounts is relatively small, which may be the reason for these findings.

What do we learn? In this setting, students will increase borrowing when the federal government increases the amount they can borrow, but it does not appear that this translates to meaningful increases in educational attainment. Future research should consider whether larger amounts have more impact or if certain students are more likely to benefit.

Read the study in the Journal of Human Resources: “Maxed Out? The Effect of Larger Student Loan Limits on Borrowing and Education Outcomes,” by Jeffrey T. Denning and Todd R. Jones.

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Jeffrey T. Denning (@JeffDenning) is an assistant professor of economics at Brigham Young University and a research affiliate at the Institute of Labor Economics (IZA). Todd R. Jones (@toddrjones) is an assistant professor of economics at Mississippi State University.

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