Motivation Setting Data Main Results Conclusions Second Chance: Life without Student Debt Marco Di Maggio 1 , Ankit Kalda 2 and Vincent W. Yao 3 1 Harvard Business School & NBER 2 Indiana University 3 Georgia State University Oct 2019 Di Maggio, Kalda and Yao Student Debt Relief 1 / 32
Motivation Setting Data Main Results Conclusions Student Debt Delinquencies on the Rise Di Maggio, Kalda and Yao Student Debt Relief 2 / 32 14
Motivation Setting Data Main Results Conclusions Policy Makers Worry about Student Debt Defaults The newly appointed Chairman of the Federal Reserve stated “You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating, it impacts the entire half of their economic life, as this goes on and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth.” Di Maggio, Kalda and Yao Student Debt Relief 3 / 32
Motivation Setting Data Main Results Conclusions Policy Debate Di Maggio, Kalda and Yao Student Debt Relief 4 / 32
Motivation Setting Data Main Results Conclusions Policy Debate Di Maggio, Kalda and Yao Student Debt Relief 5 / 32
Three main findings Discharged borrowers reduce their credit balances, by both reducing their demand for credit and limiting the use of the existing account. They are also significantly less likely to default on other accounts, file for bankruptcy and experience medical defaults. These borrowers’ geographical mobility increases, as well as, their probability to change job and ultimately their income. In contrast to most existing literature, we show the importance of relaxing long-term constraints. Motivation Setting Data Main Results Conclusions This Paper We use plausibly exogenous variation to quantify the effects of student debt forgiveness on credit and labor market outcomes for distressed borrowers (don’t quantify costs). Di Maggio, Kalda and Yao Student Debt Relief 6 / 32
Discharged borrowers reduce their credit balances, by both reducing their demand for credit and limiting the use of the existing account. They are also significantly less likely to default on other accounts, file for bankruptcy and experience medical defaults. These borrowers’ geographical mobility increases, as well as, their probability to change job and ultimately their income. In contrast to most existing literature, we show the importance of relaxing long-term constraints. Motivation Setting Data Main Results Conclusions This Paper We use plausibly exogenous variation to quantify the effects of student debt forgiveness on credit and labor market outcomes for distressed borrowers (don’t quantify costs). Three main findings Di Maggio, Kalda and Yao Student Debt Relief 6 / 32
They are also significantly less likely to default on other accounts, file for bankruptcy and experience medical defaults. These borrowers’ geographical mobility increases, as well as, their probability to change job and ultimately their income. In contrast to most existing literature, we show the importance of relaxing long-term constraints. Motivation Setting Data Main Results Conclusions This Paper We use plausibly exogenous variation to quantify the effects of student debt forgiveness on credit and labor market outcomes for distressed borrowers (don’t quantify costs). Three main findings Discharged borrowers reduce their credit balances, by both reducing their demand for credit and limiting the use of the existing account. Di Maggio, Kalda and Yao Student Debt Relief 6 / 32
These borrowers’ geographical mobility increases, as well as, their probability to change job and ultimately their income. In contrast to most existing literature, we show the importance of relaxing long-term constraints. Motivation Setting Data Main Results Conclusions This Paper We use plausibly exogenous variation to quantify the effects of student debt forgiveness on credit and labor market outcomes for distressed borrowers (don’t quantify costs). Three main findings Discharged borrowers reduce their credit balances, by both reducing their demand for credit and limiting the use of the existing account. They are also significantly less likely to default on other accounts, file for bankruptcy and experience medical defaults. Di Maggio, Kalda and Yao Student Debt Relief 6 / 32
In contrast to most existing literature, we show the importance of relaxing long-term constraints. Motivation Setting Data Main Results Conclusions This Paper We use plausibly exogenous variation to quantify the effects of student debt forgiveness on credit and labor market outcomes for distressed borrowers (don’t quantify costs). Three main findings Discharged borrowers reduce their credit balances, by both reducing their demand for credit and limiting the use of the existing account. They are also significantly less likely to default on other accounts, file for bankruptcy and experience medical defaults. These borrowers’ geographical mobility increases, as well as, their probability to change job and ultimately their income. Di Maggio, Kalda and Yao Student Debt Relief 6 / 32
Motivation Setting Data Main Results Conclusions This Paper We use plausibly exogenous variation to quantify the effects of student debt forgiveness on credit and labor market outcomes for distressed borrowers (don’t quantify costs). Three main findings Discharged borrowers reduce their credit balances, by both reducing their demand for credit and limiting the use of the existing account. They are also significantly less likely to default on other accounts, file for bankruptcy and experience medical defaults. These borrowers’ geographical mobility increases, as well as, their probability to change job and ultimately their income. In contrast to most existing literature, we show the importance of relaxing long-term constraints. Di Maggio, Kalda and Yao Student Debt Relief 6 / 32
Motivation Setting Data Main Results Conclusions Student Loan Market: Background Student loans are basically split into federal loans and private student loans. The rate for federal loans is fixed and set by Congress. In almost all cases, federal student loans have better terms than the heavily advertised and expensive private student loans. Many people with private student loans, like those who took on subprime mortgages, end up shouldering debt that they never earn enough to repay. Di Maggio, Kalda and Yao Student Debt Relief 7 / 32
We use “Clerical Errors” made by the trust in this process that wiped off loans for students whose paperwork were not in order/went missing Trust lost a series of collection lawsuits against the borrowers they were trying to collect from because they failed to prove that they owned the debt in the first place. We hand-collect a unique dataset with information about these lawsuits, including borrower identities and addresses among other things, and merge this with credit bureau data to examine a comprehensive set of outcomes. Motivation Setting Data Main Results Conclusions Setting: Random Debt Discharge National Collegiate Student Loan Trust is the largest holder of private student debt with 800,000 private student loans totaling $12 billion Purchases student loans from lenders, securitizes them and allows investors to invest in bonds Di Maggio, Kalda and Yao Student Debt Relief 8 / 32
Trust lost a series of collection lawsuits against the borrowers they were trying to collect from because they failed to prove that they owned the debt in the first place. We hand-collect a unique dataset with information about these lawsuits, including borrower identities and addresses among other things, and merge this with credit bureau data to examine a comprehensive set of outcomes. Motivation Setting Data Main Results Conclusions Setting: Random Debt Discharge National Collegiate Student Loan Trust is the largest holder of private student debt with 800,000 private student loans totaling $12 billion Purchases student loans from lenders, securitizes them and allows investors to invest in bonds We use “Clerical Errors” made by the trust in this process that wiped off loans for students whose paperwork were not in order/went missing Di Maggio, Kalda and Yao Student Debt Relief 8 / 32
We hand-collect a unique dataset with information about these lawsuits, including borrower identities and addresses among other things, and merge this with credit bureau data to examine a comprehensive set of outcomes. Motivation Setting Data Main Results Conclusions Setting: Random Debt Discharge National Collegiate Student Loan Trust is the largest holder of private student debt with 800,000 private student loans totaling $12 billion Purchases student loans from lenders, securitizes them and allows investors to invest in bonds We use “Clerical Errors” made by the trust in this process that wiped off loans for students whose paperwork were not in order/went missing Trust lost a series of collection lawsuits against the borrowers they were trying to collect from because they failed to prove that they owned the debt in the first place. Di Maggio, Kalda and Yao Student Debt Relief 8 / 32
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