Risky Human Capital and Alternative Bankruptcy Regimes for Student Loans
نویسندگان
چکیده
I study the implications of various bankruptcy regimes for student loans on college investment, human capital accumulation, and earnings in a heterogeneous life-cycle economy with risky human capital investment. The option to discharge one’s debt under a liquidation regime helps alleviate some of the risk of investing in human capital. However, dischargeability triggers exclusion from borrowing and wage garnishment. Replacing liquidation with reorganization induces significant allocational consequences across education groups. Poor high school graduates with low levels of college preparedness are better off under liquidation, whereas high school graduates with high levels of assets and college preparedness are better off under reorganization. Overall, reorganization improves welfare by 1.2% relative to liquidation. However, an economy with partial dischargeability is desirable on welfare grounds. JEL classification: D91; G33; I22
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