Becker Friedman Institute

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The Nature of Credit Constraints and Human Capital

We develop a human capital model with borrowing constraints explicitly derived from government student loan (GSL) programs and private lending under limited commitment. The model helps explain the persistent strong positive correlation between ability and schooling in the United States, as well as the rising importance of family income for college attendance. It also explains the increasing share of undergraduates borrowing the GSL maximum and the rise in student borrowing from private lenders. Our framework offers new insights regarding the interaction of government and private lending, as well as the responsiveness of private credit to economic and policy changes.

Authors: 
Lance Lochner, University of Western Ontario
Alexander Monge-Naranjo, Federal Reserve Bank of St. Louis
Publication Date: 
January, 2011
HCEO Working Groups: 
Publication Type: 
Journal: 
American Economic Review
Volume: 
101
Issue Number: 
6
Pages: 
2487-2529