A Day Late and a Dollar Short: Liquidity and Household Formation Among Student Borrowers

67 Pages Posted: 6 Jun 2018 Last revised: 29 Apr 2020

See all articles by Sarena Goodman

Sarena Goodman

Board of Governors of the Federal Reserve System

Adam Isen

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Constantine Yannelis

University of Chicago

Date Written: April, 2018

Abstract

The federal government encourages human capital investment through lending and grant programs, but resources from these programs may also finance non-education activities for students whose liquidity is otherwise restricted. This paper explores this possibility, using administrative data for the universe of federal student loan borrowers linked to tax records. We examine the effects of a sharp discontinuity in program limits?generated by the timing of a student borrower?s 24th birthday?on household formation early in the lifecycle. After demonstrating that this discontinuity induces a jump in federal support, we estimate an immediate and persistent increase in homeownership, with larger effects among those most financially constrained. In the first year, borrowers with higher limits also earn less but are more likely to save; however, there are no differences in subsequent years. Finally, effects on marriage and fertility lag homeownership. Altogether, the results appear to be driven by liquidity rather than human capital or wealth effects.

JEL Classification: D14, G18, H52, H8, J24, I22, D15

Suggested Citation

Goodman, Sarena and Isen, Adam and Yannelis, Constantine, A Day Late and a Dollar Short: Liquidity and Household Formation Among Student Borrowers (April, 2018). FEDS Working Paper No. 2018-25, Available at SSRN: https://ssrn.com/abstract=3187675 or http://dx.doi.org/10.17016/FEDS.2018.025

Sarena Goodman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Adam Isen

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave., N.W.
Washington, DC 22203
United States

Constantine Yannelis

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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