Economics of Education, Finance
Advances in credit underwriting have both efficiency and equity implications. In the $1.4 trillion student loan market, private lenders offer borrowers risk-based interest rates, while the federal loan program sets a uniform price. I measure changes in consumer surplus that occur as low-risk types refinance out of the government pool into the private market. I use a dataset from an online refinancer to estimate a structural model that relates borrowers’ monthly payment choices to interest rates. I estimate refinancing increases low-risk surplus by $1,302, and show substantial distortionary costs (32% of the average transfer) under a pooled, uniform interest rate.