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.
American Economic Review
D14: Personal Finance
H52: National Government Expenditures and Education
I22: Educational Finance
I23: Higher Education and Research Institutions
J24: Human Capital; Skills; Occupational Choice; Labor Productivity