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Can Self-Control Explain Avoiding Free Money? Evidence from Interest-Free Student Loans
Brian C Cadena1, Benjamin J Keys2
1Department of Economics, University of Colorado - Boulder.
The Review of Economics and Statistics
|May 20, 2014
Summary
Many undergraduate students decline interest-free loans, possibly to control spending. Behavioral economics suggests this impulse control helps manage liquidity and avoid excessive consumption during college years.
Area of Science:
- Behavioral Economics
- Consumer Finance
- Higher Education Studies
Background:
- A significant portion of undergraduate students refuse interest-free loans.
- This behavior challenges traditional economic models of borrowing.
- Impulse control theories offer a potential explanation for this phenomenon.
Purpose of the Study:
- To investigate why undergraduate students reject subsidized, interest-free loans.
- To apply behavioral economics principles to understand student borrowing decisions.
- To identify factors influencing the rejection of student loans.
Main Methods:
- Analysis of the National Postsecondary Student Aid Study (NPSAS) data.
- Examination of student loan take-up decisions.
- Econometric modeling to assess the impact of liquidity.
Main Results:
- One in six undergraduate students offered interest-free loans decline them.
- Students receiving loans as cash are more likely to reject the offer.
- This suggests a deliberate choice to limit liquidity in certain financial situations.
Conclusions:
- Rejection of subsidized loans may be an optimal strategy for impulse control.
- Students may limit their liquidity to prevent overconsumption.
- Behavioral factors significantly influence student financial decisions regarding loans.
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