Can Self-Control Explain Avoiding Free Money? Evidence from Interest-Free Student Loans

Brian C. Cadena; Benjamin J. Keys

doi:10.1162/rest_a_00321

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Can Self-Control Explain Avoiding Free Money? Evidence from Interest-Free Student Loans

Brian C. Cadena¹; Benjamin J. Keys²

¹ Department of Economics, University of Colorado Boulder · ² Harris School of Public Policy, University of Chicago ()

The Review of Economics and Statistics 2013 open access

This paper uses insights from behavioral economics to explain a particularly surprising borrowing phenomenon: One in six undergraduate students offered interest-free loans turn them down. Models of impulse control predict that students may optimally reject subsidized loans to avoid excessive consumption during school. Using the National Postsecondary Student Aid Study (NPSAS), we investigate students' take-up decisions and identify a group of students for whom the loans create an especially tempting liquidity increase. Students who would receive the loan in cash are significantly more likely to turn it down, suggesting that consumers choose to limit their liquidity in economically meaningful situations.

DOI: 10.1162/rest_a_00321
Volume: 95 (4)
Pages: 1117-1129
Language: en
Export: BibTeX
Sources: openalex crossref