Discrimination in the Mortgage Lending: The Impact on Minority Defaults in the Stafford Loan Program

One troubling finding of researchers analyzing the Stafford Loan program is the high incidence of default among African-Americans. Moreover, other studies have shown that blacks are often discriminated against in obtaining home mortgage loans. Typically, borrowing and repayment decisions within the sectors of the credit market are analyzed in isolation. This paper, however, links the default decision in the student loan market to borrowing expectations in the mortgage home loan market. Given that the primary cost of not repaying one's educational loan is a damaged credit record, for those students who expect to be discriminated against in the credit market following their schooling, this cost is ineffective. This paper reveals economically that African-American Student loan borrowers have made an economically rational decision when they choose to default on their educational loans because they foresee themselves to be excluded from obtaining home mortgage loans whether they repay their student loans or not.