According to a study by the Indiana Public Interest Research Group, students can
ID: 1231910 • Letter: A
Question
According to a study by the Indiana Public Interest Research Group, students can obtain federally subsidized Stafford loans at below-market rates. Such loans are provided on the basis of “need”, using family income as the standard. The College Cost Reduction and Access Act of 2007 reduced the rate on subsidized Stafford loans yearly to 3.4 percent in 2012. Unsubsidized loans carry a rate of 6.8%.a. Use a graph to show the effect on the optimal quantity of schooling when the student loan rates are decreased. Hint: think of two different groups’ rates of return to education—high ability and low ability.
b. Explain the effect of having the two-tiered interest rate structure (where students from low-income families pay less) in terms of the screening/signaling model. No graph required.
Explanation / Answer
The College Cost Reduction and Access Act of 2007 reduced the rate on subsidized Stafford loans yearly to 3.4 percent in 2012. Unsubsidized loans carry a rate of 6.8%. when the students loan rate are decreased students belonging to lower financial group their optimal quantity of schooling may be affeted . as the rate is decreased their no. will increase .. considering the students belonging to higher income groups their demand remains unaffected with the decreasing rate , as they are no way going to achieve some profit from this .. now u can plot the graph acccordingly b) effect of having the two-tiered interest rate structure : to increase the no of students from lower financial group govt often announces subsidies where only a part has to b paid by the concerned person and rest by the govt . these facilities are provided to improve the level of education in the country
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