The Unintended Effects of an Intensive Margin Reform to Student Loans on Educational Attainment

This paper documents the unintended consequences of a Chilean student-loan reform that reduced the interest rate by two-thirds in 2012, along with other changes. This reform provides a unique opportunity to assess changes at the intensive margin of ongoing student loans, as opposed to the extensive margin of initial implementation. In contrast with the intended objective of improving repayment, we find unexpected effects on the composition of enrollment across institutions, limited coverage for low-income students, and gender inequality in education decisions. Using rich administrative records, we exploit differences in exposure and eligibility with a difference-in-differences approach. We further complement our identification strategy with a difference-in-discontinuities design, providing as-good-as-random local variation in eligibility. Our results show a diversion effect in immediate enrollment from vocational institutions to universities with no effect on overall enrollment, diversion that permeates into two-year enrollment and second-year dropout. Virtually all our results are driven by middle-income students, with no effects on low-income students. Moreover, female overall immediate enrollment falls, in contrast with a fully compensated diversion effect for males that leaves their overall enrollment unchanged