College Education and Income Contingent Loans in Equilibrium

57 Pages Posted: 29 May 2020 Last revised: 13 Jan 2022

See all articles by Kazushige Matsuda

Kazushige Matsuda

Kobe University - Graduate School of Economics

Karol Mazur

University of Oxford - Department of Economics

Date Written: April 30, 2020

Abstract

We investigate the welfare implications of income-contingent loans (ICLs) used for financing college education in the presence of endogenous dropout risk. While providing insurance through ICLs increases college enrollment, it also generates a moral hazard cost of lowering educational effort and labor hours. We evaluate this insurance-incentives trade-off in a heterogeneous agent OLG life-cycle model calibrated to the US. We show that ICLs significantly increase welfare, the social cost of moral hazard is mild, the endogeneity of skill premium significantly reduces effectiveness of ICLs and that the non-linear repayment schedule is essential to delivering high welfare gains.

Keywords: Human Capital, Endogenous Skill Premium, Income Driven Repayments

JEL Classification: E24, I22, H81

Suggested Citation

Matsuda, Kazushige and Mazur, Karol, College Education and Income Contingent Loans in Equilibrium (April 30, 2020). Available at SSRN: https://ssrn.com/abstract=3590541 or http://dx.doi.org/10.2139/ssrn.3590541

Kazushige Matsuda

Kobe University - Graduate School of Economics ( email )

2-1, Rokkodai
Nada-Ku
Kobe, Hyogo, 657-8501
Japan

Karol Mazur (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

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