College Education and Income Contingent Loans in Equilibrium
57 Pages Posted: 29 May 2020 Last revised: 13 Jan 2022
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: Suggested Citation