Income Contingent University Loans: Policy Design and an Application to Spain

37 Pages Posted: 9 Jul 2018

See all articles by Antonio Cabrales

Antonio Cabrales

University College London - Department of Economics

Maia Güell

University of Edinburgh

Rocio Madera

affiliation not provided to SSRN

Analía Viola

Foundation for Applied Economic Research (FEDEA)

Date Written: July 2018

Abstract

In Europe, the need for additional funding coming from either budget cuts and/or increased costs due to increased competition has reopened the debate on the financing of university systems. An attractive alternative to the current general-tax financed subsidies are Income Contingent Loans (ICL), a flexible scheme that puts more weight on private resources while enhancing progressivity. One challenge of the viability of ICL systems is the functioning of the labor market for university graduates. This paper offers a general analysis of the economics of ICL, followed by an application to Spain. We set up a loan laboratory in which we can explore the distributional effects of different loan systems to finance tertiary education at current costs as well as to increase university funding to improve in its quality. We use simulated lifetime earnings of graduates matching the dynamics of employment and earnings in the Spanish administrative social security data to calculate the burden of introducing ICL for individuals at different points of the earnings distribution and for the government. We find that (1) our proposed structure is highly progressive under all specifications, with the top quarter of the distribution paying close to the full amount of the tuition and the bottom 10% paying almost no tuition; and (2) the share of total university education subsidized by the government is between 16 and 56 percentage points less than under the current system.

Keywords: Income contingent loans, progressivity, university quality

JEL Classification: I22, I23, I24

Suggested Citation

Cabrales, Antonio and Güell, Maia and Madera, Rocio and Viola, Analía, Income Contingent University Loans: Policy Design and an Application to Spain (July 2018). CEPR Discussion Paper No. DP13038. Available at SSRN: https://ssrn.com/abstract=3210603

Antonio Cabrales (Contact Author)

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

Maia Güell

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Rocio Madera

affiliation not provided to SSRN

Analía Viola

Foundation for Applied Economic Research (FEDEA) ( email )

Jorge Juan 46
Madrid, 28001
Spain

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