Borrowing Arrangements and Returns to College Education

Abstract

The value of a college degree is impacted by how it is financed. Using 1968-2011 PSID surveys we construct a synthetic panel of US high school and college graduates and derive a model of their respective incomes, accounting for taxes, unemployment, retirement and mortality. With CRRA utility, the differences between the returns to a four-year college degree financed by an income share agreement (ISA) and a student loan increase with higher levels of borrowing and risk aversion. On average, borrowing $30,000 diminishes the lifetime college value premium by 11% with an ISA compared to 25% with a student loan.

Keywords: Educational Finance, Returns to Education, Wage Differentials

JEL Classification: I22, I26, J31