College Education and Income Contingent Loans in Equilibrium

57 Pages Posted: 29 May 2020 Last revised: 25 Aug 2021

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 presence of the dropout risk that depends on unobservable effort. While providing insurance through ICLs increases college enrollment, it also generates a moral hazard cost of lowering educational effort. 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 crowds-out effects of ICLs and that the non-linear repayment schedule is essential to delivering high welfare gains.

Keywords: College Education, Endogenous Skill Premium, Income-Contingent Student Loans

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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