College Education and Income Contingent Loans in Equilibrium
57 Pages Posted: 29 May 2020 Last revised: 25 Aug 2021
Date Written: April 30, 2020
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: Suggested Citation