Equity and Sustainability in Higher Education Financial Aid: Income Contingent Loans in Colombia

Abstract

In 2017, the Colombian government authorized its student loan agency, which has traditionally provided mortgage-like student loan programs, to introduce income-contingent loans (ICL) to improve loan payments’ affordability for low-income students and strengthen the fiscal sustainability of its loan program. Almost three years after the approval, not one income-contingent loan has been given to students – a consequence to change in leadership at the student loan agency as well as legitimate concerns about the sustainability of income contingent loans. We analyze the impact of introducing ICLs on equity and sustainability of the student loan scheme from the Government’s perspective, by performing microsimulations on loan repayments based on estimates of the income distribution of Colombian college graduates. We develop different scenarios to determine the conditions under which an income-based repayment scheme can lessen the financial burden for students (equity) and improve both loan collection rates and the NPV stream of loan repayments (sustainability). We use data from Colombia, but the general approach is relevant for other countries contemplating either the implementation or expansion of ICLs. We show that under a plausible set of assumptions, ICLs deliver consumption smoothing and reduce the negative income shocks of unemployment for its beneficiaries. Also, in the long-run, ICLs improve the net present value (NPV) of loan collections even though in the short-run, the stream of revenue from collections is reduced. Finally, we show how changing ICL parameters impact the long and short-run outcomes for the government.