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Modeling Income Dynamics for Public Policy Design: An Application to Income Contingent Student Loans

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  • Higgins, Tim

    ()
    (Australian National University)

  • Sinning, Mathias

    ()
    (University of Queensland)

Abstract

This paper studies the importance of dynamic earnings modeling for the design of income contingent student loans (ICLs). ICLs have been shown to be theoretically optimal in terms of efficiency in the presence of risk aversion, adverse selection and moral hazard, and have attractive equity properties. Recognition of their benefits has led to their adoption for tertiary education tuition fees in countries including Australia, New Zealand, and the UK. Since the design of ICLs relies on the prediction of the underlying costs, we explore the extent to which the complexity of earnings modeling affects the estimation of loan subsidies. The use of Australian data allows us to compare our simulated debt repayments to actual repayments under the Australian Higher Education Contribution Scheme (HECS). Our findings reveal that the complexity of earnings modeling has considerable implications for the calculation of loan subsidies.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7556.

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Length: 36 pages
Date of creation: Aug 2013
Date of revision:
Publication status: published in: Economics of Education Review, 2013, 37 (1), 273-285
Handle: RePEc:iza:izadps:dp7556

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Keywords: panel data; dynamic stochastic modeling; educational finance; income contingent loans;

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References

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  1. Baker, Michael & Solon, Gary, 1999. "Earnings Dynamics and Inequality Among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Analytical Studies Branch Research Paper Series 1999130e, Statistics Canada, Analytical Studies Branch.
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  3. Darragh Flannery & Cathal O’Donoghue, 2011. "The Life-cycle Impact of Alternative Higher Education Finance Systems in Ireland," The Economic and Social Review, Economic and Social Studies, Economic and Social Studies, vol. 42(3), pages 237–270.
  4. Migali, Giuseppe, 2012. "Funding higher education and wage uncertainty: Income contingent loan versus mortgage loan," Economics of Education Review, Elsevier, Elsevier, vol. 31(6), pages 871-889.
  5. Martin Browning & Mette Ejrn�s & Javier Alvarez, 2010. "Modelling Income Processes with Lots of Heterogeneity," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1353-1381.
  6. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 18(1), pages 83-114, January.
  7. Gary-Bobo, Robert J. & Trannoy, Alain, 2013. "Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9505, C.E.P.R. Discussion Papers.
  8. Chapman, Bruce & Lounkaew, Kiatanantha, 2010. "Income contingent student loans for Thailand: Alternatives compared," Economics of Education Review, Elsevier, Elsevier, vol. 29(5), pages 695-709, October.
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  12. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521522717.
  13. Dickens, Richard, 2000. "The Evolution of Individual Male Earnings in Great Britain: 1975-95," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(460), pages 27-49, January.
  14. Chapman, Bruce & Liu, Amy Y.C., 2013. "Repayment burdens of student loans for Vietnamese higher education," Economics of Education Review, Elsevier, Elsevier, vol. 37(C), pages 298-308.
  15. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 411-45, March.
  16. Lorenzo Cappellari, 2004. "The Dynamics and Inequality of Italian Men’s Earnings: Long-term Changes or Transitory Fluctuations?," Journal of Human Resources, University of Wisconsin Press, vol. 39(2).
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  18. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(2), pages 338-75, April.
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Cited by:
  1. Chapman, Bruce & Lounkaew, Kiatanantha, 2013. "Introduction to the special issue on Economic Research for Education Policy," Economics of Education Review, Elsevier, Elsevier, vol. 37(C), pages 200-203.

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