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Policy Watch: Income-Contingent College Loans

Author

Listed:
  • Alan B. Krueger
  • William G. Bowen

Abstract

We consider the recently proposed "income-contingent loan" (ICL), in which Congress would establish a national trust fund from which students could borrow money to finance the cost of attending college; students would repay these loans by contributing a fixed proportion of their subsequent income for a specified number of years. One key issue is whether proposed income-contingent loan plans will be self-financing; that is, will the value of loan repayments cover the initial cost of providing the loan? What about adverse selection? And how should income be defined for purposes of an income-contingent loan plan? In essence the typical income-contingent loan proposal involves three parameters: the amount of the loan; the period over which income is "taxed"; and the rate at which income is taxed. At what level must the tax rate be set for an ICL plan to be self-financing? We present several illustrative calculations that might be useful to those who wish to evaluate various proposals and present some conclusions.

Suggested Citation

  • Alan B. Krueger & William G. Bowen, 1993. "Policy Watch: Income-Contingent College Loans," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 193-201, Summer.
  • Handle: RePEc:aea:jecper:v:7:y:1993:i:3:p:193-201
    Note: DOI: 10.1257/jep.7.3.193
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.7.3.193
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    References listed on IDEAS

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    1. L. G. Hines, 1955. "Economics and the Public Interest," Land Economics, University of Wisconsin Press, vol. 31(2), pages 108-119.
    2. K. Shell & F. M. Fisher & D. K. Goley & A. F. Friedlander, 1967. "The Educational Opportunity Bank: An Economic Analysis of a Contingent repayment System Loan Program for Higher Education," Working papers 11, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
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    Cited by:

    1. Juan Esteban Saavedra & Carlos Medina, 2012. "Formación para el Trabajo en Colombia," BORRADORES DE ECONOMIA 010059, BANCO DE LA REPÚBLICA.
    2. Robert J. Gary-Bobo & Alain Trannoy, 2015. "Optimal student loans and graduate tax under moral hazard and adverse selection," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 546-576, September.
    3. Webber, Douglas A., 2015. "Are College Costs Worth It? How Individual Ability, Major Choice, and Debt Affect Optimal Schooling Decisions," IZA Discussion Papers 8767, Institute for the Study of Labor (IZA).
    4. Webber, Douglas A., 2016. "Are college costs worth it? How ability, major, and debt affect the returns to schooling," Economics of Education Review, Elsevier, vol. 53(C), pages 296-310.
    5. Christopher Avery & Sarah Turner, 2012. "Student Loans: Do College Students Borrow Too Much--Or Not Enough?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 165-192, Winter.

    More about this item

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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