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Modeling income dynamics for public policy design: An application to income contingent student loans

  • Higgins, Tim
  • Sinning, Mathias

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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Article provided by Elsevier in its journal Economics of Education Review.

Volume (Year): 37 (2013)
Issue (Month): C ()
Pages: 273-285

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Handle: RePEc:eee:ecoedu:v:37:y:2013:i:c:p:273-285
Contact details of provider: Web page: http://www.elsevier.com/locate/econedurev

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  1. Michael Baker & Gary Solon, 1998. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Working Papers baker-98-01, University of Toronto, Department of Economics.
  2. Fatih Guvenen, 2009. "An Empirical Investigation of Labor Income Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 58-79, January.
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  8. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March.
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  10. Adriaan S. Kalwij & Rob Alessie, 2007. "Permanent and transitory wages of British men, 1975-2001: year, age and cohort effects," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(6), pages 1063-1093.
  11. Bruce Chapman & Kiatanantha Lounkaew, 2008. "Income Contingent Student Loans for Thailand : Alternatives Compared," EABER Working Papers 21950, East Asian Bureau of Economic Research.
  12. 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, vol. 42(3), pages 237–270.
  13. Robert J. Gary-Bobo & Alain Trannoy, 2013. "Optimal Student Loans and Graduate Tax under Moral Hazard and Adverse Selection," CESifo Working Paper Series 4279, CESifo Group Munich.
  14. Bruce Chapman & Amy Y. C. Liu, 2013. "Repayment Burdens of Student Loans for Vietnamese Higher Education," Crawford School Research Papers 1306, Crawford School of Public Policy, The Australian National University.
  15. Dickens, Richard, 2000. "The Evolution of Individual Male Earnings in Great Britain: 1975-95," Economic Journal, Royal Economic Society, vol. 110(460), pages 27-49, January.
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  17. 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).
  18. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-75, April.
  19. 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, vol. 18(1), pages 83-114, January.
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