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Do income contingent student loans reduce labor supply?

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  • Britton, Jack
  • Gruber, Jonathan

Abstract

Government-backed income contingent student loans are increasingly being used to fund higher education. Until the outstanding balance is cleared, an income contingent repayment plan acts as an incremental marginal tax on earnings above a threshold. If this additional “tax” on earnings reduces the labor supply and hence the earnings of borrowers, this could reduce both loan repayments and tax receipts, increasing the cost of funding higher education. This paper investigates this under-studied topic by exploring bunching at various loan repayment thresholds between 2002 and 2014, using a novel, linked administrative dataset from the United Kingdom. Our findings suggest that the UK's income contingent repayment plan does not cause borrowers to reduce labor supply, at least for those with earnings near to the threshold.

Suggested Citation

  • Britton, Jack & Gruber, Jonathan, 2020. "Do income contingent student loans reduce labor supply?," Economics of Education Review, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:ecoedu:v:79:y:2020:i:c:s0272775720305471
    DOI: 10.1016/j.econedurev.2020.102061
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    Cited by:

    1. Catherine, Sylvain & Yannelis, Constantine, 2023. "The distributional effects of student loan forgiveness," Journal of Financial Economics, Elsevier, vol. 147(2), pages 297-316.
    2. Tomás Monarrez & Lesley J. Turner, 2024. "The Effect of Student Loan Payment Burdens on Borrower Outcomes," Working Papers 24-08, Federal Reserve Bank of Philadelphia.

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    More about this item

    Keywords

    Income contingent loans; Labor supply; Higher education finance;
    All these keywords.

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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