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College education and income contingent loans in equilibrium

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  • Matsuda, Kazushige
  • Mazur, Karol

Abstract

In 2009 the US government introduced a major income-contingent loans (ICLs) program for financing higher education. We investigate its welfare implications in the presence of income shocks, and endogenous dropout risk and college enrollment. While ICLs provide valuable income insurance and thereby increase college enrollment by risk averse agents, they may also lead to adverse selection of individuals with lower ability and generate a moral hazard cost of lowering educational effort and labor hours. We evaluate this insurance-incentives trade-off in a calibrated heterogeneous agent model. We show that ICLs increase welfare and that the social costs of adverse selection and moral hazard are mild.

Suggested Citation

  • Matsuda, Kazushige & Mazur, Karol, 2022. "College education and income contingent loans in equilibrium," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 100-117.
  • Handle: RePEc:eee:moneco:v:132:y:2022:i:c:p:100-117
    DOI: 10.1016/j.jmoneco.2022.08.005
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    More about this item

    Keywords

    Human capital; Endogenous skill premium; Income driven repayments;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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