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Paying after Graduation. An Empirical assessment of loans wit Income Forgiveness and Human Capital Contracts

  • Vincent, VANDENBERGHE

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Olivier, DEBANDE

    (european Investment bank, Luxembourg)

There are many arguments supporting greater private contribution to higher education costs, particularly in Europe. But this case largely rests on the capability to offer deferred, income-contingent payments and to pool the cost of income contingency among all graduates. The two first features are critical to efficiency - students and lenders should not be deterred by excessive risk - and justice - contributions should be tailored to ex post ability to pay. While cost pooling is essential to avoid public debt classification of student contracts. Examples of instruments satisfying these criteria are loans with income-forgiveness and human capital contracts. The central aim of this paper is to produce realistic estimates of how graduates’ lifetime earnings are likely to be affected by the generalisation of these instruments. Using data on Belgian wages, we compute estimates of contributions that these instruments could impose on graduates. We also evaluate their effect on population-wide distribution of lifetime net wages, using higher income tax as a benchmark. The paper further considers the risk of adverse selection inherent to cost pooling. It shows that investing less on students opting for less profitable programs is a simple way to mitigate its severity.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2005003.

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Date of creation: 01 Jan 2005
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Handle: RePEc:ctl:louvec:2005003
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  1. Bas Jacobs, 2002. "An investigation of education finance reform; graduate taxes and income contingent loans in the Netherlands," CPB Discussion Paper 9, CPB Netherlands Bureau for Economic Policy Analysis.
  2. David Greenaway & Michelle Haynes, 2003. "Funding Higher Education in The UK: The Role of Fees and Loans," Economic Journal, Royal Economic Society, vol. 113(485), pages F150-F166, February.
  3. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
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