Progressive Income-Contingent Student Loans

Progressive income-contingent loans (ICLs), in which repayment rates rise with income, provide college students with insurance against post-graduation income risk. We study how ICL repayment size and progressivity jointly shape repayment dynamics, educational choices, and welfare. Using Australian longitudinal survey data, we estimate income processes and parameterize existing ICL repayment rules with repayment-size and progressivity parameters. We then estimate a heterogeneous-agent life-cycle model using the method of simulated moments and evaluate alternative repayment schedules under revenue neutrality. We find that greater repayment progressivity raises welfare only when combined with smaller required repayments. Existing Australian and UK policies are not generous enough given their degree of progressivity. The welfare-maximizing ICL combines moderate progressivity with a high repayment threshold. Free education produces nearly the same aggregate welfare as the optimal ICL, but the optimal policy retains some repayment revenue from high-income workers and requires lower income taxes.