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

Vincent Vandenberghe and Debande Olivier
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Debande Olivier: european Investment bank, Luxembourg

No 2005003, Discussion Papers (ECON - Département des Sciences Economiques) from Université catholique de Louvain, Département des Sciences Economiques

Abstract: 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.

Keywords: Higher Education Finance; loans with income-forgiveness; cost of insurance, risk pooling (search for similar items in EconPapers)
JEL-codes: H52 I28 (search for similar items in EconPapers)
Date: 2005-01-01
New Economics Papers: this item is included in nep-edu and nep-lab
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Citations: View citations in EconPapers (1)

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