College education and income contingent loans in equilibrium

Kazushige Matsuda and Karol Mazur

Journal of Monetary Economics, 2022, vol. 132, issue C, 100-117

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.

Keywords: Human capital; Endogenous skill premium; Income driven repayments (search for similar items in EconPapers)
JEL-codes: E24 H81 I22 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:132:y:2022:i:c:p:100-117

DOI: 10.1016/j.jmoneco.2022.08.005

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