Modeling Income Dynamics for Public Policy Design: An Application to Income Contingent Student Loans

Tim Higgins () and Mathias Sinning ()

No 7556, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper studies the importance of dynamic earnings modeling for the design of income contingent student loans (ICLs). ICLs have been shown to be theoretically optimal in terms of efficiency in the presence of risk aversion, adverse selection and moral hazard, and have attractive equity properties. Recognition of their benefits has led to their adoption for tertiary education tuition fees in countries including Australia, New Zealand, and the UK. Since the design of ICLs relies on the prediction of the underlying costs, we explore the extent to which the complexity of earnings modeling affects the estimation of loan subsidies. The use of Australian data allows us to compare our simulated debt repayments to actual repayments under the Australian Higher Education Contribution Scheme (HECS). Our findings reveal that the complexity of earnings modeling has considerable implications for the calculation of loan subsidies.

Keywords: income contingent loans; educational finance; dynamic stochastic modeling; panel data (search for similar items in EconPapers)
JEL-codes: C15 H81 I22 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-08
New Economics Papers: this item is included in nep-edu and nep-nps
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Citations: View citations in EconPapers (11)

Published - published in: Economics of Education Review, 2013, 37 (1), 273-285

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Journal Article: Modeling income dynamics for public policy design: An application to income contingent student loans (2013)
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