Abstract
The increasing repayment burden of conventional student loans and the rapid growth of attendance costs are concerns that should spark renewed interest in income-contingent loans, especially for students in high-cost graduate and professional programs. This paper provides a model of the demand for income-contingent loans that can be used to estimate the possible effects of adverse selection and moral hazard on the financial viability of income-contingent loan plans. Simulations based on the loan-demand model are presented for medical students, and the results are discussed in terms of alternative options for reducing the effects of adverse selection and moral hazard.
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