Abstract
This paper simulates student loan schemes for Brazil. A copula approach is applied to simulate dynamic earnings paths for graduates. Repayment patterns are then simulated for time-based and income-contingent loan designs. The results show that the Brazilian time-based scheme involved unsustainable repayment burdens for many graduates and contributed to the scheme's high default rates. We also show that the new income-contingent scheme is also likely to involve high taxpayer subsidies. We consider alternative designs with different strengths and weaknesses but favour an income-contingent scheme with a loan fee, repayment rates at 50% of current income tax rates and an interest rate at the government's cost of borrowing upon graduation and above initial tax threshold. We conclude by emphasising that full involvement of the federal revenue system is more desirable than the present approach of employer withholding. This would increase the earnings base and reduce costs, which is important for Brazil's current precarious fiscal situation.
Highlights
Brazil is a large developing country with growing, but still low, participation rates in higher education
We simulate a timebased repayment loan (TBRL) with these parameters to illustrate the proportions of Brazil's graduates who would be likely to face repayment burden (RB) above a manageable level if borrowing from this TBRL
Contracts signed from the second half of 2018 will be subject to a loan cap of Brazilian Reais (BRL) 43,000 per semester
Summary
Brazil is a large developing country with growing, but still low, participation rates in higher education. Economics of Education Review 71 (2019) 83–94 for public HEIs which are currently free of charge, and the need to make student loans sustainable in Brazil (for borrowers and for the government) To our knowledge, this is the first paper that uses dynamic simulations of graduate earnings to look at student loans in Brazil using the method proposed by Dearden (2019). This is the first paper that uses dynamic simulations of graduate earnings to look at student loans in Brazil using the method proposed by Dearden (2019) This is a major contribution and throws new light on the old TBRL and the new income contingent loan (ICL) version of FIES.
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