Income-contingent Student Loans Research Articles

Progressive Income-Contingent Student Loans

Progressive Income-Contingent Student Loans

Efficient Consolidation of Incentives for Education and Retirement Savings

We study optimal tax policies with human capital investment and retirement savings for present-biased agents. Agents are heterogeneous in their innate ability and make risky education investments, which determines their labor productivity. We demonstrate that the optimal distortions vary with education status. In particular, the optimal policy encourages human capital investment with savings incentives. Our implementation uses income-contingent student loans and existing retirement policies, augmented by a new tax instrument that subsidizes retirement savings for college graduates. The instrument mimics the latest policy proposals by allowing employers to offer 401(k) matching contributions proportional to student loans repayment. (JEL G51, H21, H24, I26, J24, J26)

The Debt Trap, by JoshMitchell (Simon & Schuster, New York, NY, 2021), 272 pages*

Economic RecordEarly View Review The Debt Trap, by Josh Mitchell (Simon & Schuster, New York, NY, 2021), 272 pages * Bruce Chapman, Corresponding Author Bruce Chapman [email protected] College of Business and Economics, Australian National UniversitySearch for more papers by this author Bruce Chapman, Corresponding Author Bruce Chapman [email protected] College of Business and Economics, Australian National UniversitySearch for more papers by this author First published: 29 May 2023 https://doi.org/10.1111/1475-4932.12738 With thanks to Robert Shireman. The author alone is responsible for errors and omissions. Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL References Barr, N., Dearden, L. and Dynarski, S. (2019), ‘The US College Loans System: Reform Lessons from Australia and England’, Economics of Education Review, 71, 32– 49. Chapman, B. (2018), ‘Book Review of the Student Loans Mess (by Joel Best and Eric Best)’, Economic Record, 94, 204– 6. Chapman, B. and Doan, D. (2019), ‘Introduction to the Special Issue: Higher Education Financing: Student Loans’, Economics of Education Review, 71, 1– 7. Shireman, R. (2017), ‘Learn Now, Pay Later: A History of Income-Contingent Student Loans in the United States’, Annals of the American Academy of Political and Social Sciences, 671, 184– 201. Stiglitz, J.E. (2014), ‘ Remarks on Income Contingent Loans: How Effective Can they be at Mitigating Risk?’ in B. Chapman, T. Higgins and J.E. Stiglitz (eds), Income Contingent Loans: Theory, Practice and Prospects, IEA Conference Volume No. 153, Barcelona, Spain. New York, NY: Palgrave Macmillan; 31– 8. Early ViewOnline Version of Record before inclusion in an issue ReferencesRelatedInformation

Do income contingent student loans reduce labor supply?

Government-backed income contingent student loans are increasingly being used to fund higher education. Until the outstanding balance is cleared, an income contingent repayment plan acts as an incremental marginal tax on earnings above a threshold. If this additional “tax” on earnings reduces the labor supply and hence the earnings of borrowers, this could reduce both loan repayments and tax receipts, increasing the cost of funding higher education. This paper investigates this under-studied topic by exploring bunching at various loan repayment thresholds between 2002 and 2014, using a novel, linked administrative dataset from the United Kingdom. Our findings suggest that the UK's income contingent repayment plan does not cause borrowers to reduce labor supply, at least for those with earnings near to the threshold.

Optimal Taxation with Risky Human Capital and Retirement Savings

We study optimal tax policies with human capital investment and retirement savings for present-biased agents. Agents are heterogeneous in their innate ability and make risky education investments which determines their labor productivity. We demonstrate that the optimal distortions vary with education status. In particular, the optimal policy encourages human capital investment with savings incentives. Our implementation uses income-contingent student loans and existing retirement policies, augmented by a new tax instrument that subsidizes retirement savings for college graduates. The instrument mimics the latest policy proposals by allowing employers to offer 401(k) matching contributions proportional to student loans repayment.

Gender Issues in Income-Contingent Student Loans: Do Women Benefit?

Although tertiary study is strongly associated with positive wealth outcomes, for those on the margin student debt can be a deterrent, a source of financial stress, or an indicator of irresponsible bad financial behaviour. In Australia, recent debate regarding the income-contingent loan (ICL) student debt scheme has highlighted gender differences in the ability to repay the debt. Drawing on the Australian HILDA Survey data for 2002–14, this study examined the gender differences for student debt holders, pinpointing some of the gender differences in the student debt trajectory and transitions over the sample period. Findings do show that student debtors in general are slightly less satisfied with their financial situation than the general population and are more likely to be from a socio-economically advantaged background. Results indicate that women are not particularly disadvantaged under the ICL scheme regarding the issues examined.

Income-Contingent Student Loans

Income-Contingent Student Loans

Learn Now, Pay Later: A History of Income-Contingent Student Loans in the United States

The idea of financing higher education with the income that comes afterward has been formally proposed and implemented in the United States, in various permutations, since at least 1971. The attractiveness of the concept is exemplified by the political diversity of its proponents, ranging from Senator Ted Kennedy to President Ronald Reagan, and from presidential candidates Michael Dukakis (Democratic governor who ran in 1988) to Jeb Bush (Republican former governor who ran in 2016). This article examines the design of the various proposals over time, the arguments in support and opposition, and the current state of affairs.

Education and optimal dynamic taxation: The role of income-contingent student loans

We study the optimal design of integrated education finance and tax systems. The distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry. Consistent with empirical evidence, this human capital investment decision is risky. We find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income-contingent repayment can always be designed in a Pareto optimal way. We present a simple empirically driven application of the framework to US data in which individuals make a college entry decision. We find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards. So although the full optimum could lead to complicated non-linear schedules in theory, very simple instruments can replicate it fairly well. The welfare gains from income-contingent repayment are significant.

Modeling income dynamics for public policy design: An application to income contingent student loans

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.

Income contingent student loans for Thailand: Alternatives compared

There is significant irresolution in many countries concerning the design of student loan schemes. In no country recently has there been more uncertainty as to the form that loans should take than Thailand. The Student Loans Fund (SLF), a conventional approach to financing, was introduced in 1996, discontinued at the end of 2005, and re-introduced in 2007. In its place an income contingent loan (ICL) was implemented for one year only, 2006. As part of this debate we contribute to an understanding of the repayment burdens associated with the SLF in Chapman, Lounkaew, Polsiri, Sarachitti and Sitthipongpanich (in this issue). There are important issues with all ICL, and in this paper we consider the critical matter of interest rate subsidies. These are calculated for four different possible ICL arrangements for Thailand: the Thai Income Contingent and Allowance Loan (TICAL), a variant of TICAL, and two alternatives. With a broad-brush approach the subsidies for TICAL-type arrangements and for current debt levels turn out to be between 25 and 40 per cent, but are about zero for our suggested alternative ICLs. Using a better, more disaggregated, approach, subsidies for TICAL-type schemes are estimated to be about 30–55, and 3 and 18 per cent for our alternative ICLs. But with very large debts, the subsidies of all schemes are very high, implying that ICL are likely to be expensive until Thai graduate incomes rise. Importantly for equity however, the interest rate subsidies are delivered to graduates with relatively low lifetime incomes.

Student Finance and Widening Participation in the British Isles: Common Problems, Different Solutions

AbstractAcross the British Isles there are common forces encouraging an expansion of higher education (HE) while constraining the ability and willingness of governments to finance it. We examine the nature of these forces and conclude that together they are likely to lead over time to the general taxpayer funding a declining share of HE costs. While there are some potential efficiency and social equity benefits from reforms of student finance motivated by switching more of the costs towards students and their parents, the likely impact of these reforms on widening participation is unclear. We examine the current student finance systems in the British Isles and assess whether or not a system based upon income‐contingent student loans, means‐tested grants and targeted bursaries can deliver both the desired expansion and widening access.

Getting european universities into shape

Most European universities lag behind the best universities in the Anglo-Saxon world. A key challenge is to raise resources per student in Europe to US levels. The Lisbon agenda demands fundamental reform of the European university system in order to enhance efficiency, yet avoid grade inflation, to foster more competition, to allow for much larger private contributions accompanied by income-contingent student loans, and to attract larger numbers of foreign students. European universities will be pushed to compete with each other, to offer better incentives and to generate substantially more income. Universities will be stimulated to provide sufficient diversity and quality to meet the demands of a growing and diverse student body. Their ambition should be to educate the best minds in society irrespective of whether their parents are rich or poor, academically inclined or uneducated. A shift from grants to loans and an increase in tuition fees are justified by high returns. Reform should lead to a better and more equitable system of European universities.

Income-contingent student loans: Context, potential and limits

Government reliance on student borrowing in financing postsecondary education varies greatly among countries. Nevertheless, some of the problems encountered, such as competing demands on public funds that undercut grant support or an excessive burden of debt on students, make consideration of the potential and limits inherent in the use of student loans a matter of common concern. The present article examines the role of undergraduate student loans within the context of an overall program for financial assistance. The emphasis is on placing realistic limits on individual debt burden while broadening the use of loans, consistent with encouraging access to postsecondary education and providing opportunity for choice of institution. To reduce risk and make borrowing in moderate amounts acceptable, loan programs are developed that combine income-paced repayment with provision, through ex post facto grants, for earlier discharge of repayment obligations than in alternative proposals. A model is developed for simulating borrowing and cumulative debt limits given the parameter values relevant to a country's situation. Results from using alternative parameter values are compared to authorized loan limits and to average amounts borrowed and cost of attendance for low-cost and higher-cost educational options, using U.S. data by way of illustration.