Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/90131 
Year of Publication: 
2013
Series/Report no.: 
IZA Discussion Papers No. 7556
Publisher: 
Institute for the Study of Labor (IZA), Bonn
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.
Subjects: 
educational finance
dynamic stochastic modeling
panel data
income contingent loans
JEL: 
H81
I22
C15
Document Type: 
Working Paper

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