College education and income contingent loans in equilibrium

Kazushige Matsuda, Karol Mazur

Research output: Contribution to journalArticlepeer-review


In 2009 the US government introduced a major income-contingent loans (ICLs) program for financing higher education. We investigate its welfare implications in the presence of income shocks, and endogenous dropout risk and college enrollment. While ICLs provide valuable income insurance and thereby increase college enrollment by risk averse agents, they may also lead to adverse selection of individuals with lower ability and generate a moral hazard cost of lowering educational effort and labor hours. We evaluate this insurance-incentives trade-off in a calibrated heterogeneous agent model. We show that ICLs increase welfare and that the social costs of adverse selection and moral hazard are mild.

Original languageEnglish
Pages (from-to)100-117
Number of pages18
JournalJournal of Monetary Economics
Publication statusPublished - 2022 Nov
Externally publishedYes


  • Endogenous skill premium
  • Human capital
  • Income driven repayments

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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