Common Contracts
1 similar null contracts
Student Loans and Income Share Agreements for Financing Education∗June 2nd, 2022
Income Share Agreements (ISAs) are seen as an alternative to financing education using student loans, which subject students to default and increase their cost of bor- rowing (or financial difficulty) in the event of an unfavorable job market outcome. This paper examines a university’s decision of offering ISA financing and the impact it has on a student’s effort. We find that ISAs induce student moral hazard and result in lower student effort compared to student loans. Yet, the student surplus is higher in the case of ISA financing than student-loan financing because the ISA contract requires payment of only a fraction of after-graduation income. The university prefers student’s ISA financing in a market where the student faces large loan-default-related financial difficulties; otherwise, the university prefers student-loan financing. An implication of the university’s endogenous contracting decision is that a reduction in the student’s financial difficulty can actually reduce expecte
