Do income contingent student loans reduce labor supply?

Abstract

© 2020 The Author 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.