The Effects of Tuition and Student Loan Policies on College Outcomes and Lifetime Earnings

To increase college access and reduce the burden of student loan debt, the US government has developed several new tuition and student loan policies. These include the newly proposed free community college plan and the recently enacted Pay As You Earn plan that makes student loan repayments contingent on earnings. I develop and estimate a dynamic life-cycle model of the decisions individuals make with regard to schooling, work, savings and student loan borrowing. The model is estimated with micro-level US data and is used to evaluate the effects of these educational policies on education outcomes, lifetime earnings and welfare. My results show that the free community college plan benefits individuals from lower-income families the most, increasing their community college enrollment rate by 17 percentage points from 41 percent to 58 percent. However, it reduces the population proportion of individuals who achieve a bachelor\u27s degree by 9 percent. The Pay As You Earn plan reduces labor supply in college, lowers the time it takes to complete a bachelor\u27s degree, and enables individuals to attend higher-quality colleges. The overall education level is improved with the percent of individuals holding a bachelor\u27s degree increasing from 31 to 33 percent. I also evaluate the effects of a hypothetical loan forgiveness plan for college dropouts, which is found to increase college enrollment but reduce college completion. Of the three policies, the Pay As You Earn plan achieves the highest welfare gain and reduces lifetime earnings inequality