College Loans and Human Capital Investment

College loans serve as a double-edged sword for human capital investment: While they facilitate access to education, the burden of repayment may distort post-education investments in human capital. We examine the role of college loans and loan repayment policies through a structural model in which heterogeneous individuals, faced with borrowing limits, make dynamic decisions on consumption, borrowing/saving, labor supply, and costly human capital investment (via both college education and on-the-job learning a la Ben-Porath (1967)). We estimate two versions of the model using data from the NLSY79: one with natural borrowing limits and another with parameterized limits. Counterfactual simulations based on both models suggest that, relative to the standard fixed repayment plan, income-driven repayment (IDR) plans modestly increase educational attainment, lifetime earnings, and individual welfare. Although some generous IDR plans may result in losses for the loan program itself, overall government revenue is higher under IDRs than under the standard repayment plan when lifetime income taxes are accounted for, creating a win-win scenario for both individual welfare and government revenue.