The financial capacity of German university graduates to repay student loans

Abstract

This paper studies the financial capacity of German university graduates to repay their student loans. We find that conventional mortgage-type loans are associated with very high repayment burdens, which make it difficult for German university graduates to repay a debt of more than 10,000. We design a hypothetical income contingent loan and argue that the combination of a moderate loan subsidy with an income contingent loan would increase the financial capacity of university graduates to repay student loans of up to 30,000-40,000. We also find that university graduates are able to repay their student loans as long as the total debt at the beginning of their working lives does not exceed 7 per cent of the present value of their lifetime income. Show more