The financial capacity of German university graduates to repay student loans

Vol: 
5/2015
Author name: 
Sinning M
Year: 
2015
Month: 
September
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.

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