Self-Financing Education, Borrowing Constraints, Government Policies, and Economic Growth

Abstract

We analyze how public policies for self-financing education, public fund for loans and deferred deductibility of education expenses, affect growth in an overlapping generations economy where individuals can be borrowing-constrained on human capital investment. We show that public loans positively affect growth in the unconstrained economy, while how tax deductibility affects growth depends on the magnitude of both public loans and tax deductibility. In the borrowing-constrained economy, public loans positively affect growth, while tax deductibility does not affect growth. Both government policies affect the borrowing-constraint tightness and, therefore, can shift the economy from being borrowing-constrained to unconstrained or vice versa.