School Loans, Subsidies, and Economic Growth

This paper examines the effects of government educational subsidies on economic growth and welfare. In an overlapping-generations model with human-capital accumulation, it is shown that, even when human-capital externalities are large, an increase in government subsidies to private-education debt may have a negative effect on the long-run economic growth rate through the general-equilibrium effects of factor-price changes, thereby making future generations worse off. We also show that subsidy policy does not necessarily result in a Pareto improvement even when there are positive effects on growth.