Government Subsidy for Student Loans, Human Capital Accumulation and Economic Development

Noda, Hideo and Fang, Fengqi (2025): Government Subsidy for Student Loans, Human Capital Accumulation and Economic Development.

Abstract

Devising effective economic policies that promote investment in human capital is essential for economic development. Government subsidy for student loans is often discussed as one of the various policy instruments that support human capital accumulation. The purpose of this study is to investigate the relationship between a government's subsidy rate for student loans and economic growth from a theoretical perspective. This study also considers how changes in life expectancy and the labor force population affect economic growth. To address these issues, we construct an overlapping-generations model with uncertain lifetime. Our model suggests that increasing the government's subsidy rate for student loans promotes economic growth. Moreover, there is a positive relationship between improved life expectancy among individuals with sufficient investment in human capital and economic growth. Furthermore, a decline in the labor force population decreases economic growth, even when negative peer effects are predominant in human capital formation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic development, Human Capital, Life expectancy, Peer effects, Student loans
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue; I - Health, Education, and Welfare > I2 - Education and Research Institutions > I25 - Education and Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Aizer, A. (2008), Peer Effects and Human Capital Accumulation: The Externalities of ADD, NBER Working Paper 14354.

Ashraf, Q. H. and Weil, D. N. (2024), Economic growth, 4th Edition, London: Routledge.

Barro, R. J. (2001), Human Capital and Growth, American Economic Review, 91(2), 12-17.

Blankenau, W. F. and Simpson, N. B. (2004), Public Education Expenditures and Growth, Journal of Development Economics, 73(2), 583-605.

Caballe, J. and Santos, M. S. (1993), On Endogenous Growth with Physical and Human Capital, Journal of Political Economy, 101(6), 1042-1067.

Chaudhuri, S. and Sethi, R. (2008), Statistical Discrimination with Peer Effects: Can Integration Eliminate Negative Stereotypes?, Review of Economic Studies, 75(2), 579-596.

Cohen, D. and Soto, M. (2007), Growth and Human capital: Good Data, Good Results, Journal of Economic Growth, {12}(1), 51-76.

De Gregorio, J. (1996), Borrowing Constraints, Human Capital Accumulation, and Growth, Journal of Monetary Economics, 37(1), 49-71.

de la Fuente, A. and Domenech, R. (2006), Human Capital in Growth Regressions: How Much Difference Does Data Quality Make?, Journal of the European Economic Association, 4(1), 1-36.

Eckwert, B. and Zilcha, I. (2014), Higher Education: Subsidizing Tuition Versus Subsidizing Student Loans, Journal of Public Economic Theory, 16(6), 835-853.

Fougere, M. and M\'{e}rette, M. (1999), Population Ageing and Economic Growth in Seven OECD Countries, Economic Modelling, 16(3), 411-427.

He, L. and Li, N. (2020), The Linkages between Life Expectancy and Economic Growth: Some New Evidence, Empirical Economics, 58(5), 2381-2402.

Krueger, A. B. and Lindahl, M. (2001), Education for Growth: Why and for Whom?, Journal of Economic Literature, 39(4), 1101-1136.

Lu, C. and Yanagihara, M. (2013), Life Insurance, Human Capital Accumulation and Economic Growth, Australian Economic Papers, 52(1), 52-60.

Lyle, D. S. (2009), The Effects of Peer Group Heterogeneity on the Production of Human Capital at West Point, American Economic Journal: Applied Economics, 1(4), 69-84.

Lucas, R. Jr. (1998), On the Mechanics of Economic Development, Journal of Monetary Economics, 22(1), 3-42.

Noda, H. (2022), A Note on Life Insurance, Human capital Accumulation and Economic Growth, Applied Economics Letters, 29(1), 1271-1280.

Paulsen, R. J. (2022), Peer Effects and Human Capital Accumulation: Time Spent in College and Productivity in the National Basketball Association, Managerial and Decision Economics, 43(8), 3611-3619.

Sala-i-Martin, X., Doppelhofer, X. G., and Miller, R. I. (2004), Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach, American Economic Review, 94(4), 813-835.

Shindo, Y. (2010), The Effect of Education Subsidies on Regional Economic Growth and Disparities in China, Economic Modelling, 27(5), 1061-1068.

Yaari, M. E. (1965), Uncertain Lifetime, Life Insurance, and the Theory of the Consumer, Review of Economic Studies, 32(2), 137-150.

Yakita, A. (2004), School Loans, Subsidies, and Economic Growth, FinanzArchiv: Public Finance Analysis, 60(2), 262-276.